This Chinese start-up's 47-page IPO risk disclosure lists lack of proper licenses and Ebola virus

Tencent Holdings-backed Qutoutiao, operator of a mobile app that aggregates Chinese news and short videos, may have raised some red flags even as the company looked to attract investors for its proposed US$300 million initial public offering (IPO) in the United States.

Shanghai-based Qutoutiao, whose name means “fun headlines”, revealed those concerns as part of the mostly boilerplate clauses in its 47-page-long risk disclosure contained in a prospectus published on Friday.

The company said it was currently doing business without the proper government licences; incurred losses since it was founded in 2016; and concerned about being adversely affected by the effects of the Ebola virus and other infectious disease outbreaks.

While its platform primarily focuses on light entertainment content, Qutoutiao said in its prospectus that certain content related to current affairs, finance, society and economy may be deemed to be news content, which is regulated by the Cyberspace Administration of China (CAOC).

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“We are in the process of preparing an application for an internet news licence,” the company said. But it offered “no assurance that our application will be accepted or approved by the regulatory authorities”.

Yidian Zixun, a Beijing-based news aggregator, was the only company to have received the internet news licence after the CAOC rolled out that requirement last year.

Qutoutiao also did not possess an internet audio-visual programme transmission licence from the State Administration of Radio, Film and Television.

“As a result, the relevant regulatory authorities may find our operations to be in violation of applicable laws and regulations,” the company said. It suggested that the business may receive a warning and ordered to pay a fine of not more than 30,000 yuan (US$4,362).

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The Qutoutiao mobile app – which recommends customised articles and videos, powered by artificial intelligence, on a wide range of topics to users – was also subject to the increased clampdown by the government on what it deems as “inappropriate” content, the company said.

Qutoutiao declined to offer further comment beyond the prospectus.

Its risk disclosure further highlights the big role that the central government plays in China’s internet industry.

The government is “the visible hand” behind the country’s internet market, where success or failure – especially for media and entertainment companies – is contingent upon its approval, according to the China Internet Report co-authored by the South China Morning Post, its online tech news site Abacus and San Francisco-based venture capital firm 500 Startups.

In April, China’s media regulator ordered news aggregator Jinri Toutiao and Tencent-backed live-streaming video service Kuaishou to clean up content on their platforms, singling out both operators for disrupting order in the online media industry, the report said.

Apart from that, the Qutoutiao prospectus also showed the difficulties encountered by the company to generate any profit after two years in operation. Its net losses widened to 514.4 million yuan in the first half of this year from 28.7 million yuan in the same period last year. That was more than its total net loss of 94.8 million yuan in 2017 and 10.9 million yuan in 2016.

While Chinese online search giant Baidu remained Qutoutiao’s largest customer, contributing 75.8 per cent of its revenue in 2017, the app operator’s sales and marketing expenses, which includes cash credits awarded to users for taking specific actions, have ballooned. These reached 611.9 million yuan in the first half of this year, more than the 419.6 million yuan it spent in 2017 and 50.9 million yuan in 2016.

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Qutoutiao currently has 17.1 million daily active users (DAUs), who each spend an estimated 55.6 minutes per day on its app. That makes Qutoutiao China’s second largest news aggregator, with a 4.16 per cent DAU penetration rate behind rival Jinri Toutiao’s 20.33 per cent, according to its prospectus.

To support its algorithm-based screening process, Qutoutiao has set up a “content management team” of 566 people, comprising 43.5 per cent of its total employees, to manually screen content and comments, the company said in its filing.

With that growing manpower requirement, Qutoutiao said its business could be disrupted if any of its employees were suspected of being infected by the Ebola virus and other contagious diseases like the H1N1 flu virus and SARS.

In terms of competition, Qutoutiao said in its filing that Bytedance’s Jinri Toutiao and Yidian Zixun, an affiliate of Phoenix News, were among its rivals in the industry. User traffic is also being challenged by portals run by Tencent News, Sina News, Sohu News and NetEase News. Alibaba Group Holding, the parent company of the Post, also runs news and video app businesses.

Despite its challenges, Qutoutiao may have the inside track on new investors. Jinri Toutiao last month denied earlier reports that it was pursuing an IPO in Hong Kong.