Tencent’s China Literature most-profitable IPO debut in a decade after value soars as much as 100pc
Stock price ends the day at HK$102.4, 86pc up from its IPO price of HK$55; 143m shares change hands, worth a total HK$14b, giving it a market cap of HK$93b
Shares in China Literature, Tencent Holdings’ online publishing arm and mainland China’s largest online publishing and e-book website, skyrocketed nearly 90 per cent in value by the close on Wednesday, after initially jumping 64 per cent immediately in early trading in Hong Kong, in what’s been dubbed the city’s hottest IPO in nearly a decade.
The surge gave retail investors who won the bid for new shares a first-day profit of HK$9,480 per lot in book value – the highest among the main board’s IPO debuts since November 2007, when Alibaba.com posted a first-day profit record of HK$13,000 per lot after soaring 192 per cent.
China Literature’s lot size contains 200 shares.
China Literature closed at HK$102.4, giving it a market capitalisation of HK$93 billion, after touching a daily high of HK$110 earlier in the morning, doubling its IPO price of HK$55 (US$8.29). 143 million shares changed hands during the day, worth a total HK$14 billion.
The company’s market cap has already overtaken 11 of the 50 constituent stocks in Hong Kong’s benchmark Hang Seng Index, surpassing Cathay Pacific, Hang Lung Properties, Kun Lun Energy, and Lenovo Group, among others, according to data compiled by Et Net, a financial information provider.
The shares had closed more than 60 per cent above their IPO price in the so-called grey market – when new securities are bought and sold before official trading begins – ahead of what market watchers had already anticipated would be a blockbuster debut. The retail portion gathered demand 626 times the number of shares on offer.
“Many small investors were chasing the stock, as it was hard for retail bidders to get an allotment of new shares during the public offering period,” said Victor Au, chief operating officer for Delta Asia Securities.
“The IPO captured great investor interest, largely due to Tencent’s brand effect.”
Tencent, which controls more than half of China Literature, hit a new all-time high of HK$398.6 on Wednesday, before erasing gains, closing the day at HK$385.6, down 1.4 per cent.
Its market cap hit HK$3.66 trillion (US$470 billion), inching closer to New York-listed Alibaba’s US$482 billion, the most valuable company in Asia. Tencent’s stock has spiked more than 100 per cent this year.
“The valuation [for China Literature] is stretched at the current level, far away from the fundamentals,” Au said, suggesting the price may be expensive for a company that only just turned a profit in 2016 after two straight years of losses, despite having strong growth potential.
“It’s risky to chase a high. Small investors should watch out for the risks.”
China Literature reported a first-half net profit of 213.5 million yuan, swinging from a loss of 2.4 million yuan in the same period last year, according to its stock sale prospectus.
In 2016 as a whole, it generated a profit of 30 million yuan, following losses of 354 million yuan and 21 million yuan for 2015 and 2014 respectively.
It makes its revenue mainly from charging readers to access popular stories from famous authors who have been contracted to write, as well as operating intellectual property rights, including adapting those stories for film, television, games, or comic and animation, or licensing content to partners.
Wu Wenhui, its co-chief executive officer, said earlier this year that the company’s future focuses will be developing film, television, games, and other entertainment products based on its IP.
“We want to become China’s version of Marvel,” Wu said then.
“Through this IPO, we want to bring Chinese original literature to a more Hong Kong and global audience. In future, the company will try to develop products based on the IP we own, and also expand the genres of e-books,” he added on Wednesday.
Liang Xiaodong, Wu’s co-CEO said: “We are surprised by today’s stock performance. But this is just the beginning. We will continue working hard and growing our corporate values longer term.
“Hong Kong is an open and international market and combines mainland and international investors. In particular, the Stock Connect allows mainland investors to invest here,” he said, responding to questions about why the firm chose Hong Kong to list.
The stock surge on Wednesday has also benefited Pony Ma Huateng, chairman and CEO of Tencent.
As Tencent controls 53 per cent of China Literature, its stake is worth HK$49 billion based on Wednesday’s closing price. Ma, who personally owns an 8.63 per cent stake in Tencent, could see his interest in China Literature worth as much as HK$4.2 billion.
In addition, Wu Wenhui, who owns 27,100,626 shares in China Literature, saw his net worth rise to HK$2.8 billion.
China Literature has a business akin to Amazon.com’s Kindle Store. The platform has 9.6 million literary works from 6.4 million authors.
The IPO has locked in investor capital of more than HK$520 billion, the second largest in Hong Kong IPO history, after China Railway Construction’s HK$535 billion in 2008.
The enthusiasm for China Literature also broke the record set by ZhongAn Online Property & Casualty Insurance last month, the city’s largest technology IPO of 2017, which was overbought by 391 times.
Among the 103,352 retail bidders who have subscribed for one lot of 200 shares per person in China Literature, fewer than 8,000 were successful in getting their hands on its stock, with each person allocated a single lot.
Alvin Cheung, a director for Prudential Brokerage, said the amount of locked-in investor capital – over HK$520 billion – accounted for about a third of Hong Kong’s money supply, based on the second quarter M1 figure from Hong Kong government.
The company had planned to allocate 10 per cent of its global offering to the public in Hong Kong, or 15.14 million shares. The oversubscription has triggered a clawback rule, enabling underwriters to increase the public offering tranche to 33 per cent, or 49.95 million shares. Excluding fees, net proceeds from the IPO will be HK$7.2 billion.
Nearly a third of the net proceeds will be used to expand its “online reading” business, including growing its network of “promising [contract] writers” and expanding the genres of e-books, the company said in its prospectus.
China Literature owns IP rights to a number of hugely popular online novels in China, including fantasies Ghost Blows Out the Light series and the Grave Robbers’ Chronicles, which have already been adapted for film and television several times.
The remainder of the proceeds will fund potential investments or acquisitions, or be used as working capital and general corporate purposes.