The rise of children’s gaming platform Taomee (TAOM.NYSE) shows there’s money to be made from Chinese kids goofing off online.
The company’s revenues grew by 400% to US$36.0 million in 2010. Net income is rising even faster, from US$1.3 million in 2009 to US$21.6 million in 2010.
The company suffered a weak debut on the New York Stock Exchange on June 8. Its stock opened at US$8.49, 5.7% below its initial public offering price, and closed at US$8.23 per share. In the following week, however, it ticked up towards $10, as analysts began calling the stock a sleeper with unrealized value.
Unlike some Chinese internet IPOs that have gone before it, Taomee has all of the ingredients for success – big profit margins, a clear monetization model, and strong organic growth.
Its secret seems to be a combination of executive experience and a rarified competitive environment. Its three founders are former employees of Tencent, China’s most successful game operator. Besides Tencent, Taomee has little serious competition. In 2010, it had four of the six most popular games among kids five to 15 years old, according to iResearch. According to its prospectus, it had 27 million users in 2011.
As it builds its brand, Taomee should also have good opportunities in movies, TV and merchandising. Its offline business generated only 5% of net revenues in 2010, but that total should rise this year, as it co-produces two animated series and two films based on its biggest franchises: “Mole’s World” and “Seer.”
Capture the market
Taomee doesn’t face much competition offline, either: Few Chinese cartoon brands have national recognition. One exception is “Pleasant Goat and Big Big Wolf,” a brand owned by China’s Toon Express Group that veteran Hong Kong investor Francis Leung acquired for US$104 million earlier this year.
Foreign brands like Walt Disney are popular in China, but, as in many industries, they have struggled to produce good localized content. Their efforts have resulted in some strange products, like Disney’s “Secret of the Magic Gourd.” It seems a safe bet that Taomee’s Mole can take on a gourd any day – online or off.