Overview:
We’ve all heard of cheap China sketchy shitcos trading at low valuation multiples but have you heard of a quality well run Chinese ADR owned 70% by insiders, zero debt, willing to release cash via dividend, buying back shares, growing 50%+, trading 85% below cash and at 3.85x earnings.
iHuman is a leading developer of intellectual products throughout China. It’s primary products are interactive educational apps designed to develop kids' cognitive ability in a self-directed fun manner. The majority of these products are labelled under the iHuman brand. These products cover a wide range of fields within intellectual development, including, iHuman Chinese, iHuman ABC, iHuman Pingyin, iHuman Magic Thinking, iHuman Books, iHuman Stories, iHuman Reading, iHumanpidea, iHuman Kids Workout, iHuman Coding, iHuman fun Idioms, iHuman little artists, iHuman Writing and iHuman Fantastic Friends. Other products are offered under the bekids series app, and Aha World brand for international users.
I believe iHuman (NYSE:IH) is an asymmetrical multi-bagger that has strong qualitative and quantitative fundamentals. The stock is down 43% YTD. It has at least 100% upside from the current price of $1.75.
History:
Founded by Chi Yufeng in 1996 the company started as Beijing Jinhogen, the predecessor of Hogen education. The company started off developing plastic learning toys and curricular textbooks for kindergartens. In 2016 it launched its first online product iHuman Chinese and began its broader online transition. It went public in 2020 and became China’s first NYSE listed entertainment company. Chi owns 50% of the company. Chi also founded Perfect World Group, a video game publisher and film production company.
Business model:
Most revenue is derived from online subscriptions, where users pay for premium content and additional perks. They have two subscription models, Time-based subscription:
This is a time-based subscription package for the premium content that typically range from one month to twelve months for their various apps. Content-based subscription:
They also offer content-based subscription packages on some of their products. Their users can select specific packages comprising premium content for an indefinite term within the life cycles of their products, without subscribing for time-based packages.
Their biggest product is iHuman Chinese which accounted for the majority of their revenues and will continue to be the majority of revenues in the near future. iHuman Chinese is ranked as the No. 1 app in the kids category of the Apple App Store in China for most of 2023.
In 2023 they had 23.04m of MAUs (Monthly average users) , a 16% increase from 2022. I believe that they should continue to grow MAUs in the mid teen range as that seems consistent with the growth trend and current product offerings and development. The number of paying users was 4.27m down from 4.75m a 11% drop from 2022. I suspect paying users to sustain low single digit growth as their overall convertibility of non-paying users into paying-users stays consistent and should gradually follow the trend of increase in MAUs.
Maintaining customer retention becomes pretty challenging as customers inclination towards knowledge acquisition weakens alongside with the deceleration in their learning curve. This is why it’s crucial to have a broad range of product offerings and to continue pump out new products. It's also critical for continued innovation and development within current products to convert non-paying users into paying users. One of the ways it has been doing this is with the integration of AI. In 2021 they launched iHuman Kids Workout, an AI powered fitness app that makes personalised workouts. It deploys real time motion detection and fast image cropping technology which tracks and analyses the status, trajectory and angles of its users body movements and provides real-time feedback. Additionally, it has added AI futures to iHumanpedia with an innovative module, AI Talk, an AI-generated content chatbot which can understand and respond to children’s questions and answer with personalised feedback and guidance. I don't know whether these products will take off in the short term but I do know that integration of AI within current and future apps is a positive long term move.
Recently, they purchased Cosmicrew, a popular 3D comedic adventure animation series. This is a pivotal shift that makes for a more flexible business model. The purchase price was $9mn so relatively small compared to cash balance. The development of Cosmeicrew’s intellectual property could broaden their product offering and offline revenue stream. Their IP assets could be further monetized in the form of toys, further animation and more.
Also, they have further broadened their product offering via Aha world; A new product specifically for international markets. It's already proven to be in high demand on YouTube and TikTok accounts; it collectively attracted over 200 million views, and ranked among the top three most popular children’s apps in the U.S. Apple app store.
Perfect World group is listed on annual reports as an affiliate company and integrates in many aspects; it's a pretty weird setup. Basically all of the board originated from Perfect World Group and moved into executive positions at iHuman. The Cosmeicrew series was bought off Kunpeng, an animation studio within the Perfect World Group. This is what they said in the annual report regarding the affiliation: “Mr. Michael Yufeng Chi beneficially owns more than 50% of the voting power in both Perfect World Group and us and is a common director of both Perfect World Group and us. As such, Mr. Michael Yufeng Chi is able to direct the management and policies of both Perfect World Group and our company. Therefore, Perfect World Group and us are under common control, which, pursuant to Rule 405 under the Securities Act, makes Perfect World Group an affiliate of ours”. Additionally, it noted that: Perfect World Group had historically provided them with human resource service, administrative and IT support, financial service, and legal service. In 2023, they paid RMB29.8 million (US$4.2 million) to Perfect World Group for such services. The majority of their office space has been leased from Perfect World Group since early 2021. These types of transactions are strange and are uncommon for US companies but you generally tend to find weird transactions and structures within Chinese ADRs. I’m not going to speculate on the nature of these transactions or imply anything. I think Chi want’s to keep his business entities aligned for mutual benefit and I think in terms of management and development these close ties have proven to yield rewards. The interesting thing is that in April 2022 Perfect World Group was acquired by Gearbox Software, a US based video game development company. This will affect if not break up the close relationship. I believe (although there isn't much info) Chi Yufeng is continuing as chairman of Perfect World Group. This acquisition could mean a few things, him taking a more active role within the company potentially reshifting his place as chairman into operational management. This could be part of his broader plan to grow their entertainment segment with their acquisition of Cosmiscrew which he could have structured this way as Cosmiscrew was previously owned by Perfect World Group. This would also potentially explain the re-shifting of office. Conversely, it could also mean him taking a less active role within the company as this could be part of his broader retirement plan.
Regulatory:
A long term concern of mine is irrational regulation from the CCP. If their products are suddenly banned the business is fucked. The CCP might change their criteria of what they classify as After School Teaching (AST). In July 2021, the Chinese government implemented a far-reaching crackdown on the private tutoring industry, effectively prohibiting tutors from conducting for-profit classes in core curriculum subjects. Dubbed the “shuangjian” or “double reduction” policy, its primary objective was to alleviate financial strains on families and reduce academic burdens on students by curbing excessive homework and after-school tutoring. Notably, the regulations primarily targeted compulsory education (Grades 1-9), making it illegal to offer curriculum-based classes for profit. Enforcement activities may involve:
Currently their products are not classified as AST but who knows, it is a risk but doubt the CCP is that mad to ban all educational apps.
Financials
Revenue and gross profit has almost doubled over the past 4 years. Revenue increased slightly by 3.3% in 2023. Gross margins are 70% which remained stable throughout the past year. Profit margins are 17%. It's a capital light business. Net income has grown exponentially over the past years. It has only been profitable since 2022. Net income increased by 64% in 2023. ROE is 20%. Cash and equivalents is $171m 85% above the market cap of $92m. Their cash position increased by $22m in 2023. They have negative EV. They have zero debt and no other concerning liabilities. In 2024 the board approved a special cash dividend of $0.10 per ADS, and they bought back 2m shares in 2023. I think it's highly likely we see continued buybacks in 2024 as the discount between their performance to the stock has become much more prevalent now the stock is down 43% YTD. They are also highly incentivized to do with that the management owning 70%. The main problem with buybacks is liquidity. It would be nice to see a long term dividend policy but we will see. Chi Yufeng privatised and delisted Perfect World Group from the Nasdaq in July 2015. So why he hasn't delisted iHuman i don't know but it could be that he believes eventually the discount will close which is another reason you could see management do buybacks/ dividend.
Management
Mr. Peng Dai has been the CEO since July 2017 and a director since June 2020. Before joining them, he held senior roles at Perfect World Group and Lenovo, overseeing strategy and business development for mobile devices. Prior to that, he was a consultant at Boston Consulting Group, specialising in technology companies. Mr. Dai holds bachelor's, master's, and doctoral degrees in computer science from Tsinghua University.
He owns 6.1% or 16m class A shares that's worth $28,160,000. That’s extreme considering the fact combined compensation of directors and the CEO amounted to $2.6m.
Ms. Vivien Weiwei Wang has been a director since June 2020 and CFO since September 2020. She also serves as a director at Perfect World Group. Previously, Ms. Wang held senior roles at Perfect World Co., Ltd., where she oversaw various functions including finance, investment, and supply chain management. With over two decades of experience in finance and investments, she played a key role in Perfect World Co., Ltd.'s IPO and subsequent listings. Before joining Perfect World Group, she worked at Autodesk, Inc. and PricewaterhouseCoopers Zhong Tian LLP. Ms. Wang holds a bachelor's degree in business administration from Peking University and an MBA from UCLA Anderson School of Management. She owns 3,460,000 of class A shares.
Valuation:
At the very minimum presuming the entire business declines from here on out it should trade at cash which implies a 85% upside. It's hard to value on a comparative basis as there are no direct competitors listed on the NYSE. It is also hard to say it trades at historically low multiples as it's a relatively recent IPO. If you were to generally look at high quality businesses with similar models in China they generally trade around 10x earnings. Using this assumption it would imply a 185% upside although this is a very loose based valuation model.