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MarketScreener Homepage  >  Equities  >  Stock Exchange of Hong Kong  >  Tencent Holdings Ltd    0700   KYG875721634

TENCENT HOLDINGS LTD (0700)
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Tencent Unit's Hong Kong IPO Draws a Crowd

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11/01/2017 | 02:09pm CEST
By Saumya Vaishampayan 

The tech-stock ardor sweeping the world has reached Hong Kong, judging by the response to China Literature Ltd.'s initial public offering.

Orders for the IPO of the Tencent Holdings Ltd. unit, expected to raise $1.1 billion next week, have already topped $100 billion. Institutional investors have ordered more than 50 times their allotted shares; retail investors have been even keener, oversubscribing some 620 times.

The fever for China Literature, which operates an online library and has nearly 200 million monthly active users, partly reflects a phenomenal year for tech stocks globally. U.S.-listed shares of Alibaba Group Holding Ltd. have soared 111% in 2017, while Facebook Inc. shares have jumped 57%.

China Literature's links with Tencent are also a big draw for local investors, who hope some of its magic will rub off on the over-60%-owned subsidiary. Formed through a combination of Tencent Literature and Cloudary in 2014, China Literature makes money when its users pay to access books after reading the first few chapters free.

Tencent's domination of internet gaming and social networking in China--the latter via its hugely successful WeChat app--have helped it grow into one of the world's most valuable tech companies. Its own Hong Kong-listed shares have risen 90% this year.

China Literature is also benefiting from scarcity value. Tech stocks accounted for just 12% of Hong Kong's benchmark Hang Seng Index in September, compared with financials' 48%, according to Hang Seng Indexes. In the U.S., tech is the largest segment of the S&P 500 index, accounting for a quarter by weighting.

In September, Hong Kong retail investors placed orders for 393 times the initially available shares in internet-based insurance company ZhongAn Online Property & Casualty Insurance Ltd, co-founded by Alibaba founder Jack Ma. The stock is up more than 30% from its IPO price, according to FactSet.

The appetite for China Literature's IPO has helped drive up short-term interbank borrowing costs in Hong Kong this week, as investors using borrowed funds to place orders for shares effectively locked up piles of Hong Kong dollars. The overnight interest rate hit a nine-year high Tuesday, and though it fell back Wednesday, it remains elevated compared with levels earlier this year.

"This happens for very welcomed IPOs," said Iris Pang, a China economist at ING. The liquidity squeeze can be amplified when more than one popular company goes public at once, she added. Videogame-equipment maker Razer Inc. is looking to raise up to $630 million in Hong Kong this month.

China Literature and ZhongAn notwithstanding, Hong Kong's IPO market has been somewhat deflated this year. A total of 117 companies with a combined deal value of $13.1 billion have listed this year, according to Dealogic. That is the smallest year-to-date deal value since 2013.

Controversy has arisen over the quality of some companies listing in the city in recent years, in particular mainland financial companies that get heavy backing from "cornerstone investors"--who typically agree to buy big stakes before IPOs and hold them for a set period--only to perform poorly after the IPO. Such investors anchored Postal Savings Bank of China Co.'s 2016 IPO, at the time the world's biggest in two years. The bank's shares have risen just 11% in 2017, far behind the Hang Seng Index's 30%.

The stock price of Chinese brokerage Guotai Junan Securities Co., whose cornerstone-backed IPO was Hong Kong's biggest so far this year, fell in the month after the company went public in the spring, though it has since rallied. China Literature's IPO is set to be largest in Hong Kong this year not backed by cornerstone investors, according to Dealogic data.

Hong Kong listings facing other problems. The city's securities regulator said last month it is investigating 15 financial firms for their work on arranging shoddy IPOs in recent years that have caused investment losses in the billions of dollars.

As China Literature prepares to go public, two Hong Kong-listed global companies--mining giant Glencore PLC and handbag maker Coach Inc., which was recently rebranded as Tapestry Inc.--this week said they plan to delist, citing low trading volumes and lack of investor interest.

Write to Saumya Vaishampayan at saumya.vaishampayan@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
DJ INDUSTRIAL 0.32% 26743.5 Delayed Quote.8.19%
HANG SENG 1.69% 27930.53 Real-time Quote.-6.69%
NASDAQ 100 -0.50% 7531.0719 Delayed Quote.18.33%
NASDAQ COMP. -0.51% 7986.9551 Delayed Quote.16.29%
S&P 500 -0.04% 2929.48 Real-time Quote.9.62%
TENCENT HOLDINGS LTD 2.96% 333.8 End-of-day quote.-18.15%
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Financials (CNY)
Sales 2018 325 B
EBIT 2018 96 982 M
Net income 2018 83 786 M
Finance 2018 63 985 M
Yield 2018 0,32%
P/E ratio 2018 32,84
P/E ratio 2019 26,23
EV / Sales 2018 8,10x
EV / Sales 2019 5,92x
Capitalization 2 694 B
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Mean consensus OUTPERFORM
Number of Analysts 42
Average target price 398  CNY
Spread / Average Target 41%
EPS Revisions
Managers
NameTitle
Hua Teng Ma Chairman & Chief Executive Officer
Chi Ping Lau President & Executive Director
Yu Xin Ren COO & President-Interactive Entertainment Group
Shek Hon Lo Chief Financial Officer & Senior Vice President
Chen Ye Xu Chief Information Officer
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