Kingsoft gears up for expansion as it seeks to raise up to HK$768m
Kingsoft Corp, a Beijing-based software and online game firm, starts selling shares to the public on Monday as it seeks to raise as much as HK$768 million to fund new development.
The company, founded in 1988 by chairman Kau Pak-kwan, 42, is selling 213.34 million shares for between HK$2.90 and HK$3.60 each, according to a sale document obtained by fund managers.
Of the shares on offer in the initial public offering, 93.2 per cent will be new and the rest will be sold by existing stakeholders. Assuming an offer price of HK$3.25, the company can raise net proceeds of about HK$556.3 million.
The offering represents 20 per cent of the company's enlarged share capital. Deutsche Bank and Lehman Brothers are organising the sale.
The listing candidate may increase the size of the offering to 245 million shares if demand warrants. The share sale will close on September 28, with trading scheduled to start on October 9.
'Kingsoft is well known in northern China but seems less attractive when compared with other internet service providers such as Alibaba, which will have a public offer soon,' said Michael Wong Man-shek, research director of Hantec Investment International.
Kingsoft once dominated the market with its self-developed word processor, spreadsheet and other applications. However, piracy undercut sales and brought the company close to bankruptcy.
'Until 1995, our office software dominated the market,' chief financial officer Wang Donghui said in February. 'It was a cause of national pride. Our vision had always been to be the Microsoft of China.'
Although the situation has improved, as much as 86 per cent of software on mainland personal computers is still pirated, according to a study last year by the Business Software Alliance, a United States trade association.
An investment of an undisclosed amount from Lenovo in 1998 helped Kingsoft reinvent itself by developing online games and anti-virus software, areas where piracy is difficult.
The company generates revenue through the sale of pre-paid cards and game points for products such as Xian Lu Qui Yuan II, introduced in the second quarter of last year, and the newer JX Online. These products compete with games such as QQ Fantasy offered by Hong Kong-listed Tencent Holdings.
Kingsoft also sells software products such as Kingsoft Internet Security, an anti-virus product, and Kingsoft PowerWord, an e-dictionary.
Another Hong Kong-listed software firm is Kingdee International, a Shenzhen-based firm that focuses on enterprise resource planning software.
In June, International Business Machines and Lehman Brothers teamed up to buy a 7.7 per cent stake in Kingdee for HK$132 million.
Kingsoft's net profit fell 26 per cent to 32.7 million yuan for the three months to March on higher selling, distribution and administrative expenses. The company's sales rose 30 per cent to 103.9 million yuan.
'Kingsoft's sales growth is a little bit slower than that of other online game peers,' an analyst said.
'Online game makers may also have to pay a premium salary to attract employees, who change jobs very frequently.'
The company will use HK$170.1 million or 30 per cent of the share sale net proceeds to recruit fresh graduates and experienced researchers.
Kingsoft will use HK$115.8 million for strategic acquisitions and joint ventures related to its core businesses and HK$94.1 million to be spent on upgrading its computer servers. Some HK$76 million will be earmarked for expansion abroad and HK$72.4 million will be used to set up research and development facilities in Zhuhai, including the land costs.
Kingsoft's anti-virus software became one of the 10 most popular in Asia-Pacific excluding Japan in 2005, according to US-based market research firm IDC.
The company also produced two of the mainland's top 10 online games in 2005, according to Shanghai-based iResearch.
Mr Kau founded Kingsoft four years after he graduated from the PLA National Defence Science and Technology University with a degree in information systems management.
He was named as one of the top 10 business people on the mainland in 2000 and one of the 10 most influential leaders in the country's games industry in 2005.
Kingsoft vice-chairman Lei Jun, 37, has been with the company since 1992 and became chief executive in 1998. He was one of the founders of Joyo.com, which was set up in April 2000 and sold to Amazon.com in 2004.
Kingsoft has received US$72 million in investment from venture capital groups Government of Singapore Investment Corp (GIC), Intel Capital and New Horizon Evergreen.
GIC holds 16.8 per cent of the company and Lenovo 8.2 per cent.
What the analysts think
Michael Wong, research director, Hantec Investment International
Pros: The company is well known in north China
Cons: It is less attractive when compared with Alibaba
Herbert Lau Chung-kwan, chief investment officer, CASH Asset Management
Pros: The company is attractive as it is mainland-based
Cons: The transparency of the mainland's online-game industry is low
Yiu Chin, financial analysis director, Altruist Financial Group
Pros: Kingsoft's dictionary software is famous in Hong Kong
Cons: Sales growth is slower than peers'