ByteDance, the company behind China’s most popular news app Toutiao and hyper-popular short video app Douyin, was in talks to raise up to US$3 billion in a financing round that would see its valuation more than double to US$75 billion before its 2019 initial public offer (IPO) in Hong Kong.
Toutiao’s IPO plan comes at a time when China is devaluing the renminbi (RMB) amid the ongoing Sino-US trade war, which has seen Chinese equity capital markets negatively impacted as Chinese stocks spiral downwards.
Despite worsening China-US trade relations which weighs on China’s domestic and Hong Kong stock market, 2018 so far still has seen Xiaomi and Pinduoduo go public, while Meituan-Dianping and its spinoff Maoyan Dianyin have set their sights on IPOs later this year in Hong Kong.
According to FT, David Dai, senior analyst at Bernstein Research, explained: “If you’d asked [many of them] a year ago they would say they had no plans to list in three years, but now they are all rushing to get listed because of the cash drain from the PE and VC side.”
China’s technology giants are eager to tap the liquidity of public markets as the investment appetite of private equity and venture capital funds for large Chinese tech firms wanes amid concerns that Chinese technology shares are set to see the collapse of a bubble.
As a matter of fact, Xiaomi’s shares traded below its offer price following its highly anticipated public float, while Pinduoduo’s stock price dipped following a spectacular debut, failing to live up to the tech hype in both cases.
Set against the backdrop of Chinese equities trending down, some of the much anticipated Chinese tech IPOs have turned out to be disappointments, trading below their debut prices and failing to sustain the expectations.
How is an internet giant valued?
McKinsey research notes: “When valuing high-growth companies, start by thinking about what the industry and company might look like as the company evolves from its current high-growth, uncertain condition to a sustainable, moderate-growth state in the future. Then interpolate back to current performance.”
“The future state should be defined and bounded by measures of operating performance, such as customer-penetration rates, average revenue per customer, sustainable margins, and return on invested capital. Next, determine how long hypergrowth will continue before growth stabilizes to normal levels. Since most high-growth companies are start-ups, stable economics probably lie at least 10 to 15 years in the future.”
Valuing technology enterprises is a challenging affair, with more traditional valuation approaches, such as a price-to-earnings approach, not being a good fit.
Given the complexity of valuing tech startups, perhaps it would be useful to compare the range of valuations among the tech giants in China to at least have an estimation of how tech firms are valued. Even though they have inherently different business models, it offers a glimpse at how investors look at internet companies in general.
Xiaomi listed at an estimated US$54 billion; Pinduoduo was valued at US$30 billion; Meituan’s IPO is estimated at US$60billion. All of these are all valued substantially lower than Toutiao’s $75b.
Should Toutiao be any different? While the business models are different, some similarities that are often considered for valuing internet companies include metrics like the number of users, market size and also potential pitfalls.
Essentially, Toutiao is a Beijing-based internet startup that runs AI-driven multimedia content curation and distribution platforms across different formats, including Jinri Toutiao (a news aggregator platform), and Douyin (a short video app that went viral).
Apple and Orange
While Toutiao reported of having 240 million users, Xiaomi has already surpassed the 300 million MIUI network users mark. The latter also outperformed Toutiao in terms of revenue, posting $100b in revenue in 2017 (more than twice Toutiao’s targeted $50b revenue for 2018)
Despite this superior revenue performance, Xiaomi experienced disinterest from retail investors upon its public float in Hong Kong, with many balking at its valuation following disclosures of a $1.1 billion (seven billion RMB) loss for Q1 2018 and concerns over its market positioning.
Lei Jun, Xiaomi’s founder, argues that Xiaomi is an internet company. Yet more than 70% of its revenue comes from smartphone sales. Online-to-offline (O2O) platform major Meituan, like Xiaomi, boasts 300 million users and its 2017 revenue is also twice of Toutiao’s but is only valued at $60b.
All of these indicate Toutiao might face some problems to justify its valuation based on user numbers and revenue.
Pinduoduo and Toutiao
Pinduoduo (PDD), which debuted at $30b, might be a good comparison as both Toutiao and Pinduoduo experienced substantial growth by targeting consumers in the lower-tier Chinese cities.
Douyin’s growing threat to Tencent in China’s short-video sector mimics the rise of Pinduoduo against Chinese e-commerce heavyweights like Alibaba and JD.com.
Another area that both these companies are similar is that both have been experiencing public scrutiny. Pinduoduo for the issue of counterfeit goods sold on its platform, whereas Douyin is already drawing fire from both cyberspace regulators in China and Indonesia.
In the lead up to PDD’s IPO, there were already signs of the controversy and these escalated after its debut leading to declining PDD shares. This could serve both as a warning for Toutiao as it seeks to foray into the public markets. Responsible and safe platforms will become more pertinent for a public entity. These can affect Toutiao’s eventual market capitalization.
The common thread in all of these huge Chinese tech companies is all of them have seen their valuations escalate at each funding round due to protections being offered to investors prior to a public float arguably distorting valuations.
And for the above examples, all of them saw their share prices falling after their debut. Moreover, with signs that China’s pre-profit tech stocks may be losing their runway in Hong Kong, and the same can be said of those in the US, Toutiao’s valuation is indeed questionable.
Editor: Nadine Freischlad, Ben Jiang
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