Banking & Finance

On neutral ground

A cloud company lists on Shanghai’s STAR board

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For centuries before it adopted the policy of neutrality in global affairs, Switzerland had been Europe’s go-to supplier of mercenary troops, thanks to its bellicose pikemen and strategic location guarding the Alps. It wasn’t until losing the Battle of Marignano in 1515 that the Old Swiss Confederacy realised the hefty costs of war, and agreed not to fight the French nor ally with its enemies. Its non-partisan stance was diplomatically recognised in 1815, giving it an edge when it came to becoming one of the world’s most desirable places for the super rich to stash their assets.

Being able to maintain neutrality also has its merits in China’s internet sector, where smaller players are often forced to take sides between Alibaba and Tencent. UCloud, a Shanghai-based cloud computing company has enjoyed a growth spurt in recent years by positioning its service as neutral territory. That suited those clients that either wished not to overtly ally with any of the competing behemoths’ ecosystems (Baidu and Huawei also offer cloud services) or in other cases wanted to find a secondary cloud partner that wouldn’t upset their primary partner (and often investor).

“An Alibaba investee will definitely go for Alibaba Cloud and dare not use Tencent Cloud, making us their other cloud service,” Ji Xinhua, CEO of the eight year-old company, told CBN. “Same for mobile phone manufacturers that are competing against Huawei,” he added, noting that Chinese internet firms are increasingly hiring more than one cloud computing services provider to cope with their growing scale.

Revenues in China’s cloud computing industry are projected to cross Rmb300 billion ($42.3 billion) by 2023, according to the country’s State Council. The figure represents a threefold increase from 2018, and assumes 60% of all domestic companies and government agencies are set to store and process their data online, as well as accessing software applications via the internet.

The strong demand for cloud computing services helped UCloud turn profitable in 2017. But the company’s heavy reliance on a more niche group of customers bodes ill for its future, warned iyiou.com, a tech news portal. Around 28% of clients were from the online gaming sector, which is susceptible to government crackdowns (see WiC452). New customers also contributed less than 6% of UCloud’s total revenue in the first six months of 2019, down from 16% in 2016 – a metric that doesn’t indicate the sort of high growth usually associated with tech firms in hotter segments of the industry.

This same weakness is reflected in UCloud’s market share losses. In the first half of 2018 UCloud was ranked sixth in China’s public cloud service market, ahead of Microsoft, Baidu and Huawei, data from the International Data Corporation showed. A year later it dropped out of the top 10, as more deep-pocketed rivals invested further in the booming sector. Alibaba, Tencent, China Telecom, Amazon and Huawei accounted for over 75% of China’s $5.42 billion public cloud service market as of June 2019, again according to the IDC.

Little surprise then that UCloud’s net income for the first half of 2019 slumped 84% to Rmb7.78 million. Revenue growth in 2018 also decelerated to 41% from 63% a year earlier, with sales of Rmb1.18 billion.

Why all this context matters is that UCloud has just gone public – with some fanfare – in Shanghai. Indeed, despite the headwinds in its financials, UCloud’s initial public offering on the STAR board on January 20 was greeted with exceptional enthusiasm. Its shares spiked 120% on their debut, giving the company a market capitalisation of Rmb30.8 billion ($4.44 billion), which is among the 10 biggest of the 79 companies listed on STAR. UCLoud plans to use the fresh funds to build new data centres targeting the media and education industries. It will also establish a Rmb4.8 billion data centre in Inner Mongolia’s Ulanqab City, where power is cheap.

The IPO has also grabbed the attention of institutional investors because it represents a corporate governance precedent: it is China’s first domestic listing with a dual-class shareholding structure. UCloud’s three co-founders – Ji Xinhua, Mo Xianfeng and Hua Kun – own an aggregate 23.1% of the company (post-IPO). But their Class A shares provide five times more voting power than Class B shares, giving them a controlling interest of 60.1%.


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