Three companies backed by Tencent have announced their intention to hold initial public offerings (IPOs), adding billions more in potential liquidity to the corporate but, probably more importantly, liquidity to continue expansion and longer-term alliances between the internet conglomerate and portfolio company partners.
Content aggregating app Qutoutiao filed for an IPO in the US with a $300m target. Tencent is among the backers of the two-year-old company. It reportedly led a $200m round for a 7.8% stake in March that valued Qutoutiao at $1.6bn post-money. Founded in 2016, Qutoutiao aggregates news content according to a user’s personal tastes.
China-based smart electric vehicle developer Nio filed for $1.3bn IPO in the US. Along with company CEO Bin Lin, who will hold class C shares, Tencent will have a significant say in setting the company’s strategy (see comment).
China-based online education platform operator Koolearn, an online education subsidiary of New Oriental Education & Technology Group, reportedly filed for an IPO at the Hong Kong Stock Exchange. Koolearn had raised RMB320m ($50m) from Tencent’s Image Frame affiliate in 2016 and Tencent has a 12.06% stake.
Its stakes in these three IPOs alone would yield Tencent an estimated $2bn in paper returns. This follows a previous GCV analysis estimating Tencent’s ownership positions in five IPOs last year amounted to about $14bn.
The three latest flotations could come ahead of other large portfolio company IPOs planned for group buying platform Meituan Dianping and ride-hailing service Didi Chuxing – collectively these two alone could be valued at more than $100bn given private valuations of a reported $30bn to $60bn for the former and $70bn for the latter.
The bubble chart summarises Tencent’s partial exits since the beginning of 2017 with known retained ownership stakes. Other notable partial stakes have been acquired by Tencent since the beginning of 2017. Tencent and its subsidiary Tencent Music Entertainment agreed to swap minority stakes of undisclosed size with music-streaming service Spotify. Tencent also committed $372m for a 5% stake in China International Capital Corporation (CICC), one of the country’s most active investment banks. Tencent holds 5% of electric car developer Tesla Motors, led by Elon Musk, as well as 13.9% of social media platform Snapchat, which it acquired after a drop in its stock price.
A notable IPO was that of Pinduoduo, a China-based group buying platform backed by Tencent. It raised about $1.63bn when it floated in the US. The company priced the initial public offering at the top of its $16 to $19 range and issued about 85.6 million American depositary shares on the Nasdaq Global Select Market. The IPO reportedly valued Pinduoduo at $23.8bn. Pinduoduo’s group buying platform enables multiple buyers to form groups to buy items in bulk at discounted rates.
China-based e-commerce marketplace operator Yixin Group, spun out of automotive transaction services provider BitAuto, raised HK$6.77bn ($867m) in its IPO, giving an exit to Tencent. The company issued almost 879 million shares on the Hong Kong Stock Exchange at the top of the HK$6.60 to HK$7.70 range it had set. The first day of trading give it a market cap of about $6.54bn. Yixin runs an online platform that functions as a marketplace for vehicles. It also operates a financial services operation that provides leasing as well as financing for car purchases.
Bilibili, a China-based online entertainment platform backed by Tencent and mobile game developer FingerFun, raised $483m in its IPO on the Nasdaq Global Select Market. The company priced 42 million American depositary shares at $11.50, in the middle of its $10.50 to $12.50 range, giving it a $3.19bn market cap. Bilibili operates an online platform focused on anime, comics and gaming that incorporates video-streaming, mobile games and livestreaming. It had an average of 76 million monthly active users in the first two months of 2018.
China-based live game-streaming platform Inke, backed by online game publisher Beijing Kunlun Tech and Tencent, raised HK$1.05bn in its IPO. The company priced its shares at HK$3.85, at the bottom of the range it had previously set, while increasing the number of shares in the offering from 257 million to 300 million. Founded in 2015, Inke runs a mobile-focused livestreaming platform that concentrates on gaming, allowing viewers and video creators to communicate with each other. It had about 195 million registered users at the end of 2017.
China-based automotive sales service provider Cango, previously backed by Tencent, insurance firm Taikang Life Insurance and ride-hailing company Didi Chuxing, floated on the New York Stock Exchange in a $44m IPO. The offering consisted of 4 million American depositary shares at $11 each. The company had initially targeted $300m for the IPO. Cango operates an online platform that connects car dealers, buyers and financial institutions.
Apart from IPOs, Tencent’s trade sales this year include Flipkart to Walmart for more than $20bn, although Tencent was reported to be keeping a stake in the company, Ele.me to Alibaba at a reported $9.5bn valuation, and bike-hiring platform Mobike to another portfolio company, Meituan Dianping for a reported $2.7bn.
In its financial results, Tencent said: “Recently we have invested aggressively in game live broadcast services, which we view as supportive to our game platform, and in smart retail opportunities, which we view as supportive to our payment and cloud services. We have partially funded these investments by monetising some existing investments, for example, exiting our positions in investee companies Ele.me and Mobike.”
But cash returns have come in other ways, too. As the shifting of assets show, the relationship between Tencent and its portfolio companies are more entwined than just that of investor and investee. In its latest financial results, Tencent gave the example of China Literature, which it floated earlier in the year and with which it worked closely.
Tencent said: “Our video services reached 74 million subscriptions, up 121% year on year and maintaining our industry-leading position in China. We attribute this success primarily to our exclusive content in key video genres. For instance, an exclusive drama series, Legend of Fuyao, which was sourced from intellectual property developed with our listed subsidiary China Literature, was ranked the number-one exclusive drama series by video views industry-wide in the first half of the year.”
In an article on cross-shareholdings, the Financial Times noted Meituan paid Tencent RMB87.8m for marketing and promotion services last year, a drop from the previous year’s RMB128.1m, but this year it was handing all its business to Tencent, capping the annual fee at RMB450m. Similarly, Pinduoduo paid Tencent $33m in service fees in the first three months of the year. If the projections materialise, Meituan will be paying Tencent up to RMB3.6bn in fees in 2020, the FT said.
Alibaba, Tencent and Baidu form a troika developing much of the innovation ecosystem in China. While Baidu has been building up its technology, the battle has seemed to be between Alibaba and Tencent, with slightly differing approaches. As news provider Fortune noted in an article on the two, “Alibaba’s is largely a strategy of buying controlling stakes in businesses that are a fit with its commerce platform. Tencent takes hundreds of minority stakes in an array of businesses to win over partners and gain access to their technology.”
In May 2018, Alibaba and Cainiao led a $1.38bn investment for an approximate 10% equity stake in ZTO Express, an express delivery company in China that listed nearly two years ago.
While looking for controlling stakes more broadly, Alibaba in the past three months has taken up an option to acquire a third of Ant Financial ahead of its IPO, and has partnerships with portfolio companies similar to those of Tencent. Its “royalty and technology service fees” earned Alibaba in the region of RMB1bn, or about $160m, per quarter, from Ant, according to news provider TechCrunch.
But regardless of broad approach, their ambitions remain undimmed. As Peter Diamandis, executive founder of Singularity University, concluded in a report on the Baidu, Alibaba and Tencent: -“China’s tech behemoths are disrupting everything from intelligent urban infrastructure to personalised medicine.
“But they are not just revolutionising these industries on their home turf. They are bringing enormous sums of capital and cutting-edge technology to startups and markets across the globe. The pie is not getting smaller – it is getting bigger.”
Led in large part by Tencent and Alibaba, investment bank Goldman Sachs in its Venture Capital Horizons report focused on China, and noted a 111% growth in Chinese venture capital investments in the first six months of the year, hitting $30.9bn in the second quarter out of a global total of $71bn, probably making 2018 “a record-breaking year for global venture capital investments”.
Comment: Tencent plans greater control of Nio
James Mawson, editor-in-chief
Nio, a China-based smart electric vehicle developer, filed last month to raise up to $1.3bn in an IPO in the US, but among the details of its offering is an unusual move for one corporate venturing unit to exert significant influence over its future strategy through unequal voting rights.
Nio’s F-1 filing said: “Each fully paid preferred shares held by Tencent will be converted into the same number of fully paid ordinary shares to be redesignated as class B ordinary shares.”
Holders of class A ordinary shares are entitled to one vote per share, holders of class B ordinary shares are entitled to four votes per share and holders of class C ordinary shares – effectively Bin (William) Li, Nio’s chairman and chief executive – are entitled to eight votes per share.
With Li owning 17.2% of the company through various holding entities, Tencent is its largest investor, with a 15.2% stake. Together, therefore, the two groups will have more control through the power of the extra voting rights.
The filing warned: “Due to the disparate voting powers associated with our triple classes of ordinary shares, Mr Li and Tencent entities will have considerable influence over important corporate matters. After this offering, Mr Li and Tencent entities will continue to have considerable influence over matters requiring shareholder approval, over matters such as electing directors and approving material mergers, acquisitions or other business combination transactions.
“This concentrated control will limit your ability to influence corporate matters and could also discourage others from pursuing any potential merger, takeover or other change of control transaction, which could have the effect of depriving the holders of our class A ordinary shares and our American depositary shares of the opportunity to sell their shares at a premium over the prevailing market price.”
This type of structure has been tried before, but usually only to give the founders and executives greater control. US-listed messaging company Snap floated last year giving new investors in its A shares no voting rights, while early investors, such as Tencent with 17.5% after buying stock following the flotation, had one vote per B share and the C stock – held exclusively by Snap’s co-founders, CEO Evan Spiegel and chief technology officer Bobby Murphy – came with 10 votes each, or about 88.5% of the voting power, according to analysis by Recode.
Similarly, Facebook CEO Mark Zuckerberg controls 60% of the voting power at the social giant, while, at Alphabet, Google co-founders Sergey Brin and Larry Page control more than 52% of the vote combined, Recode noted.
Li’s decision to grant Tencent greater voting rights reflects the importance of the internet conglomerate in Nio’s future. Tencent has, through private investments in public offerings, often tried to acquire shares in portfolio and listed companies rather than using stock markets to exit holdings.
This trust has been built over the past decade. Li Bin had worked with Tencent Investment’s managing partner, Zhaohui (Jeffrey) Li at his previous startup, car retailer BitAuto. Li Bin founded BitAuto after the millennium and reportedly raised $12m from Li Zhaohui in 2009 during his time as an investment principal at Germany-based publisher Bertelsmann’s Asian corporate venturing unit. BitAuto then listed in New York in 2010 and Bertelsmann Asia Investments reportedly sold its stake in BitAuto to unidentified buyers for $65m at the start of 2014.
Li Zhaohui this year joined Nio’s board, alongside Tencent colleagues James Mitchell, chief strategy officer, and Zhong Xiangping, a general manager of the map platform product.
Nio in its filing said: “Our key partners include Tencent, Baidu, Mobileye and Contemporary Amperex Technology [a battery maker for electric vehicles]. We believe their expertise and know-how broaden our service offering and solidify our technological leadership. For example, we are closely collaborating with Mobileye [acquired by data company Intel for $15.3bn last year] to develop next generation autonomous driving technology to be used in our vehicles.
“We have partnered with other strategic partners, including Baidu for its online video iQiyi, search engine and map data and mapping technology, and Tencent for its Tencent Cloud, QQ music, Keen Lab and for NOMI text to speech function.
“We also plan to establish and develop strategic partnerships with Tencent, JD and other technology leaders in our ecosystem to explore more value-added services empowered by big data and our cloud architecture, such as mailbox service, or last-mile express delivery service, and in-car entertainment.”
While Nio also discusses the manufacturing alliance with JAC to make its ES8 and ES6 models, the focus of much of the filing is a pitch to change how people buy and use a car.
Tom Whitehouse, chairman of the London Environmental Investment Forum and contributing editor to Global Corporate Venturing, said of Nio: “It is the most compelling vision of advanced mobility that I have come across so far. I feel it will be very difficult for Europe and North America to compete.”
News provider Financial Times in its analysis said: “The promise to its potential investors in Nio’s American depositary shares – who will join early backers such as Tencent, Baidu and Sequoia Capital – is to revolutionise the experience of owning a car.”
Li Bin said in the IPO filing: “Product excellence is just the beginning for Nio. What users want is a holistic experience exceeding expectations.
“We expect that the ownership of cars will be redefined by a new experience with respect to cars, services, digital connections and the experience beyond the car. Technological advances will not only reshape automotive products, but also connect cars, smart devices, infrastructure, service providers and users, making a more efficient and innovative user experience possible.”
The FT noted that while Nio “has only received 17,000 orders for its first car, some 490,000 people have downloaded its social network app, and posted more than a quarter of a million photos”.
Mike Maples, partner at venture capital firm Floodgate, in a guest comment for Fortune, said the power of connections in a world of networked capitalism meant “software-defined networks will be the most valuable businesses, displacing traditional corporations as central actors”.
Effectively, Nio, which also runs a corporate venturing unit in Nio Capital, is trying to leverage network effects – best seen by Tencent on its WeChat messaging and applications platform – and a collaboration and partnering ecosystem to restructure what is meant by a corporation.
Rather than focus only on reducing transaction costs in buying an electric vehicle, Nio is pushing the firm into areas that Julian Birkinshaw, professor of strategy and entrepreneurship at London Business School, in an article for Harvard Business Review, said would also be important to future success, such as purpose, managing priorities and a long-term approach.
Heady stuff for a startup with $7m in revenues and more than $500m in losses so far this year, but Birkinshaw noted: “Firms create value by nurturing ‘unreasonable’ behaviour.”
Giving Tencent greater influence over the company is less unreasonable from this perspective of longer-term partnership, but whether it will assist the flotation has yet to be tested.
