Bankers prepare ground for Baioo IPO

The roadshow for the Chinese online game operator is due to start on Monday and bankers are expecting solid institutional and retail investor interest.

Bankers this week began pre-marketing for an initial public offering of shares in Hong Kong by Baioo Family Interactive, the latest in a hot streak of Chinese technology companies seeking to float overseas.

The children’s online game operator aims to raise up to $250 million from the IPO, which is scheduled for April.

The formal roadshow is due to kick off on Monday across Asia and the US, according to bankers close to the deal. On offer will be 705.9 million primary shares, with a greenshoe option of roughly 105.9 million shares. International investors will be offered 90% of the tranche while 10% will be aimed at investors in Hong Kong. 

Baioo plans to use the funds raised to develop new mobile-internet educational games and to expand its current range of both online and offline products, including print media and film production, according to a term sheet seen by FinanceAsia.

Baioo reported net revenues of Rmb454.9 million ($73.1 million) last year, compared with Rmb203.2 million in 2012 and Rmb83.2 million in 2011.

Demand

Bankers said they are confident of attracting institutional and retail investor demand and, as such, are not banking on any cornerstone investment pledges.

“It’s a sector people like a lot at the moment,” one banker close to the deal told FinanceAsia. “It’s [going to be] pretty popular. And the deal size is between $200-$250 million. So there isn’t really a need for a cornerstone to be honest. With the retail claw-back, that tranche may end up getting half the deal.”

A cornerstone investor could also lessen liquidity by leaving few stocks for retail investors, he added.

“It’s got a good brand and it’s in a good sector. I think there could be clawbacks,” a second banker echoed. “We haven’t seen many clawbacks in recent IPOs apart from Poly [Culture],” he said, referring to the Chinese art auction house that raised $331 million in Hong Kong earlier this month and saw its retail portion oversubscribed 605 times.

“If anything, some recent IPOs have seen orders placed and then withdrawn. But I think [Baioo] could be an exception,” the banker added.

The number of cornerstone investors allocating funds to Chinese technology companies has dropped in recent years. Based on Dealogic data, pre-IPO cornerstone pledges to technology companies in Asia ex-Japan amounted to $55 million in 2013. That compares with $103 million in 2010. 

Internet usage

Internet usage in China continues to rise rapidly, enabling online games operators such as Baioo to expand their business.

The China Internet Network Information Centre (CNNIC) estimates that internet penetration reached 42% in China in 2012, up from just 8.5% in 2005. The country's online gaming market, meanwhile, grew at a compound annual growth rate (CAGR) of 27.6% from 2010-2012 and by 24.5% in 2013 alone, CNNIC's numbers show. It is forecasting similar growth of 24.8% this year.

In line with the aggregate trend, children’s internet usage has been surging also. China internet specialist iResearch Consulting Group estimates that the number of child internet users increased at a CAGR of 9.4% from 2011-2013. It forecasts that number to rise further at a annual rate of 6.9% from 2014-2016, taking China's non-adult internet penetration rate to 64.6% in 2015 from 49.8% in 2013.

After food, education is the second-highest area for child-related spending in China, a potential boon for online education companies such as Baioo.

“Baioo is making an effort in expanding its business to online education ... we think that the company can leverage its expertise in understanding children’s online usage patterns and the extensive user base that it secures in its virtual worlds to strengthen its online education business,” analysts said in a  syndicate research report.

One of Baioo’s closest competitors is internet giant Tencent, a company that’s seen its market value surpass $100 billion since listing in 2004. Shares are up about 17% so far this year. Other competitors include Forgame and Taomee Holdings, which shares are up 4% and 1%, respectively.

China tech IPO boom

Aside from Baioo, there are several eagerly awaited Chinese technology IPOs in the works this spring. China’s largest Twitter-like service Weibo, owned by New York-listed Sino Corp, aims to raise $500 million before its US IPO, while e-commerce conglomerate Alibaba Group, the most anticipated IPO since Facebook, is tipped to secure $15 billion.

Meanwhile, China Mobile Games & Entertainment is seeking $100 million through the sale of some 3.4 million American depository shares.

But a number of risks and uncertainties remain when investing in mainland technology companies, namely over regulation and censorship.

“The laws and regulations governing virtual worlds, games and education services in China are developing and subject to future changes. If the company or the third-party publishers that it works with fail to obtain or maintain all the applicable permits and approvals, the company’s business and operations would be materially and adversely affected,” Baioo was quoted saying in the syndicate research report. “The uncertainties in the PRC government’s policies and regulations regarding virtual worlds and games and children’s internet usage in China may also adversely affect the business.”

Weibo and Tencent’s WeChat have both been hit with censorship issues by the government. But the country is slowly liberalising its financial services industry and easing restrictions for foreign investors, which may carry over to technology and internet companies, provided it is at a pace the government is comfortable with.

Citi, Deutsche Bank, JP Morgan and CICC were joint bookrunners on the deal, while CIMB acted as lead manager.

¬ Haymarket Media Limited. All rights reserved.