Bottom line: NetEase is likely to complete a spin-off of its news division, possibly through a sale to Sina, while Postal Savings Bank’s massive IPO will meet with tepid reception due to limited growth prospects.
Two significant but very different IPOs are in the headlines as we get set for the Mid-Autumn holiday break, one from China’s vibrant private sector and the other from a big state-run behemoth. In the former category is NetEase (Nasdaq: NTES), one of China’s oldest Internet companies, which is reportedly mulling an IPO for its news portal, one of its original businesses with a history dating back to the 1990s. In the other news, China Postal Savings Bank has reportedly placed most of the shares for its massive $8 billion listing with a group of 6 cornerstone investors.
Each of these listings involves a well-known company that is losing its way in the rapidly evolving Chinese business world. As one of China’s oldest Internet names, NetEase’s news portal is highly respected, but also suffers from lack of major growth prospects. Postal Savings Bank is also a well-known institution, but one whose future looks increasingly cloudy as younger Chinese abandon traditional state-owned banks in favor of other more attractive options.
I’ve written quite a bit about the Postal Bank IPO already, so let’s begin with the NetEase item that is quite new. I should add that this particular plan isn’t completely new, since NetEase discussed a similar spin-off 4 years ago that was never completed. (previous post) Now the latest reports are saying that once again NetEase plans to get rid of its news portal business, either via an IPO or a sale that would be worth about $300 million. (Chinese article)
The reports say NetEase still hasn’t decided which path it will take, and is currently in talks with several potential partners. To put things in perspective, the $300 million price tag is a tiny fraction of NetEase’s total market value of $30 billion. That shows just how insignificant the portal division has become over the years for the company, which now makes most of its money from it far more successful games division.
I do expect that NetEase will complete the spin-off this time, as it’s clear the division will simply wither and fade away without some new ownership. One intriguing possibility could be a purchase by larger and equally old rival Sina (Nasdaq: SINA), which I speculated this week may be getting ready to be sold to e-commerce giant Alibaba (NYSE: BABA). (previous post) An IPO could also happen, though probably wouldn’t get a great reception due to the news portal’s cloudy business outlook.
Year’s Largest IPO
Next there’s the Postal Savings Bank IPO, which has formally launched with a final fund-raising target of $8.1 billion, roughly the same as the $8 billion previously discussed. (English article) The IPO would be the world’s biggest since Alibaba’s world-record $25 billion offering 2 years ago, marking a major accomplishment for such a stodgy state-run company.
Postal Bank’s stodgy corporate profile is probably one of its strongest assets, since its conservative investment policies mean it probably has far fewer bad loans than many of China’s other banks, which are facing a massive bad debt crisis. But even so, Postal Bank had to call on other big state-owned companies to purchase nearly $6 billion worth of its IPO shares.
That means that nearly three-quarters of the IPO shares are being bought by names like Shanghai International Port Group and Victory Global Group, an unusually high proportion and not a huge vote of confidence from private sector investors. I used to be more bullish on this IPO due to Postal Bank’s lower exposure to bad debt.
But every time I visit my local post office here in Shanghai and see the group of elderly customers waiting in line at the bank branch, I realize more and more how this bank’s clientele is rapidly aging and likely to die out in the next 20-30 years. That certainly doesn’t bode well for future business prospects of the bank, or the broader postal service that is rapidly being overtaken by younger, more nimble package delivery rivals.
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