Hong Kong’s hottest IPO in 10 years just turned supernova

PUBLISHED : Tuesday, 07 November, 2017, 10:58am
UPDATED : Tuesday, 14 November, 2017, 5:08pm

China Literature, the country’s largest online publishing and e-book website, has priced its initial public offering at the top end of a price range, as investors overbought its shares by more than 600 times in the hope of getting in early on what could turn into another internet star like its parent Tencent Holdings.

China Literature’s shares will begin trading in Hong Kong for the first time on Wednesday at HK$55 each, which prices its offer at HK$8.3 billion (US$1.06 billion), making it the city’s second-biggest stock sale by an internet company this year. Investors submitted bids to buy 9.48 billion shares, or 625 times more than what the company had on offer.

It means 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.

Tencent’s China Literature, mainland’s biggest online publisher, launches IPO worth up to US$1.1 billion

At stake is the hope that the stock price of China Literature, which has an archive of 9.6 million volumes of work produced by 6.4 million writers in a business model similar to Amazon’s Kindle Store, will turn into another Amazon, or Tencent. Amazon’s stock price rose 0.8 per cent Monday in New York to US$1,120.66, valuing the company at US$540 billion. Tencent’s shares rose 3 per cent Tuesday to HK$388.80, giving the company US$473 billion in capitalisation.

Among the 103,352 retail bidders who have subscribed for one lot of 200 shares per person, fewer than 8,000 were successful in getting their hands on China Literature’s stock, with each person allocated a single lot.

Still, the enthusiasm for China Literature broke the record set by ZhongAn Online Property & Casualty Insurance, the city’s largest technology IPO of 2017, which was overbought by 391 times.

ZhongAn’s shares soared as much as 57 per cent within six days of its September 27 debut, easing 0.5 per cent on Tuesday to HK$76.45.

“This IPO is so hot that a large amount of market liquidity has been frozen during the subscription period, even triggering a rise in Hong Kong’s interbanking borrowing rate,” said Alvin Cheung, a director for Prudential Brokerage.

He said the amount of locked-in investor capital – over HK$520 billion – accounted for about one third of Hong Kong’s money supply, based on the second quarter M1 figure from Hong Kong government.

“This is largely due to the brand effect of Tencent.”

ZhongAn Online’s co-founders include Alibaba’s Jack Ma, Tencent’s Pony Ma, and Ping An Insurance’s Ma Mingzhe. Jack Ma’s Ant Financial is among the biggest shareholders of the company.

Cheung said Hong Kong’s IPO market has heated up since ZhongAn Online’s share offering attracted good investor interest at the end of September.

Nonetheless, he cautioned that in both cases investors should watch if the share prices are too far away from their headline financial fundamentals.

China Literature reported a first-half net profit of 213.5 million yuan (US$32.2 million), swinging from a loss of 2.4 million yuan in the same period last year, according to its stock sale prospectus.

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.

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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.

The company derives 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, co-chief executive officer for China Literature, said earlier this year that one of 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.

The company owns IP rights to a number of 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 the company’s potential investments or acquisitions, or be used as working capital and general corporate purposes.

China Literature’s flotation comes as several other well-known tech names have made, or launched, IPOs.

Razer, the US gaming hardware company backed by Intel and Hong Kong tycoon Li Ka-shing, has seen another huge oversubscription from retail investors for its Hong Kong IPO, which is worth up to HK$4.3 billion. The stock is expected to debut on the Hong Kong stock exchange’s main board on November 13.

Yixin Group, China’s largest online car retailing platform, also launched its IPO in Hong Kong on Monday, seeking to raise as much as HK$6.77 billion in what could be the third-largest internet business IPO in the city this year. Yixin expects to start trading on the Hong Kong stock exchange on November 16.