Chinese video pair set to go live with $3b IPOs

Online video platform operators iQiyi and Bilibili seek to raise close to $3 billion in concurrent US IPOs. But the pair offer quite different propositions for investors.

Rivals iQiyi and Bilibili are used to fighting for the eyeballs of China's online video viewers. On Monday, the pair went head to head in a new context as they both launched US initial public offerings, seeking to raise $2.9 billion between them.

However the distinct business models of the two companies suggest they will appeal to different group of investors.

iQiyi, the online video site backed by Chinese tech giant Baidu, will feature in the bigger of the two deals as it looks to raise as much as $2.4 billion. That would be the largest flotation of a Chinese company in the US since Alibaba’s $25 billion IPO in 2014.

However, Bilibili is poised to trade its shares earlier as it is scheduled to price its $525 million IPO on March 27, a day earlier than iQiyi.

These two IPOs are set to reserve a trend which has seen several Chinese video companies taken off the stock market. Recent deals include Yukou Tudou, which was taken private by Alibaba for $3.5 billion in 2015, and Ku6 which was bought by Shanda Games a year later.

iQiyi and Bilibili are not alone in tapping public funding. Mango TV, an online video site that has certain exclusive broadcasting rights in China’s Hunan province, is in the process of a $1.4 billion backdoor listing on the Shenzhen Stock Exchange.

IQIYI

iQiyi’s upcoming IPO is an important part of Baidu’s strategy to monetise the video platform. In 2016, Baidu CEO Robin Li and iQiyi CEO Yu Gong had offered to acquire Baidu’s 80.5% stake in the video site for $2.8 billion, but the plan for a management buyout was scrapped after minority shareholders objected to the offer price.

In terms of operations, the huge capital raised through the IPO promises to boost iQiyi's firepower as it burns through cash to compete strategically with the likes of Alibaba’s Youku Tudou and Tencent Video.

Baidu, Alibaba and Tencent – the so-called BAT – have spent billions of dollars on their respective video streaming sites to purchase the copyright of television entertainment shows and dramas both domestically and abroad.

However, they have realised little, if any, profit over the years because Chinese viewers are accustomed to free content online, which means video sites are unable to rely solely on subscription revenue.

Still, iQiyi booked a net profit of $150 million last year, reversing a $1.2 billion loss a year earlier, as the site invested heavily in creating proprietary content, including dramas and variety shows, to draw advertisement revenue.

iQiyi’s latest production was street dance variety show Hot Blood Dance Crew, for which it reported 100 million views within 40 minutes of its debut last week.

The company also produced hip-hop reality show The Rap of China last year, which became an overnight sensation and attracted over 200 advertisers.

iQiyi said it has 50.8 million subscribers as of the end of last year and 60.1 million by end-February, implying that it has expanded its user base by nearly 20% in just two months.

In terms of subscriber base, the Chinese company is now close to Netflix, the biggest over-the-top (OTT) service provider in the US, which reported a global user base of 62.8 million as of the end of last year.  

Initial deal terms show iQiyi will sell 125 million American Depositary Shares (ADS) at $17 to $19 each. The company will make its debut on Nasdaq on March 29.

Goldman Sachs, Credit Suisse and Bank of America Merrill Lynch are joint global coordinators of the IPO. China Renaissance, Citigroup and UBS are joint bookrunners.

BILIBILI

Compared to iQiyi, private video streaming site Bilibili has perhaps less funding pressure because it focuses on a niche market: animation, comics and games – the so-called ACG subculture.

The Shanghai-headquartered company, commonly known as B Station in China, said 81.7% of its users were members of so-called Generation Z: young people born between 1990 and 2009.

It is now one of China’s biggest live-streaming sites and serves as a platform for users to share self-generated content – which could be anything from makeup or hairdressing demonstrations to gamers showcasing their skills in online contests.

Since most of the content is generated by the users, Bilibili did not have to spend much on acquiring copyright and can instead focus on enhancing user experience.

The company was the pioneer of the "bullet chatting" feature now seen in many Chinese live-streaming and social networking sites.

Bullet chatting, also known as bullet curtain, refers to a pop-up commentary section on screen that displays the thoughts and feelings of other viewers watching the same video.

It is a unique function in Chinese video sites that, according to its advocates, creates a sense of togetherness among the viewers, and extends the average time spent on these sites. 

By the end of last year, Bilibili had an average of 71.8 million monthly active users, an increase of 45.3% from 49.4 million a year earlier. Each user spent an average of 76 minutes per day on the site, according to its preliminary prospectus.

However, peer competition is a major risk for Bilibili because it operates in the highly-segmented entertainment video market. Unlike the OTT market, which is dominated by the BAT, the gaming and entertainment video market is split between multiple operators including AcFun, Douyu, Huya and Panda, among others.

In the preliminary prospectus, Bilibili said it faced significant competition, primarily from companies that operate online entertainment platforms in China. Some of those companies may be able to attract and retain more users, content partners and advertisers because of longer operating histories and significantly greater financial resources.

Bilibili will be selling 42 million ADS at $10.5 to $12.5 each. It will make its debut on Nasdaq on March 28.

Joint bookrunners of the IPO are Morgan Stanley, Bank of America Merrill Lynch and JP Morgan.

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