Beijing, China-based Datasea (NASDAQ:DTSS) is an emerging technology company that develops information technology (IT) systems and network security solutions, leveraging its proprietary technologies and IP to provide complete security solutions that are designed, built and customized to each client’s specific needs. After a period of beta-testing its technology platform, the company has recently launched commercially and has signed two important contracts that management believes reflect that its strategy is on-track.
The company’s strategy is to address a few targeted issues that management believes potentially could lead to high-growth opportunities. For example, the need for external cyber-security services is sizable and growing. According to AT&T Cybersecurity Insights, small businesses don’t usually have access to the resources they need to create and maintain a cohesive cybersecurity strategy. Instead, they should rely on a provider that can plan and roll out the strategy affordably and efficiently. In addition, tourism – for which the company has recently announced an important agreement – is a key sector for China and accounts for roughly 11% of its GDP.
In terms of cyber security, according to a study conducted by research firm Ponemon, 2017 Ponemon Cost of Data Breach study, the average cost of a data breach globally is $3.62 million. A 2017 Verizon Data Breach Investigations report concluded that 75% of breaches were perpetrated by outsiders, with 62% involving hacking. The Verizon report further found that 81% of the breaches leveraged stolen or weak passwords and 51% included malware. While some 24% of the companies breached were in the financial services sector, a sizable 61% of the companies were businesses that employ fewer than 1,000 people – in other words many were mid-size to small companies. According to the 2017 Ponemon study Institute, the average cost per each stolen record in a cyber security breach increased 1.8 percent globally.
All in all, the study notes a multitude of problems that follow in the wake of a data breach, including the loss of customers, cost and inconvenience of notifying customers about the compromise of their sensitive data, and the time to contain and address the security breach. Importantly, the inability to retain customers has serious financial consequences, according to Ponemon Institute.
The dramatic increase in content and data being transmitted over the internet and stored in the cloud is increasing concerns about security and also placing burdens on enterprises. Moreover, as more data storage and IP traffic moves to the cloud, cloud-based business analytics and business intelligence is also expected to grow, increasing the need for greater security, we believe. Gartner expects strong demand for all types of cloud services offerings. Market research firm Markets and Markets estimates the cloud analytics market at roughly $16.52 billion, which would represent a 25.8% 2013-2018 CAGR. Overall, these changes have also made it that much more difficult to ensure internet privacy.
Strategy to Focus on Education, Elevator and Potentially Tourism
With cyber-security and Big data in mind, the company’s strategy is to target a few high-growth silos in China, in particular the smart elevator and smart campus spaces. While Datasea is largely pre-revenue at this point, in order to maximize its sales and marketing efforts, it focuses on these targeted silos, specifically the education market with its Safe Campus security system, potentially the tourism market and the smart elevator market.
The education market will leverage Datasea’s Shuhai Smart Campus Safety Management System or Safe Campus security system, which provides a complete digital campus information platform to enhance communications among teachers, students and their families.
Education Market: Recent Agreement Marks Commercial Launch
Importantly, the company recently has made two announcements that management believes bode well for advancing its strategy, as noted. One announcement has been within the company’s targeted education market. Regulatory changes and recent trends in China might also boost the need for increased digital safety within the school setting.
Elementary and middle schools are the company’s primary target markets within this silo. Through the company’s smart student ID cards, which students wear daily, schools can manage the profiles of all teachers and students and send campus-wide notifications. The system also includes an e-commerce option for parents to purchase items for their children. In addition to fees from merchants selling through the platform and paid online education services for students, the company expects its Safe Campus system to generate revenue via an advertisement model. Ads are displayed on student ID cards and computer terminals.
The company continues to promote Safe Campus to schools in certain large cities. In March 2015, the Chinese government obligated schools to ensure on-campus security. In fact, school administrators can sometimes be held responsible for major accidents, according to Datasea. According to a study by China’s Prospective Industrial Research Institute, the cost of an overall security system for a kindergarten class is estimated at RMB 50,000 to RMB 200,000 (US$7,500 to US$30,000) and for elementary, middle and high schools and colleges, the costs escalate.
Based on the number of schools in China, the company estimates that its potential on-campus security market could be some RMB 35 billion to RMB 230 billion (US$5 to US$35 billion). The company’s focused group, elementary and middle schools in larger cities, together account for roughly 85% of the entire campus security market in China, according to Datasea.
Agreement Launches Safe Campus Platform Commercially
Recently, the company entered into an agreement with Beijing Chuangyan Zhixing Education Technology to distribute Beijing Chuangyan’s Science Education Course Terminals in primary and secondary schools across China. Beijing Chuangyan is an educational technology company that often works with the PRC’s Educational Equipment Research and Development Center of the Ministry of Education. Datasea expects the agreement to leverage Beijing Chuangyan’s Science Education Platform and its Science Curriculum program to enable the two companies to develop joint products, including science education courses and tools to evaluate teaching quality, among other tools.
The company’s tools could prove timely, given current trends in schools. According to trade publications, China has tightened school security in recent years, including stationing more than 2,000 security guards in kindergartens and schools across Beijing to enhance safety. In addition, security in schools in other parts of China has also been increased.
China’s Tourism Sector is Key Economic Sector
Separately, the company also entered into a cooperation agreement with Zhongchuan Cultural Tourism Development to provide intelligent security systems for tourist attractions and venues in China. Zhongchuan is a subsidiary of China Cultural Media Group administrated by the Ministry of Culture and Tourism of the PRC, to provide intelligent security solutions and upgrade current security facilities at cultural tourist attractions throughout China.
Zhongchuan’s key businesses include maintaining a China-focused cultural tourism public service platform, maintaining a ‘big data’ platform of investment and financing in the Chinese tourism industry, and determining the optimal allocation and operation of cultural tourism assets in China. Datasea will tailor intelligent security solutions for tourist attractions and provide data management and evaluation.
Datasea believes the market demand in China for building and upgrading current intelligent security systems at these venues is significant, with 259 national top level scenic venues, 1,284 top scenic venues, and nearly 10,000 local-level scenic venues in China, according to Ministry of Culture and Tourism November 2018 data.
Moreover, tourism is a critical sector for China. Revenue from tourism represented roughly 11% of GDP in 2018, according to data from the Ministry of Culture and Tourism. The Ministry also noted that tourism revenue increased some 10.5% in 2018 compared to 2017 to RMB 5.97 trillion ($881.49 billion). However, general expectations are that tourism revenue growth could slow in the near-term, in-line with a broader economic slowdown. In fact, tourism growth in China slowed during this year’s important Spring Festival holiday, according to CNBC, which cites reduced consumer confidence as a key factor. People often spend Chinese New Year visiting their relatives, which boosts tourism, as it is one of China’s few major public holiday seasons and an increasingly popular time for Chinese residents to travel.
Although tourism revenue continues to increase in 2019, economic slowdown and uncertainty regarding U.S.-China economic trade appear to have constrained consumer spending overall within China. Specifically this slowdown can also be seen from car sales data, which has fallen for seven months consecutively, according to CNBC. CNBC notes that the auto sector can be viewed as a barometer on consumer willingness to spend generally. Official domestic travel data from China’s Ministry of Culture and Tourism also appears to support that tourism growth has slowed recently. The ministry recorded 415 million visits within the country during the recent Chinese New Year holiday. While that represents an increase of 7.6% compared to the year ago period, it lags the 12.1% growth rate recorded in 2018.
Revenues from domestic tourism advanced by 8.2% year-over-year to RMB 513.9 billion ($76.4 billion), which also lags the 12.6% growth rate registered in the comparable 2017 period. Importantly, however, smaller cities in China displayed robust growth, in terms of both incoming domestic travelers and local population traveling to other sites, according to CNBC, which cites a report from Chinese travel booking site Ctrip.
Ctrip noted that the most marked difference between Spring Festival travel this year compared to last year is that the number of tourists from the counties of Heshan, Fogang and Huidong, which are located in the southern province of Guangdong, each reported significant year-over-year growth of up to six times 2017 metrics.
Moreover, according to the South China Morning Post, which cited a study by the World Travel and Tourism Council (WTTC), four of the five most rapidly growing cities around the globe in terms of direct travel and tourism-related revenue in the ten years ending in 2017 were in China. They are Chongqing, Shanghai, Chengdu and Guangzhou. According to the study, Chinese residents travelling domestically accounted for some 95% of Chongqing’s tourism and travel-related GDP, and 90% of tourism-related revenue in Guangzhou, 88% in Shanghai, 87% in Beijing and 83% in Chengdu. Given the importance of tourism to these cities, the company’s digital intelligence platform could help maintain and grow this key economic segment.
Smart Elevator Security and Management System
Currently in testing stages, the company’s Smart Elevator system helps clients reduce the operating cost of elevators and ensure passenger safety by collecting data of the elevator operation, regular maintenance services, annual inspections and any malfunctions. A remote surveillance system will automatically alarm the building operator if there is a malfunction or launch a backup power when needed.
Among the many benefits of ‘smart elevators, they improve energy efficiency and can reduce passenger waiting time, according to online magazine Buildings Smarter Management. In addition, Datasea’s Smart Elevator system can locate the nearest maintenance crew and notify them of an emergency. Once Datasea launches Smart Elevator, it expects to generate revenue through in-car ads.
Market Opportunity for Big Data
The company also plans to become a national provider of big data processing services in China. According to management, Datasea is developing systems to analyze industry trends, market and customer data, as well as supply chain and financial information, among other metrics. Digital data continues to grow, which in turn means that analyzing it requires more sophisticated systems. According to IDC (International Data Corporation) predictions, by 2025 the global datasphere – the amount of data created in the world – will grow to 163 zettabytes (that is a trillion gigabytes). That’s ten times the 16.1ZB of data generated in 2016.
The growth in the amount of data that needs to be stored, shared and used will also drive demand for processing the data and maintaining the privacy of sensitive information. At the same time, it will lead corporate entities to become more and more vulnerable to data breaches.
Industry insiders believe that there is substantially more sensitive data being produced and stored currently than the amount that is being secured. In other words, industry insiders believe that much of the sensitive data being produced is not being secured properly. Importantly, this gap is expected to widen. In fact, IDC estimates that nearly 90% of all data created in the global datasphere will require some level of security by 2025, but not even half will be secured. Thus, public and private entities likely will require cybersecurity technology to protect and manage a growing amount of data.
Market research firm Gartner forecasts that global spending on information security technologies and services exceeded $114 billion last year, representing a 12.4% advance compared to 2017. Gartner forecasts that the market will reach $124 billion in 2019, an 8.7% year-over-year increase. Gartner estimates that privacy concerns about sensitive data will fuel 10% or more of market demand for security services through 2019, impacting several segments of the economy.
Stock Price and Liquidity
In advance of launching its platform commercially, Datasea has also focused on strengthening its balance sheet and enhancing the liquidity of its shares. In December 2018, the company raised $5.8 million in a public offering of shares. As of March 31, 2019, the company had $5.3 million of cash on its balance sheet. At the same time, the company implemented an uplisting to the NASDAQ, providing greater liquidity to investors seeking to build a position following a one-for-three reverse stock split in April of 2018.
Datasea is an emerging technology company that develops IT systems to provide complete security solutions that are customized to each client’s specific needs. The company has recently launched its technology platform commercially and has signed two important contracts that management believes reflect that its strategy is on-track. Specifically, the company’s strategy is to address a few targeted issues that management believes potentially could lead to high-growth opportunities. In addition to providing cyber-security services, a sizable and growing market, the company’s focus is on the education, elevator and potentially tourism market in China. The company’s recent two announcements bode well for advancing its strategy, management believes. Risks to advancing the strategy include competitive as well as market risk, among others, in our view.
One announcement has been within the company’s targeted education market. The other is within the tourism sector. Recently, the company entered into an agreement with Beijing Chuangyan Zhixing Education Technology to distribute Beijing Chuangyan’s Science Education Course Terminals in primary and secondary schools across China. The company’s tools could prove timely, given current trends in schools. According to trade publications, China has tightened school security following recent in-school attacks.
Separately, the company also entered into a cooperation agreement with Zhongchuan Cultural Tourism Development to provide intelligent security systems for tourist attractions and venues in China. Datasea believes the market demand in China for building and upgrading current intelligent security systems at these venues is significant. Moreover, tourism is a key silo for China’s economy, with revenue from tourism representing roughly 11% of GDP in 2018, according to data from the Ministry of Culture and Tourism.
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