Shares in Tencent’s China Literature leap 86% in Hong Kong debut

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Shares in Tencent’s ebook subsidiary China Literature rose as much as 100 per cent on their trading debut in Hong Kong on Wednesday, in the city’s biggest technology initial public offering in 10 years.

China Literature raised HK$8.3bn ($1.1bn) in a heavily oversubscribed IPO, dwarfing the HK$1.55bn raised by its parent Tencent in its 2004 listing.

Its shares peaked at HK$110 in morning trading after being priced on Tuesday at HK$55 each, the top of the range announced by the company.

They closed the day up 86 per cent at HK$102.40. In recent years, a doubling in the share price on the first day of trading for a Hong Kong listing has been rare.

The strong appetite for China Literature stock on Wednesday was driven by retail investors trying to get a piece of what many perceived could be the next Tencent, said Kevin Tam, an analyst at Core Pacific-Yamaichi in Hong Kong.

“They expect this to be Tencent number two,” he added. “Many retail investors missed out on the first Tencent IPO and the 10-times growth.”

But Mr Tam cautioned that such expectations for China Literature were misguided. Much of Tencent’s value is locked in its userbase but China Literature has “just a very small slice of that”, he said.

China Literature provides internet literature such as ebooks and serialised short stories and had 173m monthly average users as of December 2016.

The float is the first in a series of IPOs planned by Chinese tech giant Tencent. Sogou, the Tencent-backed search engine and text input software company, will list in New York on Thursday and is aiming to raise $585m. Bankers expect Tencent to also list Tencent Music, the world’s third-biggest music streaming service by subscriptions.

The high demand for China Literature shares comes as the pay-for-content business model is slowly taking hold in China — a market historically known for bootleg videos and poor IP protection — as middle-class millennials come to expect higher quality from subscription services.

“The value of online literature IP franchises is rising in China because of many content adaptation opportunities, such as TV dramas, movies and games,” said Karen Chan, analyst at investment bank Jefferies. “Tencent has already established a record in IP operation across these genres.”

Although China is famed for inventing the printed book, the digital version has quickly become more profitable in a country whose citizens are glued to their smartphones.

China’s top 10 online writers earn twice as much as the country’s top 10 offline writers, according to consultancy Frost & Sullivan, in research commissioned by China Literature. Chinese adults spend roughly one-third of their leisure time on the mobile internet, according to research by state media.

China Literature is the country’s market leader in online literature in terms of both readers and writers, who it contracts — it publishes 88 per cent of all writers published online in China, according to Frost & Sullivan. The company first made a slim profit in 2016. It posted a net profit of Rmb213m ($32m) in the first half of this year, with a net profit margin of 11.1 per cent.

Ren Yuxin, Tencent‘s chief operating officer, on Wednesday hailed the successful IPO, which he said “took years of effort” and close co-operation with authors.

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According to data from Dealogic, China Literature’s listing was the largest by a tech company in Hong Kong since the float 10 years ago of Alibaba.com — a subsequently privatised subsidiary of Alibaba, the Chinese ecommerce group that in 2014 listed in New York in a blockbuster $25bn IPO.

Some analysts have questioned the logic of going public. “China Literature is over-valued because of Tencent’s glory. It was created from a merger for only one purpose — IPO,” said Zhang Yi, chief executive of research group iMedia, referring to the merger in 2015 of Tencent Literature and Cloudary to become China Literature.

“It’s very hard to say this kind of company will have a long-term promising future, because the company doesn’t have a founder, just all the founders getting together for the IPO. I’m afraid there will be people just cashing out from this IPO and leaving right away,” Mr Zhang added.

By Yuan Yang
Additional reporting by Yingzhi Yang and Louise Lucas
FT

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