Books opened on Monday for iDreamSky Technology ahead of its US initial public offering, with the Chinese mobile game platform operator aiming to raise up to $124 million in August.
iDreamSky will price 7.7 million American Depository Receipts — all primary — between $12 and $14 a unit in a Nasdaq flotation next month under the leads of Credit Suisse and JP Morgan. The base deal size is $108 million, which will increase to $124 million if the greenshoe option is exercised, according to a term sheet.
Chinese internet group Tencent, which owns 27% of iDreamSky and is its largest shareholder, and Cayman-domiciled Cheetah Mobile are acting as concurrent private placement holders.
Each are pledging to purchase $15 million and $8 million respectively in iDreamSky’s shares once the company goes public, a banker close to the deal told FinanceAsia.
While technically considered a separate transaction, concurrent private placements purchase stock at the IPO price.
Demand has been robust for the Shenzhen-based mobile game publishing company thus far, with the institutional tranche multiple-times covered just hours after books opened, another banker said.
At $12 to $14 per share, iDreamSky is being marketed at 8.8 to 10.2 times its 2015 earnings, a discount to most of its peers, which are trading on average 16.5 times 2015 earnings, the banker said. The company’s market capitalisation is $660 million.
The roadshow will take company executives to Hong Kong, New York, Boston and San Francisco before pricing on August 8.
Comparables
Its closest comparable is King Digital Entertainment, maker of the popular Candy Crush game that this year held the largest US technology IPO since Twitter’s November debut. Still, iDreamSky and its syndicate are hoping that’s where the similarities end. King Digital’s shares fell 16% on its market debut and have dropped 18% to July 28. It is currently trading at 7.74 times its 2014 earnings, according to Bloomberg data.
Although iDreamSky is being marketed at a slight premium to King Digital, it comes at a discount to its other comparables, which include Boyaa Interactive and Zynga. Boyaa is trading at 21.42 times its 2014 earnings and is up 14% year-to-date. Zynga, maker of the FarmVille series, is trading at 136.4 times its 2014 earnings, with shares down 23%.
Outlook
Shenzhen-based iDreamSky is one of China’s largest mobile game publishing platforms in terms of active users, with more than 100 million active monthly users.
It is, like so many mainland companies, a play on the country’s growth.
The China Internet Network Information Centre (CNNIC) estimates that the mainland’s internet population rose from 73.1 million in June 2008 to 463.8 million in June 2013, representing a compound annual growth rate of 44.7%.
And the increasing mobile internet usage in China has led to rapid growth in the mobile game market. As of June 2013, some 65% of China’s mobile internet population, or 299.8 million mobile users, played mobile games, according to CNNIC numbers. The size of the mobile game market surged from Rmb3.3 billion ($533.4 million) in 2010 to Rmb13.9 billion in 2013, and is forecast to hit Rmb42.7 billion by 2016.
iDreamSky reported net income of Rmb33.2 million for the first three months of the year, compared with a net loss of Rmb595,000 for the same prior-year quarter in 2013. Its net income for 2013 meanwhile totalled Rmb27.8 million, compared with a net loss of Rmb9.3 million in 2012.
Proceeds will be used towards acquisitions of gaming licenses and other intellectual properties, future M&A opportunities and working capital, according to its prospectus on the US Securities and Exchange Commission website.
Industry outlook
There are a number of risks when investing in Chinese technology companies, namely regulation and censorship. Beijing has a stranglehold on all of its sectors, and the internet is no exception. Weibo, a micro-blogging service and China’s version of Twitter, became entangled in a public censorship dispute after it emerged that the company had a team of censors working to clean up content deemed unsuitable by the government.
But China is in the process of liberalising its financial services industry and easing restrictions across sectors, which should carry over to internet and technology companies.
iDreamSky is the latest Chinese technology company seeking to float its shares in the US ahead of Alibaba’s highly anticipated blockbuster IPO, which could raise as much as $20 billion.
Although the two are very different in terms of size — Jack Ma’s company could be valued as high as $200 billion — global technology funds and potential investors will scrutinise iDreamSky and its aftermarket performance ahead of Alibaba’s flotation, which has been pushed back to September.
Chinese companies raised $2.9 billion through US listings in May, compared with $525 million in June, according to Dealogic data.
New York’s Nasdaq Composite Index fell .5% on Monday, although it is up 7% year-to-date.
