China’s internet sector is intensely competitive and may even be showing signs of overheating but the Hong Kong IPO of Tian Ge Interactive Holdings suggests there is huge demand for grassroots online social interaction.
Investors have been concerned because internet companies' share price performance has dropped an average 20% since March 7. The internet companies listed this year registered a larger decline of 26%, according to an April research by Credit Suisse.
“The price drop in March was a short-term correction,” said Ricky Lai, a Hong Kong-based TMT analyst with Guotai Junan Securities. “The sector has great growth potential,” he added.
Quite so. Tian Ge Interactive surged as much as 16% on its trading debut on July 9, and the shares have risen 8.9% since, while Hong Kong’s benchmark index has edged up only 1.2%.
Tian Ge in Chinese means dove, a symbol of freedom, beauty and peace. The company, an online social video platform in China, currently operates eight “many-to-many” live social video communities, including 9158 Video Community and Sina Show, and one “one-to-many” community — Sina Showcase.
In an online “room”, a “one-to-many” community allows a host — usually a pop star or a celebrity — to perform while the host’s fans are watching, while a “many-to-many” model allows multiple users to interact with each other and themselves perform videoke to others.
Founded in 2008 and based in Hangzhou, the same place where China’s e-commerce behemoth Alibaba resides, Tian Ge generated a net profit margin of 37.6% in 2013, even higher than Alibaba’s 25% in its fiscal year 2013, according to the companies’ prospectus.
Tian Ge’s profitability comes from its attractiveness to China’s massive young, grassroots users.
“We built a business that tries to solve a problem in China,” Paul Keung, chief finance officer of Tian Ge, told FinanceAsia. “Urbanisation in China resulted in a large and growing population of young people who were moving from tier-2 to tier-5 cities for work.”
For migrants to cities, a relatively faster-paced lifestyle and the new urban environment may leave less time and fewer opportunities to make friends and rebuild their social networks, according to Keung.
“If you mix [urbanisation] with several decades of a single child-policy and the fact that there is a lack of entertainment options, you find that there is a massive and unmet need for social and recreational interaction,” said Keung.
Among 632 million Chinese internet users, 64% have an education below bachelor, 57% are below 30 years old and 73% earn a monthly salary below Rmb3,000 ($490), according to a mainland research institution China Internet Network Information Center.
Meanwhile, the popularity of online entertainment in China has grown significantly in recent years. According to US venture capital firm Kleiner Perkins Caufield Byers, China has surpassed the US in terms of total time spent on internet and mobile media, with Chinese users spending 55% of their total media time on Internet and mobile media, compared to 38% for US users.
Nearly 60% of Tian Ge’s users live in tier 3 to 5 cities, 30% in tier-2 and 10% in tier-1 cities. It has more than 10 million monthly active users, who on average spend over 20 hours in the interaction rooms per month.
“Grassroots users are usually price-sensitive, willing to take more time [rather than spend money] in looking for fun, and they are more eager to win admiration and attention than others such as white-collars [because they can’t easily gain it in the reality],” said a TMT analyst with a US investment bank.
Take virtual gifts for example. Tian Ge’s users can interact with hosts and other users through chatting, sending and receiving virtual gifts and room-wide expression through virtual items.
Virtual gifts and virtual items, priced from Rmb0.01 to Rmb100,000, can be purchased on the online platform using its virtual currency, which can be bought in real renminbi. “Giving gifts to hosts and favorite users is a way to express one’s admiration and satisfy one’s vanity,” said the analyst.
In addition, users can pay Rmb100 to Rmb40,000 for VIP-ships with which users can have privileges in different levels in the chat rooms. Last year, more than 97% of Tian Ge’s revenue was generated from the purchase and consumption of virtual goods, as well as from VIP bundles.
Ironically, it is the same chat rooms that also vex some investors.
Some are worried that the huge quantity of such “user generated content” and the nature of real-time social interaction will create difficulties for the company in detecting content deemed illegal by the government – which of course could bring punishment and penalties.
For example, in August 2011, the Jinhua City Municipal Public Security Bureau investigated an incident of drug use being streamed through Tian Ge’s platform, according to the company’s prospectus. The government’s “Clean the Web 2014” campaign, started in April, may also affect Tian Ge’s business and operation, the prospectus said.
Keung said the company has an exemplary track record and will continue to develop new technologies, software and best practices to monitor and filter its user generated content.
Listing for more opportunities
Unlike most Chinese internet companies, which look to list in the US, Tian Ge chose Hong Kong because it is “able to pass the earnings test in accordance with Hong Kong listing rules” and its “user base and business model may be easier for Hong Kong-based investors to understand”, explained Keung.
The company won pre-IPO investments from IDG and Sina and gained 10 investors such as Qihoo 360, Atlantis Investment Management, pharma company Town House and Taiwanese smart TV manufacturer Amtram.
“Growing adoption of 4G in China, and the proliferation of mobile, Smart TV, and the expanding of screen sizes should drive adoption, usage and monetization of live social video platforms,” said Keung.
Tian Ge wants to drive user growth by expanding further in mobile. China’s mobile internet market is massive, with about 527 million mobile internet users as of the end of June. Currently 10% of Tian Ge’s active users are accessing its live social video communities from a mobile device. The Credit Suisse report said internet companies’ average mobile users were more than 30%.
Tian Ge is introducing new communities or expanding its content, and now has more than 26,000 rooms spanning music, karaoke, talk shows, finance, health, gaming and education.
The company is also developing a new O2O—online to offline-- business for the karaoke industry, which enables real-time interaction between users in physical Karaoke venues and those online on PCs or mobile devices.
China’s live social video business is still in the early stages. There are approximately 140 million users and the market is expected to triple in three to four years, according to mainland internet researcher iRsearch.
“Our user base is primarily mainland China, so we plan to focus most of our attention on the local markets,” said Keung. “However, we believe live social video has global applications and we see opportunities to leverage our technology and know-how to overseas markets.”