China Literature's HK IPO set to be a bestseller

Tencent's e-book platform will be one of the most hotly-contested Hong Kong IPOs among institutional and retail investors for quite some time.

In 1841, American fans of British novelist Charles Dickens stormed New York harbour in the hope of being first to pick up the final chapter of his serialised novel The Old Curiosity Shop.

In today's Hong Kong, a different kind of literary sensation is set to spark a similarly enthusiastic – if less violent – reaction from retail investors who see massive potential in a high-profile company that is connecting e-book authors to China's readers.

China Literature on Monday launched an initial public offering that will raise HK$7.3 billion to HK$8.3 billion ($931 million to $1.1 billion) on Monday.

The e-book platform has been generating massive hype among investors since it filed its listing application in July. That's largely because the company is a subsidiary of Tencent, the Chinese internet giant behind near-ubiquitous messaging-to-payments app WeChat and the biggest Hong Kong-listed company by market capitalisation.

The high expectations for China Literature’s post-IPO performance comes on the back of its parent’s explosive growth since it went public in 2004. Tencent has generated a total investment return of 450 times, or a compound annual growth rate of 60% over a period of 13 years.

Demand for China Literature shares could also be boosted by the so-called “star investor” effect, referring to the preference among retail investors for IPOs backed by prominent investors or companies. A similar dose of star power bolstered the recent floatation of Zhong An Insurance, which jumped 18% on its debut after receiving a flood of orders, particularly from retail investors.

Alibaba co-founder Jack Ma, Tencent chairman Pony Ma and Ping An Insurance chairman Mingzhe Ma were among the high-profile investors in the online insurer. 

Investment bankers are expecting similar, if not bigger, level of support from retail investors for China Literature, which almost dominates the country’s online literature platform with a commanding 72% share of the market as of the end of last year.

As of the end of June, the platform connected as many as 6.4 million writers to some 192 million readers. Members of the public can access the initial chapters of some literary works but are required to pay to read them in full, and these payments are shared with the authors.

In the first six months, income from providing online content accounted for about 85% of the company’s total revenue. The remainder comes from intellectual property operations – involving TV and movie production based on its popular titles – and from sale of physical books.

Explosive growth

China Literature made its first ever profit last year: a modest $4.6 million. That figure pales against its maximum implied market value of $6.4 billion, indicating investors would be betting on the company’s future explosive growth as it starts to monetise more content.

Syndicate analysts estimate earnings to leap to $150 million by the end of next year, translating to a price-to-earnings multiple of 37.3 to 42.7 for the company on a pre-greenshoe basis.

Investment bankers however admit that the figures are for reference only due to the company’s near-monopoly and the lack of comparable businesses in the public market.

China Literature’s main competitor, Shanghai-listed iReader, currently trades at around 35 times earnings on a one-year forward basis. But bankers said they were not directly comparable due to difference in size and business model.

In any case, all eyes will be on whether retail investors will be able to fully trigger the IPO clawback, which will see them getting 33% of all the IPO shares. That would require retail investors to bid for more than 50 times the 15.1 million shares for sale in the public tranche.

Initial terms of the IPO include 151.3 million shares – equivalent to 16.7% of the company’s enlarged share capital – for sale at HK$48 to HK$55 each. There is a 15% greenshoe option comprising entirely existing shares offered by Tencent.

Pricing is slated for October 31 and listing is expected on November 8.

Joint sponsors of the IPO are Morgan Stanley, Bank of America Merrill Lynch and Credit Suisse.

Joint global coordinators and bookrunners are JP Morgan, CICC, China Securities International, China Renaissance, China Merchant Securities, CMB International, BOC International and HSBC.

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