Tencent’s sizzling hot e-books IPO presages more mega spinoffs

HONG KONG • China Literature Ltd’s red-hot debut may spur parent Tencent Holdings Ltd to consider spinning off other parts of a US$470 billion (RM1.99 trillion) empire that spans everything from movies to music streaming.

Tencent’s e-books business soared almost 90% on its debut, Hong Kong’s largest tech coming-out party since 2007. That marked the best first-day performance this year among initial public offerings (IPOs) of US$500 million or more, suggesting strong demand for businesses spawned within Tencent — some with multi-billion dollar price tags.

It’s already said to be fielding pitches from banks to handle an IPO for its music arm that could raise at least US$1 billion next year.

The extraordinary reception for its online books unit could now spur China’s largest social media conglomerate to float other businesses to raise cash, unlock value for shareholders and cultivate independent divisions that can expand and carve out new markets on their own.

“The units could have more freedom to look for strategic partnerships, and attract investment. It could also make the units less Tencent-centric, opening more chances for collaboration,” said Li Yujie, an analyst with RHB Research Institute Sdn Bhd in Hong Kong.

“Apart from what it considers its core business — social network, games, advertising and payments — everything else is possible.”

Tencent has a tradition of encouraging independence, pushing teams to split off and work on side projects in the hope that some will hit paydirt.

It’s similar to Google’s longstanding 20% rule, in which engineers take a day a week to work on personal pet projects, except much more competitive. That formula’s produced notable successes: The now-ubiquitous WeChat messaging service sprang from a team of just a few people and initially cannibalised Tencent’s then-dominant QQ for computers.

Some of the first iterations of China Literature, in which Tencent retains a majority stake, sprang from internal skunkworks that were then combined.

The country’s biggest publisher of e-books, which espouses a model similar to Amazon.com Inc’s Kindle Store, will now use its IPO proceeds to invest more on analysing user preferences, work with Tencent’s WeChat and QQ messaging services to make reading more sociable, and convert its most popular titles into anime, movies or games.

China Literature — which raised HK$8.3 billion (RM4.48 billion) in its IPO — feeds into Tencent’s broader ambition to create a technology and entertainment colossus.

The Shenzhen-based company became China’s second-biggest technology company on the strength of its WeChat messaging app, which since has morphed into a portal for shopping, banking, videos and gaming.

To that end, it will select some content, and co-invest or co-produce movies and anime series, co-CEO Liang Xiaodong told Bloomberg Television. He added that his company is closely working with its parent’s film and video units.

“User demand for content is getting very strong, especially original material,” Liang said. “Our content can easily be converted into movies and games to maximise coverage.”

Investors had signalled their approval for that approach even before the company’s first-day spike. China Literature attracted strong interest from retail investors, who placed orders for more than 600 times the stock available to them in the IPO, people with knowledge of the matter said earlier.

Morgan Stanley, Bank of America Corp, Credit Suisse Group AG, China International Capital Corp and JPMorgan Chase & Co were joint global coordinators of the offering.

Its stellar first-day showing conferred a value of almost US$12 billion on the debutante and also made a fortune for co-CEO Wu Wenhui. His roughly 3% of the company, according to data compiled by Bloomberg, is now worth more than US$350 million.

Created through the merger of Tencent’s online literature business with Carlyle Group LP-backed Cloudary Corp, China Literature had a profit of 213.5 million yuan (RM136.64 million) in the first half of this year, compared to a 2.4 million yuan loss for the same period in 2016, according to its prospectus.

The company had 9.6 million works and 6.4 million writers as of June 30, and customers can pay for an entire book or buy a few chapters at a time to see if they want to keep reading.

“Demand is especially strong since Hong Kong is in a bull market,” said Paul Pong, MD at Pegasus Fund Managers Ltd in Hong Kong. “And there are not many profitable tech companies, so there’s a lot of upside.” — Bloomberg