SUM: Oriental Culture is currently trading below its IPO price, but this belies positive performance data in 2021 and a growing art market.
- 2021 operating revenues doubled to $37.6m, driven by a resurgent arts and antiques market;
- China’s art and antiques market grew rapidly with around 63,400 sold. The total value of items sold was $5.9bn, that’s more than in the US;
- Oriental Culture Holding recently announced its entry into the metaverse sector.
Oriental Culture Holdings (NASDAQ: OCG) went from strength to strength in 2021. Revenue for 2021 reached $37.6m representing a sizable increase from the $17.4m recorded in 2020. The company, a leading online service provider of collectibles and artworks, experienced substantial growth on the back of a resurgent sector in China.
The Hong Kong-based firm 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.
In December 2020, Oriental Culture priced its initial public offering (IPO) at $4 a share to raise $20.2m in total gross proceeds. After rising considerably in early 2021, the stock took a downward trend and currently trades under its IPO price, at $3.80 at the time of writing. The 2022 tech stock selloff and Russia’s invasion of Ukraine also appear to have weighed on the stock’s price. However, for me, the Oriental Culture share price belies the company’s positive performance and the growth of the Chinese artwork and antiques market. I feel this firm is on an upward trajectory and that’s why I’m backing this stock to soar!
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Strong showing in 2021
Oriental Culture saw its revenue grow substantially in 2021, buoyed on by a strong Chinese market for arts, antiques, and collectibles. Total revenue rose to $39.4m, up from $17.4m from the year previous. Net profit rose to $11.5m, representing fourfold growth from 2020 and exceeding a previous high of $9.09m.
The grow came on the back of considerable growth in the number of active traders, which grew from 77,000 in 2020 to 159,000 in 2021. The value of transactions totalled a whopping $15.6bn. The rapid growth in transactions also saw transaction fee revenues reaching 65.1% of total revenues for the year.
The growth was accompanied by more positive metrics. Oriental Culture also narrowed its cost of revenue to $2,425,420, down 8.2% from 2020. Furthermore, its gross margins for the last three years were 90.1%, 84.9%, and 93.6%, respectively, with a weighted average net margin of 33.1% in 2021.
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The firm ended the year with cash and short-term investments totalling $33.15m. Despite spending as much as $10.38m on the procurement of fixed assets and intangible assets in 2021, the company still received a cash inflow of $8.9m.
The positive performance was driven by the continued growth of the Chinese art and antiques market. Demand for OCG’s services may have also benefited from pent-up demand for their services following the disruption caused by the pandemic in 2020. The impressive 2021 performance, coupled with excellent cash reserves, should support the company’s growth plans, including its expansion into the NFT (non-fungible token) space.
A growing market
The art and collectibles market has recovered following the events of 2020 placed it – and everything else – in a temporary standstill. However, the art market did rebound equally across the world. In fact, according to ArtNet, Asia has emerged as a powerful engine in the art market’s recovery. China has seen particularly impressive growth.
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This was reinforced by a report conducted by Artron, a Chinese art sector organization. The group reported that 63,400 pieces fine art were sold in China in 2021. Revenue from fine art sales in China grew 43% to a total of $5.9bn. As such, the fine art market was the largest in the world in 2021, exceeding the amount sold in the US at $5.7bn. According to the data, 138,000 pieces of fine art were sold in the US last year, but the average price was lower.
Tech platforms such as OCG played their part in this growth. Wan Jie, Founder and president of Artron Art Group praised the Chinese art industry for adopting new technologies in the sector. “We believe that new trends emerging in the arts, such as the popularity of NFTs, changes in the auction sector, millennials joining in art collecting and investment, will bring even more opportunities to the art market in China and worldwide this year,” the Artron founder said in a statement.
Oriental Culture’s growth plan
NFTs are perceived to be a sizeable growth market in the art world. Turnover in the NFT market reached $232m in 2021 with nearly 300 pieces of NFT products sold. The digital art market was very niche in that only 279 lots were sold but turnover was higher than that of photography.
OCG recently announced its expansion into the NFT market. The company will provide services to create and mint NFTs for cultural and artwork collections and the sales, auctions and trading of NFTs through its e-commerce platform. In a statement, Mun Wah Wan, Chairman of Oriental Culture, said: “HKDAEx Limited is dedicated to build a leading platform that provides comprehensive services from creating and minting NFTs for cultural and artwork collections to the sales, auctions and trading of NFTs on our online platform.”
The firm is also pushing into the Metaverse space with a blockchain-based metaverse game, which aims to create a virtual “Wine World” for wine and alcohol product merchants and fans across the world. With the aforementioned projects, Oriental Culture is on track to becoming a full-featured and technologically advanced multi-service provider in the art and collectibles e-commerce space.
Should I buy Oriental Culture stock?
For me, Oriental Culture stock looks cheap. The price-to-earnings ratio (P/E) has moved from 29.4 in 2020 to 6.8 in 2021. The company also appears to be on a positive track for growth. Its P/E ratio currently stands at 5.9 and I think that’s outstanding value for a firm which looks ready to grow further. Moreover, the average P/E ratio of the US Online Retail industry is around 16.4. However, past performance is certainly not indicative of success and 2022 isn’t looking like the best year for Chinese economic growth. With millions of people locked down in an effort to achieve dynamic zero Covid-19, it is hard to imagine that the art world will be unaffected. But, as a long-term investor, I feel that OCG will prove a solid pick for the future.
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