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8-K - CURRENT REPORT - China Internet Cafe Holdings Group, Inc.v234869_8k.htm

Investor Presentation China Internet Café Holdings Group, Inc. (OTCQB:CICC) September 2011

 
 

Notice of Disclosure This information is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy any security or related financial instrument. This presentation may include “forward - looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934 and are intended to be covered by the safe harbor provisions for forward looking statements. This information is supplied from sources we believe to be reliable but we can not guarantee accuracy. This document and the information contained herein is confidential. The agents and the agents’ counsel assume no responsibility or liability of any nature whatsoever for the accuracy, adequacy or completeness of the publicly available information or as to whether all information concerning the Company required to be disclosed by the Company has been generally disclosed. The agents’ counsel and the Company's counsel are acting as counsel to the agents and the Company, respectively, and not as legal counsel to the subscriber. The agents have not engaged in any independent investigation or verification with respect to any of the information concerning the Company. Prospective purchasers are responsible for their own due diligence investigation in respect of any investment in the Company.

 
 

Executive Summary Capitalization Shares % Insiders 19,450,000 92 Public 1,750,507 8 Total 21,200,507 100% China Internet Café owns and operates 57 internet cafés in Southern China • Branded under Shenzhen Junlong Culture Communication ( Junlong ) • Headquarters in Shenzhen, China • Employees: 700 • Opened first café in 2006 • Public through RTO in July 2010 Junlong brand of internet cafés • Translation: Dragon Surf • Affordable online entertainment for factory workers and student customers • Internet usage fees generate 95% of revenue • Over 13,000 computers Well defined growth strategy • Balanced organic growth and regional expansion through acquisition • Obtain national internet café chain license Key Financials Ticker CICC 2010 Revenue (12/31/10) $20.5M +45% 2010 Net Income (12/31/10) $5.7M +30% 1H 2011 Revenue (6/30/11) $15.1M +82% 1H 2011 Adj. Net Income* $3.2M +20% 1H 2011 Adj. EPS $0.16 +11% Price (8/31/11) $1.01 Market Capitalization $21.4M *Excludes $0.7 million non - cash gain related to changes in fair value of derivative instruments

 
 

Investment Highlights Valuation • 2010 PE multiple: 2.6x (Actual) • 2011 PE multiple: 1.5x (Based on make good) • 2011 NI Margin > 25.0% Make Good • 2011 net income: $10M • 0.65M shares in escrow Proven Company Execution • Profitable business since inception • 3 year NI CAGR 24% • $5.8M in cash flow from operations for 2010 Strong Café Performance • Average annual revenue per café (locations open > 1 year) • 2009: $528,000 • 2010: $588,000 • Same store sales: 11.9% • 80% of customers visit > 1x per month • Average payback period: 14 - 24 months

 
 

Steady Growth of Internet Café Usage Internet café industry • Approximately $13B in revenue in 2009 according to the Ministry of Culture • Poised for continued growth • Regulators drive consolidation Affordable entertainment for low to middle income consumers • Safe & easy access to information • Affordable costs: 5.9% of $450 monthly income for frequent user » Gaming computer ~$1,200 » Plus internet service cost • Low home computer/console ownership • Social: customers prefer café atmosphere, ability to meet friends and team play • Quality: unreliable home internet connections Source: www.enfodesk.com Source: www.iresearch.com Chinese Internet Cafés (Thousands) Registered Chinese Internet Café Users (Millions)

 
 

Locations • Select locations throughout Shenzhen ( Longgang, Pingshan, Baoan, Yantian) • Dedicated team sources prime locations within walking distance to factories • Located in highly populated and dense locations such as universities, industrial zones and business centers

 
 

Customer Demographics Demographics Age 82.3% are 18 - 25 Gender 78% are male Disposable income $ 280 - 560 /month Target Customers: • Factory workers • College students • Local residents

 
 

Café Pricing Configuration Member Non - member Off Peak Peak Video chatting $0.15 $0.30 $0.45 LCD screens 0.23 0.38 0.53 World of Warcraft 0.30 0.45 0.61 High end g aming 0.45 0.53 0.68 Private booth 0.45 0.61 0.76 *Exchange rate:6.69 • Customers purchase reloadable integrated circuit (IC) cards – IC cards are inserted into computer – Separate cards for premium game services – Funds deducted per 6 minutes of usage time • Hourly pricing ranges from $0.15/hour to $0.76/hour

 
 

Inside the Cafe Movies, surfing, VOIP service, instant messaging, online gaming, snacks and drinks, preloaded games and videos Over 1 Million Active Customers in Q2 2011 • Customer activity: – 80% active within last year – 65% within 1 month – 50% within 1 week • Average number of visits/month: 1.5 times

 
 

Café Usage 57% 21% 15% 7% Café Usage Preference Gaming Chat Surfing Movies/Other Junlong caters to gaming customers • Premium high speed internet performance • 57% of users vs 30% industry average • Longer play times • Higher revenue per hour • Proprietary Saflash software for stability • Average length of visit: 4 - 5 hours

 
 

Strong Cafe Portfolio Junlong granted internet chain license by Ministry of Culture (MoC) in 2005 Strict government oversight • Mandatory license • MOC actively fining and shutting down illegal operations in 2009 • Safety and size thresholds • Frequent internal inspections Café Portfolio Factsheet Average number of computers 245 Average size 875m² Average occupancy 11.3 hrs/day Revenue per square meter/year $618.4 Revenue contribution/year/cafe $500k Average cafe cost $350k High end café cost $500k - 600k Payback period 14 - 24 months Busiest hours 6PM - 12AM Company Owned Cafés 0 10 20 30 40 50 60 2006 2007 2008 2009 2010 2011 8 13 22 27 48 57

 
 

Quality Management Protocols Quality control – centralized and standardized operations management Routine corporate inspections • At least 2/month at random • Cleanliness and cafe appearance, fire safety, game and software content updates, uniforms, staff training Incentivize café employees for revenue performance • An average of $462 awarded to store managers per year for achieving revenue targets (Monthly salaries range from $450 - $900 per month) • Penalize cafe managers for infractions • Promotion from within policy Internet café industry facility requirements • Stringent safety regulations and content restrictions • Monitored by 4 separate regulators

 
 

Technology Differentiation According to 2010 survey: • 53.2% attend for service and equipment quality • 26.5% attend for internet speed and stability of connection Junlong cafés are designed to run at 100% capacity Innovation improves customer experience Saflash proprietary network control software • Team gaming area • Broad portfolio of games frequently updated • Host local movie/TV content – Limits outside bandwidth usage to insure faster connections – Updated daily • VOIP services available through prepaid IC card • Prevents disruptions in internet connections – Lower package drop rate – Stable gaming • Throughput maximization – Microsoft Windows development platform – Automatic flow control China Telecom provider agreement delivers Fast computers and reliable internet connections which are important to Junlong’s customers

 
 

Growth Plan Focused Approach to Expansion 1. Existing cafe acquisitions • Joint venture operations in new provinces • Provide financial and operational support to smaller regional operators • Targeted regions include Guizhou , Yunnan, Sichuan and Chongqing • Qualify for national internet café chain license • Secure national operating license 2. Organic growth • Company owned cafés in Shenzhen manufacturing zone • Company owned high - end cafés in up - scale residential locations • JV owned cafés based around newly acquired cafe operations

 
 

Increased MoC Regulation of Internet Café Market Policy: Safety through Consolidation In 2009, the MoC cracked down on illegal operators • Underage users • Internet addiction • Unsafe conditions • Banned content Encourage larger, better regulated nationally licensed chains Junlong will meet national license requirements after expansion into two additional provinces: Expected in early 2012 National license requirements: Benefits of national license: – $7.5 million registered capital – 30 wholly owned cafés in 3 provinces – No fines in past year – Priority application for entry in tier two cities – Tax benefits – Telecom discounts – Marketing benefits o Brand awareness o Attract franchisees National Internet Café License

 
 

Acquisition Strategy Minimize development risks by partnering with quality regional operators Location Timeframe Regional characteristics Hunan 4Q11 • Densely populated locations such as colleges town, entertainment areas and residential areas • Focused on capital city, Changsha Hubei 1Q12 • Developing tier 3 city with low rates of computer ownership • Mostly focused on lively streets, downtown areas and small districts • Targeted markets offer attractive returns – Average hourly bill rate in undeveloped regions is 6RMB ($0.90) compared to 5RMB ($0.75) in Shenzhen

 
 

Organic Growth Strategy 57 cafés as of August, 2011 • L arge cafés with 300 or more computers focusing on movies, high - end games and entertainment • Medium cafés with 150 to 300 computers and a few movie suites focusing on high - end games • Small café with 100 to 150 computers Implement high end cafes • Private rooms » Surround sound equipped movie screening areas • Team gaming and tournament play areas » LCD screens for spectator viewing Optimizing resources and improve operations • More stringent requirements for new locations • Upgraded café format, signage and layout • Minimize CapEx by leveraging economies of scale Estimated Mid - Tier Café Expenditures 250 Computers $160,000 Furnishings & Decoration 56,000 Equipment 56,000 Permits 30,000 Leasehold improvement 19,500 Prepaid rent + other expenses 31,000 Total $352,500 PC Configuration First class 8% High end 20% Middle 40% Low end 32% Increased costs for computers, furniture and decorations in high end stores

 
 

Key Financials $ in millions Fiscal Year ended Dec 31 ($ in thousands) 2008A 2009A 2010A 1H 2011 Revenue $10,107 $14,038 $20,460 $15,115 Gross Profit 3,772 5,629 8,637 $6,047 Gross Margin 37.3% 40.1% 42.2% 39.9 % Operating Income 3,665 5,463 8,002 4,716 Operating Margin 36.3% 38.9% 39.1% 31.1% Net Income 3,014 4,388 5,746 3,241* Net Income Margin 29.8% 31.3% 28.1% 21.4% *Excludes a one - time expense of $0.6 million expense related to Financing & Derivative Financial Instrument

 
 

Experienced Management Guo Dishan : CEO • Bachelors degree in Business Administration from Management Administration Institute in Guangdong Province (1996) • Executive president of the Internet Industry Association in Long Gang District Shenzhen, Guangdong • Member of the Guangdong Chamber of Commerce of high - tech industries Li Jingwei : VP of Corporate Finance • Master of Professional Accounting from Monash University, CPA • Served as a senior accountant at Bentleys MRI, Melbourne, Australia Li Zhenfan : Engineering Manager • Bachelor of Public Administration; Hunan Teacher - Training University • Responsible for Junlong Saflash system software R&D • Served in Shenzhen Altai Technology Co. Ltd. as the Chief Technology Officer/Chief Information Officer Guo Zhenquan : Sales Manager • Five years experience as sales manager in internet cafés industry • Strong strategic planning capacity and management decision - making ability Huo Kai: Marketing Manager • Masters degree in Computer Management from Grafton College Dublin Ireland • Five years marketing experience

 
 

Investment Summary Strong demand • Driven by increasing internet cafe user base in China – $13B industry revenue – 185 million users in 2010, ▲ 38% Y/Y Well defined growth strategy • Balanced organic growth complemented by acquisitions Proven business model • Sustainable and profitable business with recurring revenues • Increase in number of users with rising revenue per user • Cafés are designed to run at 100% capacity Commitment to customer service and quality Seasoned management team • Extensive experience with the internet cafe business • Maintains significant ownership stake

 
 

Contact Us Investor Relations Ted Haberfield Executive Vice President MZ - HCI Direct: 760 - 755 - 2716 Cell: 858 - 204 - 5055 Email: thaberfield@hcinternational.net Website: www.mz - hci.com www.chinainternetcafe.com Company Mr. Jingwei Li Vice President of Corporate Finance Phone: +86 - 755 - 3366 - 8770 Email: Jingwei@cncicc.com

 
 

Appendix I Regulation Restriction Regulator Provincial office of national authority Age restriction At least 18 years old Ministry of Culture Content control Internet o perations license PRC approved content only Unmonitored internet communication Monitoring software required Ministry of Culture Local Internet security safety Public safety Fire Safety 1 computer per 3 m 2 Extinguishers Clear aisles and exits Emergency management system Police & Fire Internet cafés are subject to numerous national, provincial and local regulations

 
 

Appendix II • Major licenses from government bureaus

 
 

Appendix III • Awards

 
 

Appendix III: Corporate Structure China Internet Café Holdings Group, Inc. OTCQB:CICC (Nevada) Classic Bond Development Limited (BVI) Shenzhen Zhonghefangda Network Technology Co., Ltd. (PRC) Shenzhen Junlong Culture Communication Co., Ltd. (PRC) 100% 100% Contractual agreements* *Contractual agreements consisting of a management and consulting service agreement, an equity pledge agreement, option agreement and proxy agreement