Kingsoft Subsidiary Cheetah Mobile Files for IPO on the NYSE

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CheetahKingsoft Corporation (SEHK: 3888) announced two months ago that it would spin off a business unit for Internet security and other services and list its shares in the U.S. The spinoff has filed with the U.S. Securities and Exchange Commission and is renamed Cheetah Mobile — it was formerly known as “Kingsoft Network” in Chinese and it developed a web browser called Cheetah. (Update: The company would begin trading on the NYSE on May 8th.)

Kingsoft acquired Conew, aka. Keniu, an Internet security and photo editing service provider in 2010 and merged it into its own anti-virus business. Sheng Fu, founder of Conew, was named CEO of the new company whose focus would be security software.

As Fu was known as the right-hand man to Zhou Hongyi, CEO of Qihoo, when they were developing the online security product at Qihoo before the two had a fight and Fu left the company. Qihoo sued Fu alleging the latter used confidential information of the former for developing Conew security product, poached Qihoo employees and competed with it within the restricted period, and publicly made negative comments on Qihoo.

So the acquisition of Conew was seen as a strategy of Kingsoft to fight against Qihoo who disrupted the China’s Internet security market by making its paid security service for free. So were the next moves by the new Conew. Like Qihoo, the combination of Conew and Kingsoft’s anti-virus business would offer their services for free, develop a web browser Cheetah and expand overseas.

As Qihoo had been dominating in online security and web browser markets in China, Kingsoft thought there might be a chance to beat it overseas. While Qihoo launched an English version of its flagship security service and bought a stake in a Brazilian security product, Kingsoft stealthily launched Clean Master, Android storage management app in 2012. At the end of 2013, Sheng Fu announced the free app had had more than 100 million installs. I learned from mobile advertising and other service providers that the company has spent a large amount of money acquiring overseas users since its launch. And now Clean Master is trying to gain users in the domestic market.

Cheetah adopted Qihoo’s business model, too. Actually a handful of Chinese Internet companies who offer free Internet services, including the biggest Chinese input method service provider Sogou, adopted Qihoo’s model. They’d channel users of their free software to a web browser and monetize mainly through search marketing and other advertising means, and online gaming.

81.7% of the total revenues by Cheetah Mobile in 2013 was from advertising, and the rest was from gaming, according to the company’s prospectus.

It is believed that companies like Tencent and Baidu are backing Cheetah to fight against Qihoo. Qihoo became Tencent’s enemy back in 2010. Tencent invested in Cheetah and now holds 18% a stake in the company. Baidu felt threaten more recently as Qihoo gained more than 20% of the search market in China.

Baidu and Tencent were, actually, of Cheetah’s top three advertisers. In 2013, Alibaba, Baidu and Tencent contributed 25%, 19% and 14% of its total revenues, respectively. Tencent contributed 24% in the previous year and the decline was due to the fact Soso, Tencent’s search service, was merged into Sogou.