The firm declared its venture into cloud gaming alongside Tencent as it faces dwindling profits in its primary office equipment sector
Essential Points:
- The recently listed Eshallgo has initiated a cloud gaming program with Tencent, backed by a $20 million funding from CS Asia Opportunities Master Fund
- Shares of Eshallgo dropped by 23% over five days following the announcement of the deal, as investors expressed skepticism regarding the shift away from the company’s core office equipment domain
By Edith Terry
Investors could be forgiven for questioning what office equipment distributor Eshallgo Inc. (EHGO.US) was aiming to achieve with the announcement made last week regarding its foray into the cloud gaming sector alongside industry leader Tencent (0700.HK). They needed to parse through a series of related announcements to understand the situation. The more they delved, the less optimistic they appeared, or so it seemed.
The pivotal announcement that drew everyone’s focus occurred on December 20, when Eshallgo revealed a “broad strategic initiative” to integrate into Tencent’s business ecosystem by collaborating in the realms of office integration services and cloud gaming. The agreement included a collaboration with Tencent to create cloud gaming consoles, in addition to a sales contract with Beijing Liuliuqiu Cultural Development for an initial batch of 1,000 cloud gaming consoles.
As part of this initiative, Eshallgo stated its acquisition of D&K Asset Management through a stock transaction involving a grant of 4 million shares. This acquisition provided Eshallgo access to Beijing Liuliu Ball, which will unveil a cloud gaming device compatible with various cloud gaming services, including Microsoft Xbox Cloud Gaming and Nvidia GeForce NOW.
At least one investor supported the concept: CS Asia Opportunities Master Fund, which invested up to $20 million in equity funding to assist Eshallgo with its Tencent venture by committing to purchase 4.17 million of the company’s shares at $4.80 each. The fund, whose investment was announced concurrently with Eshallgo’s Tencent strategy unveiling, indicated it believes Tencent’s endorsement will significantly impact Eshallgo’s growth.
Contrarily, other investors remained unconvinced, as demonstrated by a 23% drop in Eshallgo’s Nasdaq-listed shares within five days following the announcement. After reaching as high as $5 just prior to the announcement, the stock settled at $3.52 on Thursday, reflecting a 12% decline from its IPO price of $4.
The new collaboration with Tencent appeared crafted to inspire investor confidence as Eshallgo’s principal business seems to be struggling amidst China’s slowing economy and the ensuing decline in office demand. The company’s revenue decreased around 8% to $17 million during its latest fiscal year ending in March. More troubling was the near obliteration of its profits, with a mere total of $8,652 for the 12-month period, compared to $477,689 in the preceding fiscal year.
Details regarding how Eshallgo’s foray into cloud gaming consoles with Tencent will operate remain unclear, contributing to investor unease. This uncertainty adds to the trepidation surrounding the company’s future and aspirations, which have already been severely impacted by the Covid-19 pandemic and the subsequent economic downturn affecting office service demand.
China’s office sector has been lethargic and faced severe disruptions for several months in major cities during 2022 due to pandemic restrictions. This sector is pivotal for Eshallgo’s existing primary operations, which involve selling and leasing premium office equipment, coupled with maintenance and repair services.
Eshallgo is associated with brands such as HP, Epson, Xerox, Sharp, Toshiba, Konica, and Kyocera, and has diversified into offering office furniture, IT products, water dispensers, and printer paper. This industry was valued at approximately $17.5 billion in 2023, accounting for about 10% of the global market, according to Cognitive Market Research. Eshallgo’s clientele includes prominent entities like Ping An Insurance, Taiping Life, and Centaline Property.
Market Evolution
Prior to its Nasdaq IPO in July, Eshallgo indicated it was observing a transition in the marketplace for its after-sales maintenance services, as mentioned in its prospectus. In the first six months leading up to September 2023, representing the first half of its current fiscal year, income from its maintenance services surged by 45.4% to $1.1 million. Conversely, revenue from equipment sales declined by 16.2% to $6.5 million, and revenue from equipment leasing fell by 5.6% to only $722,601. Between its 2022 and 2023 fiscal years, Eshallgo streamlined its workforce from 172 to 157 employees.
The Chinese operational branch of Eshallgo, Junzhang Shanghai, holds 45% ownership in 24 subsidiaries, which collectively operate 155 service outlets nationwide and employ 1,500 registered technical service personnel in lower-tier cities. Junzhang Shanghai had secured the necessary business licenses for e-commerce operations and developed proprietary software, remote management systems, and mobile applications, “all of which are pending refinement and testing” after the IPO, as stated by Eshallgo in its prospectus.
Although vast, China’s office equipment supply sector is remarkably fragmented, and competition remains intense. This may explain the prolonged nature of Eshallgo’s journey toward the Nasdaq and its subsequent weak performance. The IPO process itself required over a year to complete, culminating in a modest $4.7 million raise after shares were priced at $4, which represented the lower end of their predicted range. Eshallgo had previously sought to raise $15 million during its initial filing in April 2023 – three times the final amount. In May 2024, this goal was downsized to $8 million, before being reduced again to the ultimate amount.
So, has Eshallgo discovered a new direction with its partnership with Tencent? As improbable as it might sound, the response could very well be “yes.” Its targeted niche lies within the gaming console market, which had been prohibited in China until 2015. Only 15% of China’s 685 million gamers utilize console hardware to enjoy their favorite games, per Sekkei Digital Group, indicating the market is less saturated compared to mobile or PC gaming. Revenues from the console hardware sector reached $1.1 billion last year, with console software contributing an additional $1.27 billion. The market continues to expand, albeit at a slow pace, and is projected to hit $2.48 billion by 2027.
Tencent has collaborated with Nintendo since 2019, coinciding with the launch of the Nintendo Switch in China. Nintendo generates 38% of the revenue from the console video game sector, followed closely by Microsoft Xbox at 33% and Sony PlayStation at 24%. Liuliu Ball could differentiate itself with plans to develop consoles that “support multiple cloud gaming services” through the “optimal integration of hardware and network resources,” as highlighted in the announcement.
Are there any similarities between the sale of office equipment and the marketing of gaming consoles that Eshallgo can leverage? The company’s experience in establishing a national infrastructure for distributing office equipment may prove advantageous in forming a comparable sales network for gaming consoles, despite the distinct nature of the customer bases. With the $20 million in newly acquired funding, alongside the $4.7 million from its IPO and an additional $5 million raised through convertible debentures in November, Eshallgo undoubtedly has ample resources to invest in their new gaming endeavor.
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