Tencent Ties With 58.com, Xiaomi With Xunlei
Newly listed companies are becoming popular investment targets for some of China’s tech giants, with online classified site 58.com (NYSE: WUBA) and video sharing site Xunlei (Nasdaq: XNET) both picking up major new backers in the form of Tencent (HKEx: 700) and Xiaomi, respectively. Meantime in other IPO news, a long-delayed domestic IPO for the website of the official Xinhua news agency is finally moving ahead, some 2 and a half years after a deal was first rumored. The case of Xinhuanet is particularly interesting because Xinhua and People’s Daily, the official Communist Party newspaper whose People.com (Shanghai: 603000) website is already listed, recently merged their 2 money-losing online search sites.
Let’s begin with Tencent, which has announced it will purchase about 20 percent of 58.com for $736 million. (company announcement) The purchase continues a pattern for China’s biggest listed Internet company, which has shown a preference for buying large but non-controlling stakes in companies like 58.com. Tencent then attempts to find synergies with those new strategic partners, while allowing their management to remain largely independent.
In this particular case, I don’t really see too much potential for synergies with 58.com, which operates classified advertising sites for many Chinese cities and is often called the Craig’s List of China. Investors were more enthusiastic, bidding up 58.com shares by 5 percent on the news. That gave the company a market value of nearly $4.5 billion, quite a bit above the valuation of $3.7 billion implied by Tencent’s purchase price.
To date, 58.com shares have more than tripled from their IPO price late last year, and investors are obviously hoping for more upside from this Tencent tie-up. Perhaps the pair will find some synergies, possibly by making 58.com available over Tencent’s popular social networking platforms. But I would predict 58.com shares could be set for a breather or even some downside over the short-term, since any major new benefits aren’t likely to come for a while.
Next let’s look at Xunlei, whose IPO a week ago was surprisingly strong despite signs of a broader weakening market. Xunlei talked up growing strategic ties with smartphone sensation Xiaomi at the time of the listing, and now we’re learning that the latter has actually purchased nearly 30 percent of the former. (Chinese article)
That would explain the strong performance to date for Xunlei’s shares, which are now up about 25 percent from their IPO price. The Xiaomi investment ends Xunlei’s status as China’s last remaining video site without a major strategic partner. That should be good for Xunlei over the next 2 years, but it also means its future will be closely tied to the continued success of Xiaomi’s popular smartphones and its newer set-top boxes and their associated video services.
Last there’s Xinhuanet, which originally planned a domestic IPO as early as late 2011. The company was forced to wait for rival site People.com to make its offering first, and then the Chinese IPO market was frozen as the regulator placed a lengthy ban on all new offerings. Now media are reporting Xinhuanet has made a public filing to revive the offering. (Chinese article) No fund-raising amount was given, though the company said its revenue and profit grew 37.5 percent and 23.9 percent in 2013, respectively.
For anyone who follows China-listed media stocks, it’s worth noting that People.com shares are now more than double their IPO price, even as the broader market has stagnated. Xinhuanet shares are likely to follow a similar trend, less for the company’s profit potential and more due to its political connections. The merger last year of the struggling People’s Daily and Xinhua online search sites could well become a template for these 2 state-run media giants’ (previous post) websites, which are likely to trail behind better-run private-sector peers. Accordingly, I wouldn’t be surprised to see an eventual merger of People.com and Xinhuanet, perhaps within the next 2-3 years.
Bottom line: 58.com shares could see some downside due to inflated expectations after a new Tencent tie-up, while Xunlei shares should continue to enjoy some upside from its growing Xiaomi ties.
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