NetEase's Cloud Village Music Arm Gets The Nod For Hong Kong IPO, A Shot In The Arm For A Dawdling Market After A Quiet July

Cloud Village, NetEase's unprofitable music streaming arm, could target up to US$1 billion in Hong Kong IPO IPO comes after regulators clamped down on its rival, Tencent's music arm, on anti-monopoly grounds.
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NetEase's Cloud Village Music Arm Gets The Nod For Hong Kong IPO, A Shot In The Arm For A Dawdling Market After A Quiet July

Cloud Village, the music streaming subsidiary of NetEase, has moved a step closer to its Hong Kong initial public offering (IPO) after winning the approval from the city bourse's listing committee late last week.

The Hangzhou-based company, with over 60 million tracks in its library, is aiming to raise up to US$1 billion, according to a person familiar with the plan, speaking anonymously for describing a confidential matter. The source added that the amount raised could still change as Cloud Village is still gauging investors' demand.

Cloud Village would be the first sizeable IPO in Hong Kong by a Chinese internet company in more than three months, following the US$1.25 billion fundraising in April by Trip.com, the dominant operator of China's online travel and ticketing service, according to data provided by Refinitiv. A successful fundraising would also be a shot in the arm for a dawdling stock market where 17 IPOs raised a mere US$2.7 billion in July, down 62 per cent from last year for the third-lowest month this year.

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Cloud Village, which is yet to turn a profit, would face a barrage of questions from investors about its outlook and business model. The company, which claims 183 million monthly users at the end of March including the largest following among fans of Japanese pop music, or J-pop, in China, said it's in a "relatively early stage" of turning fandom into profits, and may incur losses for three more years from 2021 through 2023, according to its draft prospectus. About 13 per cent of active users were paying customers.

Net loss more than tripled to 1.7 billion yuan (US$263 million) in the quarter ended March, while its 2020 net loss widened to 3 billion yuan.

NetEase's cloud-based music interface on display on a smartphone in Linyi, China. Photo: Getty Images

NetEase's cloud-based music interface on display on a smartphone in Linyi, China. Photo: Getty Images

NetEase, one of China's largest internet companies and games publishers, owns 62.5 per cent of Cloud Village. Other shareholders include this newspaper's owner Alibaba Group Holding.

"If we fail to ramp up the scale of our operation and if we do not achieve our satisfactory future growth, we may have funding shortfall which may require us to raise funds further before reaching our adjusted net profit and/or net operating cash flow break even," the company said.

NetEase's chief executive officer and founder William Ding Lei at a press conference in Beijing on February 24, 2006. Photo: Bloomberg.

NetEase's chief executive officer and founder William Ding Lei at a press conference in Beijing on February 24, 2006. Photo: Bloomberg.

Cloud Village also cited China's anti-monopoly rules as a risk factor. Tencent Music Entertainment, the country's dominant music streaming platform and Cloud Village's largest competitor, was ordered to end its exclusive music licensing deals with global record labels and fined 500,000 yuan last month by the State Administration of Market Regulation (SAMR), the antitrust watchdog agency.

Cloud Village itself is not the subject of any anti-monopoly investigation, or punitive action. Still, "the regulatory environment of anti-monopoly is tightening," Cloud Village stated in its prospectus. "Regulators are increasingly paying attention to the exclusive licensing and sub-licensing arrangements for the Chinese online music market."

Its monthly average revenue from membership subscription per paying user for its online music services was at 7.1 yuan as of the end of March, down from 8.4 yuan at end of 2020.

Cloud Village plans to use the IPO net proceeds in expanding its music content library, for potential investment or acquisition and merger opportunities, and on promoting its brand.

Joint sponsors of the deal include Bank of America, CICC and Credit Suisse, they were not immediately available for comment.

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