China-based internet company Tencent has recently been involved in five large initial public offerings (IPO) for Asia-based companies that have floated in either Hong Kong and New York.
Tencent’s ownership positions in the five is estimated by Global Corporate Venturing Analytics to be about $14bn. For context, Intel Capital, arguably the largest and most successful corporate venturing unit of the past 25 years, had six portfolio companies complete IPOs in the first nine months of 2017 (while another 19 were acquired), but for lower paper returns.
In terms of return size, it is worth looking at some of the most famous wins in venture capital history, such as VC firm Accel’s stake in social network Facebook, which was worth $9bn at the time of its 2012 IPO, and peer Sequoia Capital’s $60m investment in messaging application WhatsApp, which was worth $3bn in its sale to Facebook in 2014, according to data provider CB Insights.
It apears as though the mere presence of Tencent among a company´s shareholders potentially drives its price up, given a user base of nearly one billion for its WeChat app, and strategic positions across the economic landscape in China.
The positive secondary effect was clearly observed in the stock price of Snap, the owner of messaging app Snapchat, which rose after Tencent revealed its 13.9% stake. Tencent’s purchase of a 5% stake in China International Capital Corp in September 2017sent the investment bank’s shares in Hong Kong to an all-time high.
Yixin Group, a China-based e-commerce marketplace operator spun out of automotive transaction services provider BitAuto, raised HK$6.77bn ($867m) in its IPO last week.
Tencent has a 24.3% shareholding in Yixin, which also counts e-commerce firm JD.com (in which Tencent also owns 16.6%) and internet company Baidu as backers. Yixin issued almost 879 million shares on the Hong Kong Stock Exchange priced at the top of the IPO range, giving it a market cap of about $6.54bn and Tencent a stake worth almost $1.6bn.
A week earlier Tencent had successfully floated its e-book publishing subsidiary, China Literature, on the Hong Kong Stock Exchange. China Literature raised approximately $1.1bn when it floated near the top of the $6.60 to $7.70 range.
China Literature’s share price soared by almost 100% in the morning session of its first day of trading, reaching HK$105 per share. Tencent owns 63% of the issued shares, worth about $7.1bn of its $11.3bn market cap.
Sogou, a China-based search engine operator backed by internet companies Sohu and Tencent, floated in the US raising $585m in an IPO on the New York Stock Exchange (NYSE), priced at at the top of the range it had set. Tencent’s stake was diluted from 43.7% to 38.7%, worth $2.05bn of Sogou’s $5.3bn market cap.
Singapore-based online services provider Sea raised $884m in an IPO late last month on NYSE with shares priced at $15.00 each, above the $12 to $14 range. Founded in 2009, Sea runs a diversified online business that incorporates a digital media and game offering (Garena), an e-commerce marketplace (Shopee) and a financial services platform (AirPay).
Tencent invested in Sea at an early stage and held a 39.8% stake pre-offering that was diluted to 35.1%. It then purchased additional shares in the offering to take a 37.6% holding as at the end of September, worth $1.88bn of its $5bn market cap.
Tencent recorded another IPO exit in In September 2017, when online insurance platform ZhongAn recorded the largest ever fintech IPO in Hong Kong. The $1.5bn IPO was priced at the top of the IPO’s range.
Tencent and insurer Ping An each owned 12.1% stakes pre-IPO, worth $1.7bn pre-dilution based on ZhongAn’s $14.1bn market cap, while the share held by Ant Financial, e-commerce firm Alibaba’s financial services affiliate, stood at 16%.
These IPOs will not be the last in the streak, as Tencent seems to have backed at least a quarter of the noted unicorns – companies worth at least $1bn – in China, according to GCV’s October issue analysis, and there is at least one more IPO in the making.
Meituan-Dianping, a China-based local services platform, plans to go public in the US as soon as 2018 and is seeking at least $3bn. It was valued at $30bn as of a $4bn funding round led by Tencent that closed last month.
Formed by the 2015 merger of group buying service Meituan with local reviews and listings platform Dianping, the combined company acts as an online portal to a range of services including ride hailing, food delivery and event ticketing.
Tencent appears to be using IPO less as an exit than an extra funding round for its portfolio companies (with the option to potentially sell shares later). Jeffrey Li, managing partner at Tencent Investment, said at the GCV Asia Congress in September its returns from holdings after they had become unicorns were better than those taken before they reached that status, so the approach makes sense.
Certainly, Tencent’s own history in having South Africa-listed media company Naspers as a long-term shareholder, as its value has risen above $400bn and it continues to deliver quarterly results that surpass expectations, would encourage this thinking.
