Cloud Village Inc., the music streaming unit of NetEase, was approved by the Hong Kong Stock Exchange to go public, according to a NetEase filing on Sunday.
Why it matters: Cloud Village’s IPO could be the latest sizable deal in Hong Kong. The company is expected to raise about $1 billion, according to various media reports.
- The company’s IPO comes three weeks after its main competitor Tencent Music was asked by regulators to give up exclusive music deals. The antitrust regulation created opportunities for NetEase to obtain more music licenses from major labels.
Ongoing losses: Cloud Village has been operating on losses, losing RMB 1.8 billion ($278.6 million), RMB 1.6 billion, RMB 1.6 billion in 2018, 2019, and 2020, respectively, but the company has managed to narrow its negative profit margin, according to its latest prospectus updated on Sunday.
- The company’s negative gross margin narrowed from 115% of its revenue to 12% from 2018 to 2020.
- The company said in its prospectus that it expects further losses in the next three years, mainly owing to costs from content, marketing, and research and development units.
Revenue streams: Cloud Village’s revenue comes from two services: online music service accounted for 58.4% of its annual revenue in 2020, and social entertainment service, including online karaoke, audio livestreaming, dating, and other services, accounted for the rest. The music service is growing big without making money, while the entertainment service is getting more money out of fewer users.
- The company managed to grow its active users in online music services, but users have grown less inclined to pay. In the first quarter of 2021, the company’s monthly active users (MAUs) grew 8% to 183.1 million from last year, while the average revenue per paying user (monthly ARPPU), an indicator of a user’s paying ability, declined 22% to RMB 7.1.
- In social entertainment services, however, the trend is reversed. Users have decreased 10% in the first quarter from last year to 18.9 million, but more users were willing to pay. Monthly ARPPU grew 22% to RMB 553.3, doubling the department’s sales figures.
Context: NetEase first announced plans to spin off its music streaming unit for a separate listing in Hong Kong in late May.
- Founded in 2013, Cloud Village is primarily a music streaming site. It also offers social networking opportunities for young music enthusiasts in China.
- Cloud Village is the second-largest music streamer in China, following Tencent. In 2020, Tencent Music accounted for 72.8% of the market share, while Cloud Village accounted for 20.5%, said the prospectus.