Lvji

Navigation Tech

Lvji Technology is the largest Intelligent Online Tour Guide provider in China with a market share of 86.2%. Lvji deploy software via cloud to provide online tour guides with proprietary contents: hand-drawn and interactive maps, real-time navigation, voice-overlay commentaries and editorial contents of tourist attractions and points of interest. Where Google Maps help you navigate to the target, Lvji helps you navigate inside.

The types of attractions include - but not exclusive to - theme parks, historical sites, city guides, zoos, landscapes, botanical gardens and museums. On the back-end they service the tourist attractions with digital distribution tools and visitor movement capabilities via SaaS. Lvji grew its revenue with +4000% the latest 4 years - while maintaining a 30% net profit margin - and I have just initiated a position at <1.2 EV/sales 2019.

Online Tour Guide - an introduction

Jiuhua Mountain - classified as a category A5-attraction - have some 99 temples, numerous famous hiking trails and more than 10 000 Buddha statues. Located in a protected area of 174 square km with stunning scenery. This national park - recognized by the UNESCO - have tens of millions of visitors per year.

The local government administrating the national park decided to partner with Lvji to go digital and expand their service opportunities such as food, lodging, travel, shopping and entertainment.

Lvji photographs the area, collects GPS data, conducts in-door mapping and write editorial content to create a highly accurate and interactive micro/local map as a foundation. The next step is to hand-draw a map with unique aesthetic - according to customer preferences - vividly displaying the various scenic spots.

Although my screenshots below are static, please keep in mind you can zoom, tilt, scroll just as a regular interactive Apple/Google Map.

Voice-over commentaries are played automatic within trigger range via GPS and editorial content is available at points of interest. You can follow a recommended trail or just pick the ones with the highest user ratings. 720 Panoramic VR content is being rolled out and historic attractions can be supplied with dramatic audio re-enactments. Visitors can discover daily shows and promotions, see which facilities are opened or closed, food menus and restaurants, parking lot availability - and so on. In short, the corporate vision when making the online tour guides is to enhance the travel experience of “eat, live, travel, shop and entertain”.

The number of online tour guides purchased by end user grew significantly from 2 million in 2016, to 74 million in 2018. Average price per electronic guide was ¥7.4 (equals $1,08 USD / 9,5:- SEK) in 2019, making it a low-cost complementary to your family outing.

Lvji’s high quality proprietary contents enable high end user satisfaction and in 2019 over 95% of the users rated their guide experience as “good”. It is currently a straight 5.0 on the Apple App Store and a straight 5.0 on the Tencent App Store.

Lvji is filling a blind spot that has not been properly covered by either Google Maps or AutoNavi (Alibaba): the ‘last mile’ of mapping. Moreover, its first mover advantage with a coverage of 100% of the tier-one 5A China tourist attractions and exclusivity deals with two OTAs, set a high bar for new entrants to enter.

Another example is Yishui Firefly Cave with its 25 000 square meters of underground cave and adjacent 6.1 km long underground river. This popular category 4A tourist destination approached Lvji to create a digital guide for tourists and back-end capabilities to better manage the tourist experience.

The Maps

Lvji produced $402 000 in revenue and $130 000 in net profits per employee in 2019, with a total workforce of 200 (of which 50% are in content-production). At the same time, Electronic Arts pulled $570 000 in revenue and $155 000 in profits per employee. Highly impressive for a company established only 7 years ago, selling digital products for a mere dollar.

Lvjis brand, trademarks and copyrights (audio, editorial content, graphics, software, patents and other intellectual property) is the golden goose here.

Lvji have 79 educated art-professionals drawing content and 17 engineers in research and & development creating - what I argue is - unique IP. Lvjis maps incorporate a variety of aesthetic styles (either influenced by location and culture, or by commission from the operator). GPS co-ordinates are manually measured and verified at each point of interest creating high accuracy. The maps are updated on a 2-4 week basis with content and optimization.

Lvji received its first Copyright for a cartoon-styled map in 2014 and developed a total of 22 044 online tour guides (+70% YoY and 30x in 5 years) per end of June 2020. Online tour guides covering Overseas locations South Korea, Italy, Japan, Australia, among others (incl. Macau, Taiwan, Hong Kong) surpassed 10 000 at the end of June 2020.

Lvji doesn’t rely on a small number of tourist attractions. The top 10 tourist attractions contributed to 19.9% of total revenue in 2016 - down to only 2.3% today.

China have ~10 000 tourist attractions which are categorized A1 to A5. As of June 2020 Lvji cover 100% of the A5 tourist attractions and 70% of the A4. Category A1-A5 is a ¥500 billion a year industry. To partner with Lvji and improve the tourist-experience is probably a low-cost rational choice.

Lvji created headlines when it was studying with the Japanese Government to cooperate on electronic tourist guides in conjunction with the Olympic Games for the in-bounding Chinese traveler - the largest international travel group in the world.

The Kremlin, Russia

Point of Sale

Sale of online tour guides are for the most part done through OTAs and to a lesser extent mini programs (WeChat) and their own app. Lvji is available at 32 (up from 19 in 2016) Chinese OTAs as a value-add purchase (embedded via API) to a regular travel booking. Available at 32 OTAs means they’re exposed to hundreds of millions of users as a value-add at the end of their travel purchase (i.e. booking a hotel night, flight ticket, train ticket etc).

Lvji currently have 2 exclusivity deals where the OTA is obliged to only offer online tour guides from Lvji. In the OTA application below, Lvji have a dedicated spot inside the “Holiday Section” making the purchase convenient and easy.

Although currently only representing <5% of revenue, Lvjis own app reached 1 925 435 users at the end of June 2020 - up from 881 967 users in June 2019 (+100% YoY).

Tourism SaaS

Lvji Technology is qualified as a HNTE (High-and-New Technology Enterprise) and is subject to a preferential -40% lower income tax.

Lvji’s SaaS platform consist of four parts:
- Smart Management
- Service System
- Smart marketing
- Smart operation

Lvji collect end user information and conduct data mining in order to derive information on user behavior and preferences, which then is provided to their clients - such as Jiuhu Mountain and Yishui Firefly Cave referenced above. Furthermore, the software enables clients to analyze foot traffic in real-time and provide optimization of visiting routes and points of interest. The system provides passenger flow monitoring and heat map analysis allowing operators to efficiently allocate internal resources and staff.

Other features include:

- Face recognition at the entry point of the tourist attraction, which enables unmanned management of the tourist attraction

- Location/fleet-management for unmanned vending machines, shared bicycles, shared cruises and other facilities through location tracking, usage statistics and equipment lifetime.

Upon request from theme parks, Lvji has partnered with Tencent to create a local ticketing solution (i.e carousels, shows, museum entrance fees). Eliminating fake tickets/embezzlement and giving the visitor the convenience of having it all paperless and organized.

Instead of out-dated brochures and physical maps clients are now provided with a digital distribution tool which is current, correct and interactive. Zoo’s, museums and theme parks can now provide service in a way tourists in this digital age expects.

The Market Opportunity

The market size of domestic tourism (excluding outbound tourism) in China is ¥6 trillion, forecast to grow +6-8% annually to 2023. Some 5 billion domestic trips were made last year. The emergence of a wealthy middle class, easing of restrictions on movement by the Chinese authorities and making it a economic priority (such as the all-for-one tourism directive of 2017) are some of the driving factors of growth.

China is currently the largest outbound tourist in the world with 150 million people travelling abroad last year. Since 2012, tourists from China have been the world’s top spender - outspending the nr. 2 with a factor of 2x.

A new vertical of the tourist industry - The Online Tour Guide Market - is growing at a break neck speed in China, expected to grow over +500% in the coming 5 years (Frost & Sullivan). As I argued earlier, there’s an increased preference for a personalized, digital and in-depth tourist experience among travelers born in the 80s, 90s and 00s. Having a digital map entering a national park - or a dramatic audio re-enactment of a historical event - for $1, is too good to pass if your entire trip costs $200-$500 (car/bus/train/plane + food + lodging).

Lvji market dominance within this is sector is simply astounding. Peers are unable to catch up and Lvji outgrows the market itself.

Now, please turn down the volume of the music you’re listening to and read this twice: In the TAM (Total Addressable Market) chart above you can read “580 m” for 2019. Guess what? Lvji alone grew revenue +80% YoY and printed 541 m in revenue. Lvji is TAM.

Mind-blowing.

Tourism - recovery?

Let’s get straight to the point: tourism is hit really bad. Business Travel will probably never see previous levels and International Travel will need a couple of years to recover.

Trip.com $TCOM, Meituan 3690.HK and Tongcheng 780.HK are the three largest players in China’s online hotel-booking market. Let’s take a look at their latest results and forecasts to get an idea if domestic tourism will recover or not.

Trip.com - 28th of May, Q1 conference call (4 months ago)

“In China, travel activities hit bottom in February, and have since been consistently on a recovery track. In recent weeks, the recovery in high-end hotel meaningfully outpaced other segments…[]…
Travel is human nature and we have full confidence that the industry will return and reach new high as the pandemic recedes.”

China Galaxy Research, covering Meituan Q2

- Hotel business to fully recover 3Q2020 and show YoY growth 4Q2020
- Hotel booking at 70% recovery in early may
-
For people in rural areas, travel is still a fresh idea

CIMB Research, covering Tongcheng Q2

- Positive Year-over-Year growth in Q4 (against difficult comparisons of 2019)
- Revenue estimates -14% (full year 2020) +50% (FY 2021) +18% (FY 2022)

Shiji Distribution 002153.CH being a middleman of 80 hotel groups stated 3 weeks ago that bookings matched pre-C19 levels, and that “…demand for outbound travel has been diverted to domestic travel”.

According to Flight Master, an online Chinese travel platform, the volume of domestic flights in August recovered to 95.4% of last year’s level.

China had a 5 month long ban on inter-provincial travel that was lifted on the 14th of July. The next day Trip.com reported a 500% increase in travel search.

I’ll conclude that 2020 travel will be terrible and Lvji will present abysmal numbers similar to their peers. 2021 will not offer a full recovery but comparisons to 2020 will be extremely easy. I wouldn’t touch airline stocks but I don’t think exploration & travel as a phenomenon is dead.

The Share

Before I starting throwing numbers I’ll provide you with a small cheat-sheet below.

Net cash calculation: Revenue recognition for Lvji occurs when the end user pays for the guide via the OTA. The credit period for OTAs is a maximum 45 days and meanwhile it’s booked under Trade Receivables & Prepayment. This is as close as cash I can think of, however, I’ll be prudent and haircut it with -100%. Also, I’ll keep total liabilities at 100%. (550 + 0 - 57 = 493). If you’re an optimist, net cash is actually 560 m.

17th of January this year Lvjis IPO was oversubscribed with +8 300% and started to trade at 2.12 (HKD) receiving an enterprise value of ¥2 140 m. Two months later 2019 results were published and revenue exploded +80% YoY.

Running a ridiculous profitable software business with a 27% Return on Equity and a 33% Net Profit Margin - profits shoot up as well.

Then Covid-19 came and Lvji was decimated along with the rest of tourism-related stocks world wide. Based on 2019 results - if they were ever to return - the stock is now trading at ev/sales <1.2 and ev/ebit <3.5….

Bear-Case assumptions:
- I’ll propose a steeper drop in revenue and a weaker recovery than industry peer consensus (historically Lvji outperformed the aforementioned with triple digit %…)
-
Only 80% of net profit trickles down to cash
- Full year net loss of -40 m and trade receivables of 67 m somehow wiped out, both reducing net cash (I actually don’t believe neither, but lets be prudent)
- Margins never recover to previous levels

As previously mentioned, valuation at listing was “actually” higher because 2019 results was not published until another 2 months. If you’re an optimist those two bars are a lot higher.

Owning shares at these bankruptcy multiples, of a software company, when the news flow regarding tourism eventually starts turning positive - can be rocket fuel, and that’s essentially my case here.

I’ll rehash previous topics to why I believe a recovery eventually will materialize:

- “Online Tour Guides” market growth +46% CAGR 2018-2023 (Frost & Sullivan)
- Market-leading product with a 95% approval rating and a 86% market share
- Domestic tourism recovery 2021-22 as indicated by industry peers and news outlets
- All-time-high number of locations (+20 000) covered, produced & paid for
- The ban on inter-provincial travel was Feb-Jul but Lvjis business seasonality is H2:

Xinjiang region decided in early august to open up for tourism on the 2nd of september (delayed opening because of lagging C-19 outbreaks). Following the news, shares of Xinjiang travel agency “Western Tourism Development” 300859.CH gained +13% and it’s up +240% since.august 6th.

Booking.com $BKNG has recovered and traded -7% from its ATH in early september. Meituan 3690.HK is up +130% since Lvji listed and Royal Caribbean $RCL (actual floating corona cruises) is up +200% from the bottom.

The way I see it, being a micro cap with $83 m EV - of which $45 m is free float - and no sell-side research, they’re simply late to recovery. I could of course be completely wrong.

I rarely see founders - already owning 39% of a company - buy even more shares on the open market. But when I do, I take notice. CEO Zang Weizhong bought shares at higher levels a while ago and he cared to leave some remarks while doing it:

“Mr Zang informed the company that he is confident about the future business prospects of the group and the current price of the shares does not reflect their business prospects as perceived by investors and that it presents a good opportunity for him to increase his shareholding….”

Disclaimer

- I own shares (I’m obviously biased)
- Before investing please read all chapters regarding “Risks” in the Annual Reports
- Do your own due-diligence before investing

Share