For anyone paying attention, there have been signs that ByteDance is preparing for an IPO for Douyin, its domestic short video business. The stock offering may take place in Hong Kong, though ByteDance has not made any official statement.
ByteDance (Hong Kong) Limited, which was established by the Beijing-based tech company in 2012, was renamed as Douyin Group (HK) Limited, effective on May 6, according to records in the Hong Kong Companies Registry. The name change also applies to a number of ByteDance subsidiaries, according to Tianyancha, a platform that tracks business registrations.
Aside from the business registration updates, a recent hire suggests ByteDance’s leadership has added an expert on public markets to their ranks. On April 25, ByteDance appointed corporate attorney and rainmaker Julie Gao as CFO. She will work between the company’s Hong Kong and Singapore offices. Previously, Gao provided legal advice to more than 100 corporations on public listings and other transactions in the capital market, including Meituan, Pinduoduo, and Xiaomi. She was also instrumental in ByteDance’s acquisitions of short video platform Musical.ly and game development studio Moonton Technology.
While an IPO for Douyin may be in the pipeline, ByteDance—the parent company—is unlikely to go public any time soon.
Since 2017, there have been rumors of the company heading to public markets. Its valuation even reached USD 425 billion in private trades in June 2021, suggesting the only way to raise more funds was by undergoing an IPO. ByteDance’s staff has often joked that whenever they were about to receive their year-end bonuses, which can be issued in cash or stock options, speculation about the company’s plans to go public are renewed.
In March 2021, people familiar with the matter told Reuters that ByteDance was mulling over the prospects of listing its Douyin business unit in Hong Kong or New York. ByteDance responded and said that it was considering spinning off some business lines for its own listings, but the plans were in flux.
ByteDance embarked on a reorganization of the company in November 2021, dividing its operations into six pillars—Douyin, TikTok, edtech arm Dali Education (which halted its services by the end of last year and launched a new education platform called Tan Shuiyuan), work collaboration tool Lark, cloud service Volcengine, and game development arm Nuverse.
Aside from its namesake short video service, the Douyin unit includes Toutiao Search, a search engine that is part of news aggregator Toutiao; online encyclopedia Toutiao Baike; short video platform Xigua Video; and other related services. In all, Douyin accounts for more than 70% of ByteDance’s total revenue.
There are examples of Chinese tech companies that have spun off and listed subsidiaries. These include JD.com, whose JD Health went public in December 2020 and JD Logistics gained a ticker code in May 2021. NetEase Cloud Music, an audio streaming business unit of internet company NetEase, had its IPO in May 2021 as well.
This choice may have to do with regulatory compliance. One experienced capital market lawyer told 36Kr that Beijing’s current regulations on data security, which came into effect in January when the Cyber Administration of China (CAC) revised its review measures, have changed the landscape for tech companies seeking to go public. Now, any online platform that has more than 1 million users must undergo a cybersecurity review before an offshore listing.
Similarly, the China Securities Regulatory Commission (CSRC) has tightened rules for all domestic companies seeking to float shares outside of mainland China. In late 2021, the CSRC released draft rules that require Chinese entities pursuing offshore IPOs to register with domestic securities regulators and submit to a review.
These changes in the regulatory framework may have hampered ByteDance’s plans to become a publicly traded company.
The legal professional who spoke to 36Kr also said that it was uncommon for a major tech company to appoint corporate lawyers—such as Julie Gao—as its CFO. Typically, figures with Gao’s experience may become legal directors, as was the case of Zhou Zifeng, a former partner at Fangda Partners who is now Ant Group’s general counsel. However, Gao brings to the table a wealth of experience in IPOs for Chinese companies. For ByteDance, which emphasizes compliance with Chinese law, the match was valuable.
The choice to list subsidiaries may also involve considerations of whether there is sufficient liquidity in public markets to support a major company’s valuation when it floats shares. In 2021, the Hurun Research Institute estimated ByteDance to be worth RMB 2.25 trillion (USD 340 billion).
If ByteDance were to go public as a whole, there would be significant demand for liquidity from investors in Hong Kong, a brokerage professional who handles Hong Kong IPOs told 36Kr. A standalone IPO for Douyin may be the app factory’s best chance at raising funds on the public market.
Unsurprisingly, ByteDance staff members’ key concern is the price of their stock options. At the moment, ByteDance’s stock options are worth USD 195 per share, a price calculated based on the entire company’s business activities. If Douyin were to have a standalone IPO, then the price would reset, and options would be redistributed. However, at the moment, it is unknown when these options can be cashed in.
Current developments suggest that ByteDance may not be planning for an IPO in the near future. Chinese tech-focused media outlet Photon Planet (Guangzi Xinqiu) reported that brokerages that manage Hong Kong IPOs for companies based in mainland China have not caught wind of ByteDance exploring the matter. Meanwhile, firms that have applied to go public in Hong Kong have tempered their pace because of falling company valuations and low liquidity.
Current market conditions make it unfavorable for companies to seek IPOs. Consider the CSI Overseas China Internet 50 ETF Index Fund, which tracks the performance of Chinese tech firms with offshore listings: it peaked in January 2021 and has been on a steady slide since then. Now, the index is below the level when it began trading in early 2017.
In 2021, the average price-to-earnings ratio of internet firms tracked by the index was above 50. ByteDance was valued at as much as USD 500 billion in July that year, but that figure has since been recalibrated to a maximum of USD 350 billion. The downward trend in its valuation will likely persist throughout 2022.
ByteDance’s revenue in 2021 was RMB 86 billion (USD 12.9 billion), a person with knowledge of the matter told 36Kr. By using the Hurun Research Institute’s estimation of ByteDance having a valuation of RMB 2.25 trillion (USD 340 billion), the company has a P/E ratio of 26, well above the index average of 16.09 as of May 10. This suggests that ByteDance is overvalued compared to other tech companies based in mainland China, and that it may be difficult to execute an IPO.
Bloomberg reported in March 2021 that ByteDance was valued at USD 250 billion in private trades, citing people familiar with the matter. That decline suggests a rush toward going public would be detrimental to its share price.
The delay in seeking a ticker code has led to attempted exits in the gray market. In October 2021, Bloomberg reported that Susquehanna International Group, an early ByteDance backer, was trying to sell USD 500 million of its stake in the company.
ByteDance likely faces pressure and needs to head to public markets soon. A company’s valuation is defined by its revenue and growth, including the rate of increase of its user base’s size. ByteDance’s revenue from its domestic business lines has tapered in recent years, so its growth potential depends on TikTok, as the short video app can capture users outside of mainland China.
In June 2021, ByteDance shared its financial results internally for the first time. Its revenue for 2020 was USD 34.4 billion, up 111% compared to 2019 but falling short of growth rates that surpassed 200% in previous years. For the full year of 2021, ByteDance generated USD 58 billion in revenue, up by 70% year-on-year, according to Beike Economy. The 2021 revenue included USD 37.5 billion from ads, but growth for this line of income has stalled as of Q3 2021, according to 36Kr.
ByteDance’s ad revenue has not increased in the first half of 2022, according to people close to the matter. For investors and staff who hold stock options, this means the company missed its previous window to capitalize on rapid growth and potentially have a successful IPO. However, now that ByteDance is developing its e-commerce capabilities through Douyin, another window of opportunity to go public is emerging—investors may recognize the company’s promise again as it becomes an indispensable platform for online shopping.
This article is based on an entry that was authored by Dou Xuan. KrASIA is authorized to translate, adapt, and publish its contents.