After Winning Over Art Lovers, Tyfon Chases Investors With IPO

Key Takeaways:

• Tyfon Culture has filed for a Hong Kong IPO, generating fees from the high-margin brokerage business for contemporary Chinese art
• The contemporary art sector’s use of experts to verify authenticity, rather than more sophisticated technology used for antiques, could put off some potential buyers

By Molly Wen

China’s market for paintings is very much a work in progress. It’s relatively small by global standards, worth less than 30 billion yuan ($4.39 billion) annually. Recent counterfeiting scandals and the onslaught of the global pandemic haven’t helped either, causing the market to contract by an average 0.4% over the last five years.

But that’s not deterring Tyfon Culture Holdings Ltd., which is trying to paint itself as an art-trading master as it makes a go at a Hong Kong IPO.

Founded in 2013 with business concentrated in East China’s Jiangsu province, Tyfon brokers sales of contemporary Chinese paintings by helping artists and art owners sell their works at physical art exhibitions and in a self-operated online marketplace. The company earns its keep by taking commissions for each sale. Its low costs, combined with high commission income, has allowed it to maintained high gross margins between 67.4% and 69.7% over the last three years.

But investors beware: This is not a company with a rich revenue palette. Commissions are its sole revenue source, and its trading volume is hardly meteoric. It brokered the sale of 12,711 artworks in 2020, rising to 17,887 in 2021, before settling at 14,172 in the first three quarters of last year. The transaction value of those paintings grew from 837 million yuan in 2020 to 1.5 billion yuan in the first nine months of last year, with the average paintings selling for 100,000 yuan, or about $14,700.

Growth in its brokerage activity has contributed to steady revenue and profit growth. Its revenue rose from 138 million yuan in 2020 to 201 million yuan in the first nine months of 2022, while its profit grew even faster from 31.86 million yuan to 66.67 million yuan over the same period as it benefited from rising margins on its limited but growing business scale.

Despite its relatively small size, the company began eying capital markets as early as March 2017, when it went public on the thinly-traded Beijing’s National Equities Exchange and Quotations (NEEQ). It ultimately privatized from that market three years later due to paltry trading volumes. It made an initial unsuccessful filing to re-list in Hong Kong in June 2020, and abandoned the campaign until earlier this month when it filed an updated prospectus.

Growing market

According to a report cited in the prospectus, Tyfon was No. 1 in terms of trading value among contemporary Chinese painting-trading platforms in 2021 with 16% of the market. The term “contemporary” refers to paintings created after 1949, the year contemporary China was founded, and does not include more valuable antiques. A total of 9.2 billion yuan worth of contemporary Chinese paintings were traded on art platforms in 2021, accounting for 38.2% of total trading of Chinese paintings.

The same report also pointed out that as buyers’ preferences change and a new generation of artists becomes more popular, China’s contemporary painting market is expected to grow at a compound annual rate of 9.9% between 2022 and 2026.

In such a market, artists and their agents are at the upper end of the business stream, with galleries, auction houses, online platforms and art exhibitors acting as midstream sales generators for downstream individual and institutional buyers. Unlike the west where buyers are a mix of investors and personal art lovers, most paintings sold in China are purchased as an investment or for collection purposes.

China’s contemporary art trading market is also relatively diffuse, with the top 10 platforms accounting for just about a third of total trading value in 2021. Tyfon is the only one among the top 10 that operates a trading platform, while the other nine are all auction houses.

Counterfeiting Challenge

In an industry where authentication, verification and appraisal of artworks is key to ensuring an orderly market, Chinese art traders are less developed than their global peers. Source-tracing is not firmly established, with the result that counterfeiting is a perennial problem.

In January 2018, a major ring selling counterfeits of works by famous artists was smashed by police in the city of Zunyi in Southwest China’s Guizhou province. The ring replicated artworks, forged certifications and then sold off the items, making a fortune in the process. In all, it counterfeited more than 200 works of art or calligraphy from famous Chinese artists like Qi Baishi and Xu Beihong, including one that was auctioned in 2013 for a hefty 50 million yuan.

While antiques can be dated using technology, the more subjective “eyes” of experts are more commonly used to verify the authenticity of contemporary art, making it more difficult to identify genuine artworks accurately. Such practice makes buying contemporary works riskier, and can put off potential buyers – especially those purchasing products for investment purposes.

In terms of its own backing, Tyfon has not accepted money from any institutional investors since its inception. Its founder and Chairman Hu Ting is its controlling stakeholder with 78.57% of the company’s shares. Her daughter Cao Yu’s owns another 5.35%, bringing the family’s control to more than 80% of the company.

By the end of last September, the company had 242 million yuan in cash and cash equivalents, growing steadily from 56.28 million yuan at the end of 2020 and 161 million yuan at the end of 2021. So, it’s clearly not bleeding cash. But the company is still eager to raise money for further expansion of its sales networks, to build up its capacity to develop art-related technologies, and also for strategic investment and acquisitions.

Tyfon’s business portfolio is rather narrow, but the company has been a relatively strong performer in its niche market. Leading Chinese auction house Poly Culture (3636.HK) was pummeled by the pandemic and fell into the red in the first half of last year, with a current price-to-sales (P/S) ratio of only 0.34 times. Tyfon’s steadier business could help to fetch a higher multiple, though the limited scope of its sector means the upside is also probably relatively limited as well.