2018 has been quite a year for Chinese IPO’s as 19 companies have come public from the region, while another 14 potential deals are waiting in the wings according to our current data, which tracks all IPO filings that are submitted through the SEC.
Moreover, we are not sure what potential deals are happening behind the scenes; nevertheless, we could be looking at a year similar to 2010 when there were 41 Chinese IPOs that hit the domestic markets. This leads us to QTT, an offering that initially began the process of coming public back in March by filing a DRS. Citigroup and a host of others will be looking to place this deal in secure hands, with the deal terms consisting of 16.0 mil ADS (4 ADS equal 1 ordinary share) between $7.00 to $9.00.
QTT states in its F-1 filing that it is the number two mobile aggregator of news in China, with its products focused on delivering “Fun Headlines”, featuring articles and short videos from professional media and freelance writers. News feeds are optimized in real time and are based on a user’s profile, behavior and social relationships. QTT will seek to further diversify its content offerings by offering literature, casual games, live streaming, animations and comics, as the company looks to differentiate itself from other news aggregators by staying away from more serious forms of news related items.
Competition in the space comes from many different sources, with the major players being Jinritoutiao, Kuaibao (operated by Tencent) and Yidianzixun (operated by Phoenix News), as well as more content diverse aggregators including Tencent News, Sina News, Sohu News, Netease and Phoneix News.
These notable rivals certainly present a significant challenge for QTT, as each are well established platforms, with notable advertising relationships and more predictable financial results. QTT formed just two years ago has been growing at warp speed, but how solid the operational foundation beneath it is not clear, given the significant changes that have occurred in a short period of time are unknown.
Financials reflect a company that is at the early stages of growth, with revenues, namely advertising revenues increasing exponentially, while expenses are also expanding at a significant rate. Case in point is the rapid rise in total operating expenses which for the six months ended June 2017 were $19.031 mil, rising to $165.290 mil for the same period ending 2018. Net losses are also accelerating; however, we need to not get too caught up in these numbers, as business models such as QTT are expected to see rapidly rising revenues, increasing expenses/costs and net losses for the foreseeable future.
Turning to the industry trends for mobile data/usage, there has been notable growth as the number of mobile internet users in China grew at a CAGR of 10.5% from 2013 to 2017, with forward looking projections continuing to forecast rapid CAGR for the foreseeable future. Moreover, QTT will look to further diversify its business by creating a global online content ecosystem.
An affiliate of JD.com has indicated in interest in acquiring up to $40.0 mil in the offering, while the recent stake by a Tencent affiliate – Image Flag Investment are notable shareholders given their strong presence in China and the weight these heavy hitters can potentially bring to the company. QTT although a fairly new business, has made significant inroads in a short amount of time within the industry and while we continue to view any Chinese deal with a great deal of caution, the markets seem to be open to significant risks that are associated with investing in Chinese based deals.
QTT will find itself up against three other IPOs for the week of 9/10, two of which are also businesses based out of China. Each of these companies represent significantly different business models, and should be a non-issue as it relates to exhausting the market with someone region specific deals in a short period of time.
Nevertheless, we would be remiss if we failed to mention that at some point sector rotation for these deals will stop. Yes, we said sector rotation, as Chinese based deals can be considered their own category. Geo-political fears, trade wars, including further tensions between the U.S. and China as it relates tariffs will most likely have an impact on how some deals will trade on the U.S. markets.