China tech crackdown turns down NetEase music’s Hong Kong IPO by 50%

By Elles Houweling

Cloud Village, the music streaming unit of Chinese internet company NetEase, is taking another stab at going public on the Hong Kong Stock Exchange after it suspended its initial public offering (IPO) in August amid China’s tech crackdown.

The company is now aiming to raise up to US$453m by selling a total of 16 million shares at 190 Hong Kong dollars (US$24.38) to 220 Hong Kong dollars apiece. This is more than a 50% cut in valuation after it initially planned to raise US$1bn in August.

At that time, the Hangzhou-based company received the green light from the Hong Kong exchange to go public. However, it decided to halt its plans after Beijing tightened its scrutiny on tech companies and their IPO plans. As a result, Cloud Village’s float was met with tepid feedback from investors.

Beijing’s ongoing tech crackdown, which has affected nearly every aspect of the tech industry from ecommerce to gaming, edtech and ride-hailing, prompted Chinese companies to think twice before deciding to list – particularly on overseas exchanges, but even through the halfway-house of the Hong Kong bourse.

New cybersecurity rules have significantly raised the threshold for security reviews for any mainland company wishing to list in the US. Initially, it seemed that even companies wanting to list in Hong Kong had to undergo additional security procedures. However, the latest draft regulation released in November clarified that the additional measures don’t apply to Hong Kong IPO candidates, thus clearing the confusion concerning floats in the coastal city.

NetEase’s streaming service is the second-largest in China, with approximately a one-fifth market share. Tencent Music, China’s number one streaming service, holds over 70%.

Until recently, Tencent enjoyed exclusive deals with the world’s major record labels, including Universal Music, Sony Music and Warner Music. In August, China’s State Administration for Market Regulation (SAMR), the country’s antitrust watchdog, ordered the Shenzhen-based tech giant to terminate its exclusive deals or face penalties.

Following the SAMR’s announcement, the CEO of NetEase said his company is “very thankful to the regulators” and looking forward to more antitrust regulations that will curb abnormalities in the market.

“This is a very positive signal for the industry,” NetEase CEO William Ding said, adding that the regulations were long-awaited by users and enterprises.

Despite a growing user base, Cloud Village remains a loss-making unit for NetEase. In the first half of 2021, it posted a net loss of 3.81bn yuan (US$597m), which it blamed on investments in content, technology and marketing, among other things.

Bank of America, CICC and Credit Suisse are the joint sponsors and joint bookrunners for the deal. The IPO date is set for December 2, and Cloud Village will trade on the main board under stock code “9899”.

The updated prospectus shows that parent company NetEase, Sony Music Entertainment and asset manager Orbis Investments have agreed to take up a chunk of the shares. Together they plan to invest US$350 million, or as much as 83% of the entire IPO’s value, assuming it is priced at the mid-point of the range.

The prospectus also stated that NetEase intends to use the raised funds to expand Cloud Village’s music library, support independent musicians, improve social functions, focus on technology research and development and implement more strategic investments.

NetEase has long been a distant runner-up to Tencent in both the gaming and music streaming industries. Founded in 1997, the company quickly gained popularity in China’s gaming industry. The music wing was set up in 2013 and has since expanded its products to offer everything from online karaoke to live-streaming and lyrics sharing.

According to GlobalData’s company database, NetEase’s overall revenue grew by US$24.49m year-over-year to $10,676m in 2020. The parent company is publicly traded on the Nasdaq.