Oriental Culture Holding: Bright Future In Art And Collectibles Market?

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Key Takeaways:

• OCG could become one of the market leaders in China’s art and collectibles market, taking over from Takung Art;
• OCG is moving into the NFT market on the back of strong performance in core business and abundant cash flow;
• OCG had a price-to-earnings ratio of just 6.8 in 2021, a considerable discount on the sector average.

On May 2, Oriental Culture Holding LTD OCG released its financial results for the full year 2021. OCG posted a doubling of its revenues and gross profits. The company believes that the results represent a considerable leap forward for the firm. It also highlights the resilience of the market and the OCG business from the ongoing shocks created by the Covid-19 pandemic.

OCG is an online provider of collectibles and artwork e-commerce services. The company provides customers of an online platform with comprehensive services, including account opening, art investment education, market information, research, real-time customer support, and artwork warehousing services.

In recent years, the trading of artworks has increasingly moved online. Many online trading platforms have sprung up to facilitate this trend. In China, OCG, along with Hong Kong-based Takung Art TKAT, is one of the several listed companies involved in the provision of online platforms and services for the trading of artworks and collectibles.

Demand for art and collectibles is growing rapidly. A report conducted by Artron, a Chinese art cultural sector group, noted that 63,400 pieces of art were sold in China in 2021. That represents a 43% increase in turnover from 2020, with the total value of trades reaching $5.9 billion. The figure puts China ahead of the United States ($5.7bn) to become the biggest art market in terms of turnover, despite a much lower number of transactions. There were more than 138,000 items sold in the US last year.

While OCG has seen improving fortunes, by comparison, Takung Art has struggled. In 2021, Takung earned $2.09 million in commission, representing a year-on-year decline of 36.5%. Its total turnover for the year was only $520 million. The artworks were sold with an average commission rate of 0.4%. The company’s adjusted operating position has remained at a net loss for the past three years. Losses amounted to $4.09 million, $0.61 million and $14.6 million, respectively. The average gross margin for the period was only 53.8%, as the platform failed to gain traction.

In the latest financial results announcement, Takung Art announced that it intends to sell off its Tianjin-based subsidiary. The Tianjin, mainland China, business has been somewhat of a laggard, denting the company’s overall performance. The firm has early-stage plans to move into the NFT space.

By comparison, OCG provides customers with trading and marketing services through two online platforms owned by its Hong Kong-based subsidiaries, namely the China International Assets and Equity of Artworks Exchange Limited and HKDAEx Limited. By the end of 2021, the newly listed products on the two trading platforms increased from 188 in 2020 to 199, and the number of active deal traders grew from 77,000 in 2020 to 159,000, with the value of transactions totaling $4.6 billion.

Moreover, as Takung phases out its share-based business model, OCG says that it expects to take the lead in China’s share-based artwork market. 

2021: a strong year

Multiple performance metrics demonstrate that 2021 was a good year for OCG. Income grew as the art and collectibles market recovered in part thanks to the Chinese government’s successes in slowing the spread of Covid-19. In 2021, OCG more than doubled its total operating revenues from 2020, reaching $37.6m in 2021. The rapid growth in transactions, also accounted for transaction fee revenues reaching 65.1% of total revenues for the year.  The more dynamic trading market last year helped improved OCG’s revenue mix.

OCG also narrowed its cost of revenue to $2,425,420 in 2021, down 8.2% year-on-year. Furthermore, its gross margins for the last three years were 90.1%, 84.8%, and 93.5%, respectively, with a weighted average net margin of 33.1% in 2021. These figures demonstrate OCG’s continuous and high-quality revenue growth track.

In terms of net profit, the company successfully exceeded the previous high of 9.09 million to reach $11.4 million in 2021, representing fourfold growth from 2020. The significant increase was mainly driven by the company’s business adjustments and rapid market growth. 

In terms of the capital reserve, the company has cash flow and short-term investments totaling $33.15 million. Despite spending as much as $10.38 million on the procurement of fixed assets and intangible assets in 2021, the company still received a cash inflow of $8.9 million. The company maintains that its cash pile is solid enough to support the company’s future ambition – including expansion into the NFT sector.

Moving into NFTs

NFT is likely to become an integral part of the future of digital cultural content. According to a report The Art Market in 2021, the total turnover of the Chinese NFT market reached $232 million in 2021 with nearly 300 pieces of NFT products sold. It accounted for 1.6% of the global artwork market.

“Today with NFTs, we are experiencing a similar paradigm shift with the same historical importance,” said Thierry Ehrmann, President of Artprice, an international art market information firm.

This February, OCG entered into strategic cooperation with Heng Well, a high-tech firm, to develop a tech-based trading platform for digital assets. In the following months, it officially launched its NFT services associated with art and collectibles. OCG also acquired shares in Beijing Jiu Yu Ling Jing Technology Co., Ltd. as part of its effort to expand into the metaverse sector. The company appears to be on track to becoming a full-featured and technologically advanced multi-service provider in the art and collectibles e-commerce space.

NFT cultural products have huge market potential and could bring new opportunities for OCG’s growth. There seems to be a natural connection between OCG’s core art and collectibles business and NFTs. This makes the creation of an aesthetically pleasing and desirable collection for the virtual world achievable. OCG hopes that the interactive experience between the real and virtual worlds of art and collectibles will enhance business growth.

As of May 2, 2022, OCG stock trades at $3.87 per share. The price-to-earnings ratio has moved from 29.4 in 2020 to 6.7 in 2021. The price-to-earnings ratio of metaverse pioneer Meta Platform FB is 13.1 while the US Online Retail industry average is around 16.4. 

While past performance is not indicative of future success, OCG believes it appears to be on the right track. The company maintains that the successful launch of its NFT business could be a powerful vehicle for future growth. 

References:

https://imgpublic.artprice.com/pdf/the-art-market-in-2021.pdf

Image sourced from Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice