LeTV Plans Global Steps Into HK, US

LeTV prepares for global expansion

Hong Kong is quickly emerging as the preferred starting point for China’s tech companies eager to move outside their home market, with word that video sharing operator LeTV (Shenzhen: 300104) is planning a service launch in the former British colony later this year. Such a move would make LeTV the first of China’s online video and Internet TV firms to test out an overseas market. If the reports are true, LeTV could discover the outside world offers some interesting opportunities, but also major challenges as it goes head-to-head with local players and also global giants like YouTube and Apple (Nasdaq: AAPL).

LeTV’s global foray reflects the mounting pressure that China’s homegrown tech leaders are feeling to show they can compete outside their own large but also high protected home market. Many of these companies realize such a global strategy will be key to their future growth, even though the few attempts we’ve seen at internationalization so far have been largely failures.

The latest reports say LeTV plans to launch first in Hong Kong first and then in the US, both by the end of this year. (Chinese article) They don’t specify what products the company is planning, but imply the expansion will include its Internet TV product that has sold reasonably well in China.

LeTV started out as one of China’s earliest online video sites and was also one of the earliest Chinese companies to try Internet TV. More recently, it has been joined in the latter space by an increasingly crowded field of other big names, including Internet leaders Baidu (Nasdaq: BIDU) and Alibaba, as well as top PC maker Lenovo (HKEx: 992) and fast-rising smartphone sensation Xiaomi.

I suspect that LeTV is making this move in a bid to justify its share price that has risen around 8-fold since the beginning of 2013. The company’s Shenzhen-listed shares now trade at a meteoric price-to-earnings (PE) ratio of 120, and even with 65 percent profit growth forecast for this year will still trade at a lofty ratio of 72 based on analyst estimates for 2014.

The company’s stock premium is probably due at least partly to its position as an early arrival to the online video space, and now its leading position in smart TVs. LeTV was in the online video businesses well before most of its rivals, including leading online video sharing sites Youku Tudou (NYSE: YOKU) and iQiyi. It also embraced Internet TV long before any of the companies in the market, and this global move would put it ahead of the pack on that front as well.

The use of Hong Kong as a first global step looks like an increasingly popular route for China’s tech firms as they seek to explore international markets. Xiaomi made a similar foray into Hong Kong last year, and is now testing out Southeast Asian markets. Likewise, social networking titan Tencent (HKEx: 700) first expanded its popular WeChat mobile messaging service into Hong Kong, and is now experimenting with a move into North America.

Hong Kong is an obvious starting point for such expansion, since it shares many qualities with China in terms of language and culture. But it’s also much more interconnected with global markets and trends due to its history as a British colony.

All that said, I’ll admit I have serious doubts about LeTV’s chances of success on the international stage over the longer term. For starters, I question its choice of the US as the second stop on its global expansion, as that market is quite competitive and will put LeTV in direct competition with Apple, which offers its own Internet TV product, as well as other niche players.

Perhaps more importantly, LeTV really needs a partner with deeper pockets if it wants to succeed over the longer term. Even with its current inflated market value of about 30 billion yuan, or  nearly $5 billion, the company is far smaller than most of the rivals it wants to compete with. It formed a “deep collaboration” with Tencent last year to promote its products and services, though it remains to be seen how close that relationship will actually become. (previous post)

Perhaps LeTV will post a respectable performance in Hong Kong, though I do expect its sales there will be limited due to the market’s small size. North America looks more problematic, and LeTV should think seriously about finding a strong and serious strategic partner if it wants to succeed over the longer term.

Bottom line: LeTV could do respectably in its plans to expand into Hong Kong, but will need to find a bigger strategic partner to boost its longer term chance of success in larger global markets.

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