Ding Lei, founder of Guangzhou-based internet company NetEase, has seen some extraordinary changes at his company. For a start, it has become a $58 billion behemoth whose services have expanded from email into online entertainment and e-commerce. The number of his staff has jumped from 221 to 20,000, and its customer base has expanded to one billon. And as of yesterday its shares are no longer traded solely on Nasdaq, but also in Hong Kong, thanks to a secondary listing that raised HK$20.9 billion ($2.7 billion).
According to the Hong Kong Economic Journal, NetEase’s offering received interest from more than 370,000 retail investors. Over HK$200 billion ($25.8 billion) was pledged to the deal, translating to an oversubscription rate of 360 times. For comparison, Alibaba’s $11.2 billion return to Hong Kong last November was 42 times oversubscribed (see WiC476) and handset maker Xiaomi’s $4.7 billion fundraising 9.5 times (see WiC408).
The enthusiasm is understandable. Since going public on Nasdaq at $15.5 per share in 2000, NetEase’s stock has been one of the market’s best performers. Adjusted for a 4-for-1 stock split back in 2006, the shares have grown nearly 102 times in value. Also tantalizing this month: its newly offered stock in Hong Kong was priced at HK$123 apiece, or a 3.8% discount to its American depositary shares. It rose as much as 10% on it s trading debut yesterday.
With Rmb5.6 billion ($791 million) in cash and cash equivalents in hand, and generating Rmb16.9 billion in liquidity from operations last year, the company said it has no problem meeting anticipated capital needs for at least the next 12 months.
The share sale in Hong Kong is seen more as a hedge against further deterioration in China’s relations with the US. We reported in WiC497 that a new Senate bill, which received unanimous support, could put Chinese companies traded in the US into a catch-22 situation (a requirement to submit company audits to a US oversight body collides with Chinese laws that forbid information sharing for national security reasons). That puts the Chinese companies at risk of being delisted in New York.
Hong Kong’s bourse has been easing its rules to provide a more favourable environment for so-called ‘China-concept’ stocks. The compiler of the benchmark Hang Seng Index also agreed last month to include companies with weighted-voting rights and secondary listings into its widely tracked benchmarks (see WiC498). Hurdles are being cleared for such stocks to join the Stock Connect Scheme, which could see stronger buying from a mainland Chinese investor base that understands their businesses better too.
Such prospects have already prompted some investors in Alibaba to trade their US-based shares in the company for its shares in Hong Kong. The free float as a portion of Alibaba’s Hong Kong registered shares has risen from 11.1% on its debut to 38.1% as of June 9, while its ADS numbers in America have declined. “The rising percentage reflects increasing demand to convert ADS to H-shares,” noted Arun George, an analyst at Global Equity Research, adding that NetEase will likely experience a similar trend.
What is also relevant to long-term investors is NetEase’s fundamentals. Drawing 78% of its revenue from online games, the company saw its net profit for 2019 more than triple on the year to Rmb21.4 billion in response to the lifting of a nine-month ban on games licencing in China, as well as a surge in income from investments. As the second largest online game publisher behind Tencent, NetEase maintained its position by focusing on games that typically accommodate hundreds or even thousands of players on the same server, such as its flagship title Fantasy Westward Journey 3D.
Following the success of MARVEL Super War, a game that it co-developed with the US comic’s franchisor in Southeast Asia, NetEase is looking to sell more of its self-developed games to overseas markets, which accounted for 11% of its gaming revenue last year.
Ding’s firm has built a video game studio in Canada (and plans one for Japan) and it has earmarked 45% of the funds raised from the Hong Kong listing to what it calls “globalisation strategies”.
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