Metaverse Startup Flowing Cloud Lists in Hong Kong, Flat R&D Investment Raises Concern

AR and VR services provider Flowing Cloud was officially listed on the Hong Kong Stock Exchange on October 18 as its first metaverse-related stock, with an opening price of HK$2.21 ($0.28) per share, equal to the issue price. However, shares then saw a 2.36% fall to HK$2.07 on October 19, resulting in a total market value of about HK$3.747 billion.

Flowing Cloud’s prospectus is rather striking, as it mentions “metaverse” more than 300 times. Founded in 2008, Zhangzhong Feitian Technology, the predecessor of Flowing Cloud, was listed on the National Equities Exchange and Quotation (NEEQ) in 2017. It was aimed at the mobile game market, then gradually turned to AR and VR, withdrawing from the NEEQ in 2019. In 2021, when the metaverse concept suddenly became a hit, the company built a new platform and in November changed its name to Flowing Cloud, announcing its strategic layout in the metaverse field.

AR and VR devices, as front-end entrances to the metaverse, are full of potential again. Flowing Cloud stated in its prospectus that AR and VR are the key applications to achieve and empower the immersive experience of the metaverse, and that they are the prerequisites and entry thresholds for its development stage.

Therefore, AR and VR marketing services have now become the most important source of income for Flowing Cloud. According to data from iiMedia Research, Flowing Cloud ranks first in the AR/VR content and services market in terms of revenue, accounting for a 2.6% total market share in 2021.

From 2019 to 2021, its AR/VR marketing services business achieved revenues of 137 million yuan ($18.9 million), 142 million yuan and 376 million yuan respectively, accounting for 54.6%, 41.9% and 63.2% of its current revenue. In addition, AR/VR content business achieved revenues of 45 million yuan, 115 million yuan and 161 million yuan, accounting for 18.1%, 33.9% and 27.1% of the current revenue. In addition to the above business, the company also provides AR/VR SaaS and IP business.

Financial data show that from 2019 to 2021, Flowing Cloud’s revenue was 250 million yuan, 339 million yuan and 595 million yuan respectively, and its net profit increased year-on-year. In the first quarter of 2022, the company’s net profit was 40.2 million yuan, up 316% year-on-year, of which the gross profit margin of AR/VR content production business reached 55.3%.
Its impressive performance has attracted several key investors for Flowing Cloud. Through its recent listing, Flowing Cloud introduced cornerstone investors such as Anji State-Owned Assets Management, Qicai Lingfeng and SenseTime. The three parties subscribed to the offering shares of Flowing Cloud of about 167 million yuan in total.

However, stagnant R&D investment that does not match income growth has caused Flowing Cloud to be called into question. In 2019, 2020, 2021 and the first quarter this year, the R&D expenditure of Flowing Cloud was 11.425 million yuan, 15.046 million yuan, 21.703 million yuan and 8.152 million yuan respectively, accounting for only 4.6%, 4.4%, 3.6% and 3.6% of the total revenue in the same period, showing a decreased trend.

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In its prospectus, the company stated that the underlying technology is its core competence, and in the past, the company subcontracted non-core technology development and interactive content modules to third parties. Its R&D team has 59 full-time employees, including 28 engineers and 21 designers, accounting for about 43.1% of all employees.

Although Flowing Cloud seems to be oriented squarely within the metaverse field after a name change, many have doubted the extent to which metaverse represents its core business. Investors noticed many expectations and goals rather than real achievements in the firm’s prospectus. Thus, there is still a long way to go from concept to application.