IPO Update: Hanryu Holdings Targets $36 Million US IPO (HRYU)

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A quick look at Hanryu Holdings

Hanryu Holdings (HRYU) has filed proposed terms pursuant to an amended registration to raise $36.4 million in gross proceeds from the sale of its common stock in an initial public offering Opinion.

The company operates a fan-enabled platform primarily for the Asian entertainment industry.

HRYU is still a very small company with little operating history and carries a multitude of risks.

Given the company’s tiny revenue base and excessive valuation assumptions, I won’t go public.

Hanryu overview

Based in Seoul, Republic of Korea, Hanryu Holdings, Inc. was established to create a fan-centric online platform for culture and entertainment services.

Management is led by Chief Executive Officer Mr. Chang-Hyuk Kang, who has been with the company since 2021 and has an extensive background in finance and tax.

The main offers of the company belong to FANTOO, a platform that allows the creation of online fan areas and economic rewards in return for user contributions.

The industry of online fan engagement platforms is used by celebrities and fan bases to connect with each other and monetize their fan base.

As of September 30, 2022, Hanryu has booked a market-driven investment of US$26.3 million from investors such as Paxnet Co. and various individuals.

Hanryu – user acquisition

The Company markets its mobile social media app through major app platforms and through online media and social media activity.

Since the launch of the FANTOO website in Mary 2021, it has attracted over 18.9 million users, with the percentages of the user base from different regions listed below:

User Base by Location (SEC)

Marketing and advertising spend as a percentage of total revenue has fallen as revenue has increased, as shown in the following figures:

Sales & Marketing	Expenses vs. Income
Period	percentage
Fiscal year ended December 31, 2022	37.0%
The year ended on December 31, 2021	113.0%

click to enlarge

(Source – SEC)

The Marketing and Advertising Effectiveness Multiplier, defined as how many dollars of incremental new revenue generated by each dollar of marketing and advertising spend, has fallen to 1.2x over the last reporting period. (Source – SEC)

Hanryu’s market and competition

According to a 2021 Financial Express market research article, the global market for celebrity fan engagement is estimated at $10 billion.

There are significant differences in the features and business models of fan engagement websites.

The increasing use of NFTs or non-fungible tokens also offers the industry further business model options.

Key contestants or other industry participants include:

• Facebook

• Instagram

• Twitter

• Reddit

• Lysn

• weaver

• universe

• Whattpad

• Amazon

• ebay

• ticketmaster

Financial performance of Hanryu Holdings

The company’s recent financial results can be summarized as follows:

• Increasing top-line earnings from a tiny base

• A swing to gross profit and a positive gross margin

• Reduced operational losses

• Reduced cash burn in operations

The following are relevant financial results arising from the company’s registration statement:

total revenue
Period	total revenue	% variance vs. before
Fiscal year ended December 31, 2022	$889,045	85.1%
The year ended on December 31, 2021	$480,224
gross profit (loss)
Period	gross profit (loss)	% variance vs. before
Fiscal year ended December 31, 2022	$433,266	-647.1%
The year ended on December 31, 2021	$ (79,195)
gross margin
Period	gross margin	% variance vs. before
Fiscal year ended December 31, 2022	48.73%	-395.5%
The year ended on December 31, 2021	-16.49%
Operating Profit (Loss)
Period	Operating Profit (Loss)	operating margin
Fiscal year ended December 31, 2022	$(6,603,325)	-742.7%
The year ended on December 31, 2021	$(20,453,973)	-4259.3%
net income (loss)
Period	net income (loss)	net margin
Fiscal year ended December 31, 2022	$(6,386,503)	-718.4%
The year ended on December 31, 2021	$(12,764,662)	-1435.8%
Cash flow from operations
Period	Cash flow from operations
Fiscal year ended December 31, 2022	$(4,096,948)
The year ended on December 31, 2021	$(7,814,399)
(Glossary of terms)

click to enlarge

(Source – SEC)

As of December 31, 2022, Hanryu had $118,957 in cash and $7.4 million in total debt.

Free cash flow for the twelve months ended December 31, 2022 was negative ($4.1 million).

Hanryu IPO details

HRYU intends to sell approximately 3.6 million common shares at a proposed average price of $10.00 per share for gross proceeds of approximately $36.4 million, excluding the sale of customary underwriter options.

No existing or potential new shareholders have expressed an interest in purchasing shares at the IPO price.

Assuming a successful IPO in the middle of the proposed price range, the Company’s enterprise value at IPO (excluding underwriter options) would be approximately $475.3 million.

The free float to outstanding share ratio (excluding underwriter options) will be approximately 7.17%. A number below 10% is generally considered a “low float” stock, which can experience significant price volatility.

Management says it will use the net proceeds from the IPO as follows:

For investments in corporate infrastructure;

For building a data center for our AI technology and hiring about 23 software engineers;

For augmenting our engineering team to staff our planned AI technology data center;

To market and host events such as live K-Pop concerts;

Development of services within the FANTOO ecosystem such as fan shop, digital stickers, augmented reality filters and emojis; And

For general working capital purposes, operating expenses and/or acquisitions of or investments in any company, product, service or technology.

(Source – SEC)

Management’s presentation of the company’s roadshow is not available.

With respect to pending lawsuits, the Company is the subject of an ongoing lawsuit for assumed debt arising out of the purchase of land on Marine Island.

The sole public bookrunner for the IPO is Aegis Capital Corp.

Evaluation metrics for Hanryu

Below is a table of the company’s relevant capitalization and valuation metrics at the IPO, excluding the impact of underwriter options:

Measure [TTM]	Crowd
Market capitalization at IPO	$507,409,580
Enterprise value	$475,290,623
price / sale	570.74
EV / Revenue	534.61
EV / EBITDA	-71.98
earnings per share	-$0.12
operating margin	-742.74%
net margin	-718.36%
Ratio of float to shares outstanding	7.17%
Proposed IPO midpoint price per share	$10.00
Net Free Cash Flow	-$4,112,158
Free cash flow yield per share	-0.81%
investment rate	-269.36
sales growth rate	85.13%
(Glossary of terms)

click to enlarge

(Source – SEC)

Commentary on Hanryu’s IPO

HRYU seeks investments in the US public capital market to fund its overall business growth and working capital needs.

From a tiny base, the company’s financials have produced increasing revenues, recent gross profit and positive gross margin, lower but still high operating losses and lower operating cash burn.

Free cash flow for the twelve months ended December 31, 2022 was negative ($4.1 million).

Marketing and advertising spend as a percentage of total revenue has fallen as revenue has grown from a tiny base. The multiplier of marketing and advertising efficiency has recently dropped to 1.2 times.

The company currently plans not to pay dividends and to retain future profits to reinvest in the company’s growth and operational needs.

Despite the negative operating cash flow, Hanryu has made only small investments.

Some industry observers estimate the market opportunity for fan-related websites at $10 billion.

Aegis Capital Corp. is the sole underwriter and the only IPO managed by the company in the last 12 months has generated a negative return (54.0%) since its IPO. This is a lowest performance for any major underwriter over the period.

Risks to the company’s prospects as a public company include its tiny revenue base and limited operating history.

Additionally, its growth potential stems from the demand for Korean culture across Asia. Should consumer attitudes towards Korean culture change in a way that reduces the appeal of the company’s services, it could face reduced revenue growth potential.

In addition, the Delaware-based holding company operates subsidiaries in South Korea, all of which are subject to South Korean laws and regulations and may affect the ability to transfer any profits to the US-based parent company

As for valuation expectations, management is asking IPO investors to pay an enterprise value/sales multiple of 535x trailing 12-month sales.

Given the company’s tiny revenue base and excessive valuation assumptions, I won’t go public.

Estimated IPO Price Date: To be announced.