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This article is written based on public information and is only for information exchange purposes. It does not constitute any investment advice

After nearly two months of gossip, the news finally came to light.

After the market closed yesterday (July 25), Oriental Selection issued an announcement announcing that Dong Yuhui had left the company amicably.

From "Traveling with Yuhui" at the end of 2023 to the current "Yuhui Travel", it only lasted seven months.

Why is it difficult for Dongfang Zhenxuan to retain Dong Yuhui? After losing its "core assets", what is the value of Dongfang Zhenxuan?

01

Substance over form

The MCN (Multi-Channel Network) business model originated from YouTube and was introduced to China in 2016 when the domestic Internet ecosystem shifted from PC to mobile.

With the iteration of content economy to traditional graphic economy and the rise of emerging e-commerce platforms represented by Douyin and Kuaishou, domestic MCN agencies have evolved into a three-party bridge connecting short video platforms, content creators and merchants.

After the "double reduction" storm in July 2021, New Oriental was forced to withdraw a large number of teaching and training businesses, but it quickly seized the hot live e-commerce track and established Oriental Selection with self-operated agricultural products as its core business to achieve transformation.

Based on the huge imagination contained in the new story, the share price of Oriental Selection has increased 26 times from HK$2.84 at the end of June 2022 in half a year; and based on its "knowledge-based" product-selling personality, Oriental Selection achieved a GMV of 10 billion in fiscal year 2023, contributing operating income and gross profit of 3.9 billion yuan and 1.5 billion yuan respectively.

At that time, the company accepted all the net profit of 1.2 billion yuan, which saved New Oriental from collapse, but also planted the seeds for today's results.

Since the establishment of Oriental Selection, Yu Minhong has made it clear on many occasions that Oriental Selection is not an MCN company. Its characteristics are:

(1) Positioning Dongfang Zhenxuan as a live-streaming shopping brand that focuses on carefully selecting good products for customers, and also as a product technology company with Dongfang Zhenxuan branded self-operated agricultural products as its core;

(2) Differentiate from traditional MCN organizations through its value distribution: Dongfang’s selected anchors do not have a performance appraisal mechanism, and sales are not linked to their salaries;

(3) Emphasis on spiritual experience and cultural communication rather than pure commercial profit drive.

However, no matter how much emphasis is placed on external characteristics, Oriental Selection’s business model based on “people, goods and places” has not changed, and it still cannot break away from the essence of being an MCN agency (acting as a bridge between three parties).

02

Deviating from the rules, different minds

Since the MCN model runs in the bones of Oriental Selection, the veins of its value chain must also match its internal laws.

Different from the seller's market environment in the era of material scarcity, under the premise of domestic oversupply and Know How demand, consumers have unprecedented choices but also face difficulties in choosing (what).

MCN organizations use content as a carrier to achieve a win-win vision for all parties - but content itself is only a tool to attract users, and ultimately real personal IP is needed as a sedimentation pool for resources.

Therefore, "Internet celebrities" carry huge commercial value in the entire chain. MCN agencies either incubate traffic IPs independently through massive signings, or simply cooperate with celebrities who bring their own traffic to quickly achieve a closed loop.

Back to June 9, 2022, Dong Yuhui was conducting "bilingual sales" in the Oriental Selection live broadcast room. His unique style and rich knowledge content attracted widespread attention and quickly became popular. The network effect quickly made him one of the top streamers on Douyin. As the value of Dong Yuhui's IP increased with the number of fans, after an internal conflict, Oriental Selection created "Traveling with Hui" as an independently operated platform at the end of 2023.

In fact, the essential logic of this behavior is that isolating mature IPs through more concrete "labels" is a strategic insurance measure.

For "newcomers" who cannot generate excess marginal value, MCN agencies bear opportunity costs and risks during the incubation stage, and therefore have a relatively strong position in the distribution of benefits; and when the value of personal IP emerges with the blessing of traffic, the position in the industrial chain given by its commercial value is even higher than that of the sponsors (merchants), and therefore its demands will naturally vary according to time and circumstances.

Therefore, the reason why Dong Yuhui finally chose to leave, no matter how emotional it was, was essentially related to the distribution of interests:

Although Yuhui Tongxing has independent accounting and operation, it is actually still a wholly-owned subsidiary of Oriental Selection. Not only is its value distribution still carried out in a "non-MCN" manner, but its operations are still subject to Oriental Selection.

For Dong Yuhui, who has transformed into a "cash cow", now that he has taken control of the company, he has enough time to realize his autonomy and negotiate premium prices in the fully competitive MCN industry.

In other words, Oriental Selection has deviated from the development law of MCN in the distribution of the value chain. Without extremely attractive conditions, huge traffic cannot be achieved.

03

What is the value of losing its pillar?

In the early stage of the tripartite relationship, MCN agencies can bring traffic to the platform and exposure to merchants’ products/services through unique content, and their services still have high added value.

However, as time goes by, mainstream platforms have completed traffic import and started to reversely demand profit margins. In addition, in a fully competitive environment, highly homogeneous content provides merchants with bargaining power. Coupled with the fact that MCN organizations are highly dependent on personal IP, they have become the lowest link in the industry chain.

According to the open letter released by Yu Minhong, Oriental Selection transferred 100% of the equity and interests of "With Hui Xing Xing" to Dong Yuhui at a "friendly price" of 76.5855 million yuan.

Interestingly, the payment for this transaction was made by Yu Minhong to Dong Yuhui "in a manner consistent with the rules of listed companies and the company's articles of association"; at the same time, Yu Minhong also lobbied the board of directors and the remuneration committee to reward Dong Yuhui with the 141 million yuan in net profit achieved in more than half a year of operation with Huixing, and also promised to support the subsequent operating system free of charge.

According to public data, "Walking with Glory" created a GMV of over 3.1 billion yuan from January to May 2024, accounting for 31% of Oriental Selection's annual GMV in fiscal year 2023. Therefore, divesting "Walking with Glory" is like losing a core pillar.

For Dongfang Zhenxuan, this move shows that Yu Minhong does not want to turn Dongfang Zhenxuan into an MCN company. However, under the constraints of the business model, the loss of the halo of the top stream will most likely have a devastating impact on its intrinsic value.

If Dongfang Zhenxuan wants to quickly regain traffic, it can only rely on "accidental luck" to obtain incremental certainty, or it can only rely on external forces (cooperation with traffic owners). However, if this happens, Dongfang Zhenxuan will become a real MCN company.

Regardless of whether the transfer of core assets at a low price is really compliant, the fact that Dong Yuhui is no longer in the industry will inevitably cause Oriental Selection to undergo a self-revolution - otherwise, there will only be more and more "departure versions of Dong Yuhui" in the future.

After the redistribution of the value chain, Oriental Selection’s profit margin is destined to return to the industry average.

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