Years of losses to profitability: Is it harder to replicate OSL's path in Hong Kong's new Web3 phase?

Jessy, Golden Finance

On June 27, OSL Group (0863.HK) announced its plan to acquire all shares of payment company Banxa, investing approximately HKD 486.7 million. On June 26, Hong Kong released the "Hong Kong Digital Asset Development Policy Declaration 2.0," which proposed four strategic directions centered around the "LEAP" framework, where P represents partnerships, emphasizing regional and international cooperation. The essence of OSL's acquisition of Banxa is also focused on Banxa's possession of 45 licenses that can support its operations in these global locations, which aligns with OSL's plan to vigorously develop PayFi.

According to the financial report information for 2024, the OSL Group achieved profitability in its first year since establishment. OSL, the exchange under the OSL Group, is Hong Kong's first licensed exchange. The earlier OSL Group was affiliated with Hong Kong shell king Gao Zhenshun, resembling more of a shell company reliant on speculation. At the beginning of 2023, the company intended to sell, and by 2024, it was successfully sold after being injected with 710 million HKD by Bitget's parent company BGX, finally achieving profitability in 2024.

A close examination of OSL Group's financial report reveals that in 2024, OSL Group's revenue from digital asset market operations reached HKD 283 million, a year-on-year increase of 73%. The main sources of revenue include over-the-counter trading, request for quote (RFQ) trading, exchange operations, and custodial services. The revenue from digital asset technology infrastructure business amounted to HKD 92 million, with a significant year-on-year growth of 415%, primarily sourced from SaaS services. OSL's turnaround from loss to profit also reflects the current state of Web3 development in Hong Kong. With the orderly advancement of various businesses in Hong Kong, such as virtual currency exchanges for retail investors, spot ETFs for Bitcoin and Ethereum, and stablecoins, the entire cryptocurrency ecosystem in Hong Kong is becoming increasingly complete.

Where do the key profit points appear for OSL? Does the transition from loss to profit also indicate that the development of Web3 in Hong Kong has entered a new stage?

From a "shell" company to being acquired by Bitget's parent company

According to Tencent's "Pangu", OSL began looking for potential buyers for acquisition in the market during the 2023 Spring Festival.

OSL's predecessor was a company listed on the Hong Kong Stock Exchange main board in 2015 - Brand China. This is a company mainly engaged in advertising and marketing, providing customized advertising and marketing services for clients in the automotive and other industries.

In early 2018, the famous shell king, through his subsidiary East Harvest, acquired 74.48% of the publicly issued shares of Brand China, becoming the actual controller of Brand China. It was after this that the OSL exchange was established within Brand China. In 2019, Brand China was renamed BC Technology.

Gao Zhenshun is known as the "King of Shells" and is famous in the Hong Kong capital market for his expertise in acquiring poorly performing listed company shell resources at low prices, then profiting through asset restructuring. Previously, he has successfully operated several similar transactions, such as selling Cultural China (later renamed Alibaba Pictures) to Alibaba, assisting the latter in its layout in the cultural industry, while also gaining considerable profits himself.

The acquisition of the brand in China, followed by the establishment of an exchange internally, renaming, and a series of other measures, are actually all aimed at enhancing the company's value and market influence through business integration and strategic adjustments. When the time is right, capital exit will be achieved through equity transfer or other means to earn substantial profits.

Subsequently, OSL obtained the virtual asset license issued by the Hong Kong Securities and Futures Commission on December 15, 2020, which includes Type 1 (Securities Trading) and Type 7 (Providing Automated Trading Services) regulated activity licenses, becoming the first licensed institution in Hong Kong.

In conjunction with the financial reports of 2021 and 2022, BC Technology Group sought to sell the OSL exchange at the beginning of 2023 due to a sharp decline in digital asset business revenue from HKD 278 million to HKD 71 million, weak trading profits, and high compliance and technology investments (administrative expenses increased to HKD 574 million). At the same time, the company's strategy focuses on high-growth SaaS services (revenue increased by 197.3% to HKD 30 million). Additionally, the sluggish cryptocurrency market has put pressure on the valuation of exchanges, and selling OSL could recoup funds to alleviate the debt-to-asset ratio (73.8%) and optimize resource allocation.

Until November 14, 2023, Bitget's parent company BGX announced a strategic investment in OSL's parent company BC Technology Group, subscribing to approximately HKD 710 million in new shares, with BGX holding a stake of 29.97%, becoming the largest shareholder of OSL. The nearly year-long search journey has finally come to an end. Following this, OSL Exchange's parent company BC Technology Group was also renamed OSL Group.

At that time, Bitget announced that due to its inability to meet Hong Kong's strict virtual asset trading platform licensing requirements, its BitgetX.hk platform for Hong Kong users would cease operations and permanently withdraw from the Hong Kong market starting from December 13, 2023. Due to the high costs, slow progress, and great uncertainty of applying for a license, BGX invested in OSL to leverage its existing license and compliance qualifications to achieve a quick layout in the Hong Kong market. This is also seen as Bitget's "curved rescue" strategy in the face of difficulties in obtaining a license directly.

Key Turning Point from Loss to Profit - HKD 710 Million Investment in BGX

After receiving investment from BGX, the development of OSL has indeed ushered in significant changes.

BGX completed a strategic investment of HKD 710 million in January 2024, after which the company's performance and business structure saw significant improvement. The financial report shows that total revenue in 2024 increased by 78.6% year-on-year to HKD 375 million, turning a net loss into a profit of HKD 47 million, operating cash flow shifted from a net outflow of HKD 686 million to a net inflow of HKD 379 million, and the debt-to-asset ratio decreased from 72.6% to 31.1%. Benefiting from the capital injection, the company's cash reserves increased to HKD 635 million.

After BGX's investment, multiple talents with rich experience in the cryptocurrency and internet finance industries have been gradually introduced, and Lu Zhenshun will officially resign as executive director in August 2024.

The major personnel changes at the top have injected vitality into OSL, and the achievement of turning losses into profits is closely related to the company's significant strategic transformation. This involves focusing on core business and divesting non-core assets, such as selling Shanghai Jingwei and completely exiting the commercial park management business. The focus is accelerating on digital asset trading and SaaS services, with the former generating revenue of HKD 263 million (+81.6%) and the latter generating revenue of HKD 92 million (+415%). The pace of globalization is also accelerating in 2024, as it uses investment funds to acquire the licensed platform OSL Japan and obtain an Australian license. At the same time, it expands institutional clients and the retail market through BGX resources, promoting the transformation of the business towards technology output and global licensed trading.

Another point of interest is that on April 15, 2024, OSL will collaborate with China Asset Management (Hong Kong) and Harvest Global Investments to launch a digital asset spot ETF. In this collaboration, OSL Digital Securities Limited will serve as the virtual asset trading and sub-custody partner for China Asset Management (Hong Kong) and Harvest Global Investments. OSL provides blockchain infrastructure to support investors in participating in investments directly with virtual assets, playing a key role in trading and custody.

By 2025, OSL will continue its global expansion and vigorously develop PayFi. The acquisition of Banxa is a testament to this, as Banxa focuses on payment technology research and development, possessing technological accumulations such as payment gateways and API interfaces. Its B2B payment solutions can complement OSL's cryptocurrency trading platform, helping OSL enhance its one-stop service capabilities. This has also accelerated OSL's globalization strategy. OSL has previously acquired Japan's CoinBest and a European digital asset platform, and this acquisition of Banxa fills the gap in the North American market. Banxa operates in Europe, North America, Australia, and other regions, with extensive market coverage. Through this acquisition, OSL has formed a triangular layout in the Asia-Pacific, Europe, and North America. Banxa holds 45 international licenses, covering key markets such as Canada and Lithuania.

From early reliance on trading fees, to the 2024 financial report showing that 81.6% of its revenue comes from digital asset trading (primarily institutional services), the 415% growth in SaaS revenue comes from technology output. This transformation from a "trading platform" to an "infrastructure service provider" corresponds precisely to the characteristic of B-end services taking the lead under Hong Kong's regulatory framework.

Hong Kong Embarks on a New Phase of Web3, but the Path of OSL is Hard to Replicate

OSL went from being deeply mired in losses and seeking a sale to achieving profitability within just one year after receiving investment from BGX, showcasing strong growth momentum and a clear expansion blueprint. Its transformation is certainly not accidental and is difficult to replicate.

Its transformation journey profoundly reflects the key turning point of Hong Kong's Web3 ecosystem from policy brewing and compliance exploration to substantial implementation and preliminary prosperity. The 81.6% surge in digital asset trading revenue and the 415% spike in SaaS service revenue for OSL in 2024 are direct manifestations of the gradual release of policy dividends.

The early "shell company" nature of OSL was quite pronounced, with its value largely tied to the "first licensed exchange in Hong Kong" license. The performance explosion after BGX took over proves that its value has shifted from being a "license holder" to an "effective operator of license value and builder of business capabilities." Profits come from real trading volume growth, SaaS service income, and technology output, as the crypto industry begins to move from a purely "compliance concept" to actual "business implementation" and "revenue creation."

Looking at OSL's journey over the past few years, especially its inclination towards institutional business, it is clear that OSL's development strategy is no longer limited to being just an exchange. Its business landscape clearly outlines the profile of a comprehensive Web3 infrastructure service provider with "trading + custody + technology solutions ( SaaS ) + payment ( Banxa ) + global compliance network." This reflects the increasing maturity of Hong Kong's Web3 ecosystem, where participants are beginning to construct more complex and synergistic business matrices to meet the increasingly diverse needs of institutional and high-net-worth clients.

OSL's series of acquisitions and global expansion may confirm that Hong Kong's policy advantages can encourage more institutions to participate in the global Web3 market competition. The transition of OSL from loss to profit also illustrates that, under a clear regulatory framework, by empowering through strategic capital, focusing on core business, shedding redundant burdens, and actively pursuing global compliance expansion and ecosystem cooperation, licensed Web3 institutions in Hong Kong are fully capable of achieving sustainable profit growth.

The development of Web3 in Hong Kong has entered a new stage characterized by practical business implementation, institutional funding, and global resource integration. In this stage, competition will also become more intense. OSL's phased profitability begins with an investment of 710 million HKD and a significant reshuffle of its upper management as the driving force for development. High costs make it a game for large capital.

In Hong Kong, there are currently nearly fifty institutions that are licensed to provide virtual asset trading services, not all of which are as financially robust as BGX. OSL took the lead and served a large number of institutional clients, making it no longer easy for latecomers to carve out a piece of the pie in this market.