China Literature's Secret Sauce

Investors seem to prefer businesses without significant government involvement.
Photographer: Grant Faint/Getty Images

In China, it may be better to have private backers than friends in high places. An initial public offering slated for Hong Kong later this year will put that theory to the test.

China Literature Ltd., a unit of Tencent Holdings Ltd. and the country's largest online publishing house and e-book seller, is expected to raise as much as $800 million in the city and may be valued at around $5.7 billion to $7.8 billion, according to Credit Suisse Group AG and Morgan Stanley reports. The company has hired banks and Tencent has said it plans to retain a stake of at least 50 percent after the float.

If there's been a theme to what makes a successful IPO in Hong Kong, it's centered on privately held companies, particularly those in the pharmaceuticals and education sectors. The weak performance of state-backed firms such as brokerage Guotai Junan International Holdings Ltd. and Zhongyuan Bank Co. illustrate that investors prefer businesses without significant government involvement.

Among transactions this year that have raised more than $500 million, standouts include WuXi Biologics (Cayman) Inc. and ZhongAn Online P&C Insurance Co. Shares in ZhongAn, which is backed by Ant Financial, the owner of Alipay, and Tencent, surged as much as 18 percent on their debut last month, thanks in good part to the company's pedigree.

If ZhongAn's success is any guide, Tencent's ownership can only buoy China Literature.

The online publisher registered an almost 60 percent jump in revenue last year to 2.6 billion yuan ($393 million). Net profit for 2016 was 30.4 million yuan, compared with a 354.2 million yuan loss the year before, while for the six months ended June 30, earnings came in at 213.5 million yuan.

Increasing competition and Chinese censorship may ring some alarm bells. Last month, regulators fined Tencent and Baidu Inc. for various offences including pornography, terrorism and violence breaches. But the benefits of having a sponsor such as Tencent should outweigh any risks. Tencent investors can also apply for priority allocation in China Literature stock, which will only help up the buzz factor.

For this share sale, the initial reviews certainly look positive.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
    Before it's here, it's on the Bloomberg Terminal.