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27 August 2018

Analysis: Tencent-backed IPOs

Since the beginning of 2017, Global Corporate Venturing (GCV) Analytics has tracked and seen a number of companies backed by China-based internet company Tencent go public in Hong Kong and the US.

Author: Kaloyan Andonov, Reporter, and James Mawson, Editor-in-chief

Three companies, backed by Tencent, have announced their intentions to hold initial public offerings (IPO) recently adding billions more in potential liquidity for the corporate venturing group but, probably more importantly, liquidity to continue expansion and longer-term alliances between the internet conglomerate and portfolio company partners.

Content aggregating app Qutoutiao filed for an IPO in the US, which will have a $300m target. Among the backers of the two-year old content aggregating app is Tencent, which reportedly led a $200m round in March that valued it at $1.6bn post-money for a 7.8% stake. Founded in 2016, Qutoutiao operates a mobile app that aggregates news content according to a user’s personal tastes, focusing on a fun, light-hearted approach.

China-based smart electric vehicle developer Nio filed for $1.8bn IPO in the US. One interesting detail about the offering concerned voting rights of different classes of shares. Class A ordinary holders will have one vote per share, class B – four votes per share, and class C – eight votes. Tencent’s fully paid preferred shares will be converted into class B ordinary shares. Tencent is currently the largest external investor in Nio with a 15.2% stake at an expected $15bn valuation. Along with company’s CEO Bin Lin, who will hold class C shares, Tencent will have a significant say in setting the company’s strategy.

China-based online education platform operator Koolearn, the online education subsidiary of New Oriental Education & Technology Group, reportedly filed for an IPO at the Hong Kong Stock Exchange. Koolearn had raised RMB320m ($50m) from Tencent’s Image Frame affiliate in 2016 and Tencent has a 12.06% stake. 

Just its stakes in these three IPOs would give Tencent an estimated $2bn in paper returns, following on from GCV analysis in November that Tencent’s ownership positions in five IPOs last year were estimated to be about $14bn. 

The three latest flotations could come ahead of other large portfolio company IPOs planned for group buying platform Meituan Dianping and ride hailing service Didi Chuxing – collectively these two alone could be valued at more than $100bn given private valuations of a reported $30-60bn and $70bn, respectively.

The bubble chart here summarises Tencent’s partial exits since the beginning of 2017 with known retained ownership stakes. In addition to those, there are other notable partial stakes that Tencent acquired since the beginning of 2017. Tencent and its subsidiary Tencent Music Entertainment agreed to swap minority stakes of undisclosed size with music streaming service Spotify. Furthermore, Tencent committed $372m for 5% stake in China International Capital Corporation (CICC), one of the country’s most active investment banks. Tencent holds a 5% stake in the electric car developer Tesla Motors, led by Elon Musk, as well as 13.9% in social media platform Snapchat, which it acquired after a drop in its stock price.

Tencent IPOs

Source: GCV Analytics

A notable IPO was that of Pinduoduo, the China-based group buying platform backed by Tencent. It raised approximately $1.63bn when it floated in the US. The company priced the initial public offering at the top of its $16 to $19 range and issued about 85.6 million American depositary shares (ADSs) on the Nasdaq Global Select Market. The IPO reportedly valued Pinduoduo at $23.8bn. Pinduoduo’s group buying platform enables multiple buyers to form groups, either on the platform itself or through social media networks, to buy items in bulk at discounted rates.

China-based e-commerce marketplace operator Yixin Group, spun out of automotive transaction services provider BitAuto, raised HK$6.77bn ($867m) in its IPO, giving an exit to Tencent. The company issued almost 879 million shares on the Hong Kong Stock Exchange priced at the top of the HK$6.60 to HK$7.70 range it had set. The first day of trading give it a market cap of about $6.54bn. Yixin runs an online platform that functions as a marketplace for vehicles. It also operates a financial services operation that provides leasing as well as financing for car purchases.

Bilibili, a China-based online entertainment platform backed by Tencent and mobile game developer FingerFun, raised $483m in its IPO on the Nasdaq Global Select Market. The company priced 42 million American depositary shares at $11.50 each, in the middle of its $10.50 to $12.50 range, giving it a $3.19bn market cap. Bilibili operates an online platform focused on anime, comics and gaming that incorporates vide streaming, mobile games and livestreaming. It had an average of 76 million monthly active users in the first two months of 2018.

China-based live game streaming platform Inke, backed by online game publisher Beijing Kunlun Tech and Tencent, raised HK$1.05bn ($134m) in its initial public offering. The company priced its shares at HK$3.85 each, at the bottom of the range it had previously set, while increasing the number of shares in the offering from 257 million to 300 million. Founded in 2015, Inke runs a mobile-focused livestreaming platform that concentrates on gaming, allowing viewers and video creators to communicate with each other. It had approximately 195 million registered users as of the end of 2017.

China-based automotive sales service provider Cango, previously backed by Tencent, insurance firm Taikang Life Insurance and ride hailing company Didi Chuxing, floated on the New York Stock Exchange in a $44m IPO. The offering consisted of 4 million American depositary shares (ADSs) priced at $11.00 each. The company had initially targeted $300m for the IPO. Cango operates an online platform that connects car dealers, buyers and financial institutions, helping to leverage financing for vehicle sales and provide after-sales services.

 Tencent public holdings

Outside of the IPOs, which are unlikely to give direct cash back to Tencent in selling shares (possibly even the reverse if Tencent is a further buyer), Tencent’s trade sales this year include Flipkart to Walmart for more than $20bn, although Tencent was reported to be keeping a stake in the company, Ele.me to Alibaba at a reported $9.5bn valuation and bike hiring platform Mobike to another portfolio company, Meituan Dianping for a reported $2.7bn.

In its financial results, Tencent said: “Recently we have invested aggressively in game live broadcast services, which we view as supportive to our game platform, and in smart retail opportunities, which we view as supportive to our payment and cloud services. We have partially funded these investments by monetizing some existing investments, for example, exiting our positions in investee companies Ele.me and Mobike.” 

But cash returns have come in other ways, too. As the shifting of assets show, what is interesting is the relationship between Tencent and its portfolio companies are more intwinned than just investor and investee.

In its latest financial results, Tencent gave the example of China Literature, which it floated earlier in the year and worked closely with.

For its second quarter, Tencent said: “Our video services reached 74 million subscriptions, up 121% year-on-year and maintaining our industry-leading position in China. We attribute this success primarily to our exclusive content in key video genres. For instance, an exclusive drama series, Legend of Fuyao, which was sourced from an IP [intellectual property] developed with our listed subsidiary China Literature, was ranked the number one exclusive drama series by video views industry-wide in the first half of the year.”

In other examples, an article on the “sort of Chinese version of Japan’s keiretsu”, or cross-shareholdings, the Financial Times noted Meituan paid Tencent Rmb87.8m ($12.8m) for marketing and promotion services last year, a drop from the previous year’s Rmb128.1m but this year was handing all the business to Tencent, capping the annual fee at Rmb450m.

Similarly, Pinduoduo, the Tencent-backed ecommerce site valued at $20bn in last month’s initial public offering on Nasdaq, paid $33m in service fees in the first three months of the year to Tencent.

If the projections materialise, Meituan will be paying Tencent up to Rmb3.6bn plus in fees in 2020, the FT said, by arguing choice in China is limited and Tencent provides “reliable and cost-efficient services” with Alibaba by far the country’s biggest cloud provider with revenue growth of 93% year-over-year to RMB4,698m ($710m) in its first quarter. 

Effectively, Alibaba and Tencent, along with peer Baidu form a troika developing much of the innovation ecosystem in China.

Similar to 500 Startups’ China internet report, consultants Stratfor in an analysis on Baidu, Alibaba and Tencent (known as the BATs) and the regulatory risks they face in China, identified through PwC research the market share of each in various tech sectors:

Tencent market share 

But while Baidu has been building up its technology in the main the battle has seemed between Alibaba and Tencent with slightly differing approaches. As news provider Fortune noted in its profile of Tencent and Alibaba’s battle supremacy in China, “Alibaba’s is largely a strategy of buying controlling stakes in businesses that are a fit with its commerce platform; Tencent takes hundreds of minority stakes in an array of businesses to win over partners and gain access to their technology”. 

Free cash flow generated from operations of RMB26.4bn ($4bn) in its first quarter to end-June, Alibaba said, partly offsetting the “cash used in investing activities, including investments in Ele.me and ZTO Express” that saw its cash fall to RMB177.3bn ($26.8bn), compared to RMB205.4bn as of March 31, 2018.

In May 2018, Alibaba and Cainiao led a $1.38bn investment for an approximate 10% equity stake in ZTO Express, an express delivery company in China that listed nearly two years ago.

Alibaba bought control of Ele.me and said it had established a company to hold it and Koubei as the combined flagship local services vehicle, “which we plan to separately capitalize with investments from Alibaba, Ant Financial and third-party investors. As of the time of this announcement, we have received over $3bn in new investment commitments, including from Alibaba and SoftBank.”

But while looking for controlling stakes more broadly, Alibaba in the past three months has taken up an option to acquire one-third of Ant Financial ahead of its IPO, has similar partnerships with portfolio companies as Tencent has. Its “royalty and technology service fees” earned Alibaba in the region of Rmb1bn, or about $160m, per quarter, from Ant, according to news provider TechCrunch.

But regardless of broad approach, it is clear their ambitions remain undimmed. As Peter Diamandis, executive founder of Singularity University, concluded in a report on the BATs: “China’s tech behemoths are disrupting everything from intelligent urban infrastructure to personalized medicine.

“But they aren’t just revolutionizing these industries on their home turf. They’re bringing enormous sums of capital and cutting edge technology to startups and markets across the globe. The pie isn’t getting smaller—it’s getting bigger.”

Led in large part by Tencent and Alibaba*, investment bank Goldman Sachs in its Venture Capital Horizons report focused on China, and noted a 111% growth in Chinese venture capital investments in the first six months of the year, hitting $30.9bn in the second quarter out of a global total of $71bn and so likely pushing 2018 “to be a record breaking year for global venture capital investments”.

Disclosure: Tencent and Alibaba will be represented at the GCV Asia Congress in Macau and Hong Kong on 19 and 20 September.

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