Tencent's red-hot e-book IPO sets stage for music arm's debut

[HONG KONG] China Literature Ltd, the online reading unit helping Tencent Holdings Ltd build an entertainment empire, raised US$1.1 billion alongside existing investors in its Hong Kong initial public offering (IPO), according to people with knowledge of the matter.

The operator of the QQ Reading app and existing investors priced 151 million shares at HK$55 apiece, the top end of a marketed range, the people said, asking not to be identified because the information is private.

At the IPO pricing, China Literature would have a market capitalisation of HK$49.9 billion (S$8.7 billion). Shares will begin trading on Nov 8, according to the prospectus. A representative for China Literature declined to comment.

The Tencent unit sells electronic books in a model similar to Amazon.com Inc's Kindle Store, which offers different titles in China than in the US and elsewhere. China Literature had 9.6 million works and 6.4 million writers as at June 30, according to its prospectus. Customers can pay for an entire book at once, or buy a few chapters at a cheaper price before determining whether to keep reading.

The company also wants to leverage its works into other forms of entertainment, such as movies, TV series and anime, as Tencent aspires to create a Marvel-like empire. Shenzhen-based Tencent became China's second-biggest technology company on the strength of its WeChat messaging app, which has since morphed into a portal for shopping, banking, gaming and consuming entertainment.

Tencent's music unit, which provides a Spotify-like streaming service, is seeking bank pitches for an IPO that could raise at least US$1 billion, people familiar with the matter said on Wednesday. Tencent Music Entertainment Group has asked advisers to pitch for a role on a share sale that could take place next year in Hong Kong or New York, according to the people.

Tencent Music was spun out from its parent after merging with China Music Corp. It has deals in place to distribute songs from artists including Beyonce and Taylor Swift via licensing rights with some of the world's largest record labels, including Universal Music Group, Warner Music Group and Sony Music.

Retail investors were enthusiastic about the Tencent e-book spinoff, placing orders for more than 600 times the stock initially available to them in the IPO, people with knowledge of the matter said earlier. The portion of the deal reserved for institutional money managers was also oversubscribed by several times, the people said.

The Hong Kong overnight interbank rate, known as Hibor, approached a nine-year high this week partly due to retail investors locking up funds for a clutch of IPOs, including China Literature and gaming device maker Razer Inc. The rate also jumped when ZhongAn Online P&C Insurance Co took orders for its US$1.5 billion IPO in September.

Companies are seeking listings amid a surge in the city's benchmark Hang Seng Index, which last month hit its highest level in nearly a decade. Razer has set the terms for a Hong Kong IPO that could raise as much as US$545 million, while Yixin Group Ltd, a unit of US-listed Bitauto Holdings Ltd, has started gauging investor demand for a deal, according to terms for the deal obtained by Bloomberg.

China Literature's offering is the fifth-largest IPO in Hong Kong this year, according to data compiled by Bloomberg. First-time share sales in the city totalled US$11.4 billion this year, compared with US$21.8 billion during the same 2016 period, the data shows.

Shares of Tencent rose as much as 1.5 per cent on Wednesday in Hong Kong to the highest in about two weeks.

Morgan Stanley, Bank of America Corp, Credit Suisse Group AG, China International Capital Corp and JPMorgan Chase & Co are joint global coordinators of the offering.

BLOOMBERG