NetEase Cloud Music, a freemium music streaming service, has been publicly listed on the Hong Kong Stock Exchange on 2 December, as according to the Chinese media outlet the Securities Times. The music arm of the Chinese Internet technology company NetEase will be trading as a standalone business and the listing shows a diversification into a new market for the company.
It is understood that the new player in the market aims to raise HK$ 3.28 billion ($421 million), following an initial public offering (IPO) that priced shares at the mid-point of the marketed range (at HK$205 ($26.3) per share). On the first day of trading, however, the new player saw a fall in its shares by 2.5%, to close at HK$ 199.9 ($25.6), evaporating approximately HK$ 1 billion ($128.3 million). This drop has indicated a pessimistic sentiment from the market towards the company’s future performance, and such negativity could be the product of NetEase Music’s bumpy path to IPO.
Cloud Village Inc, the operator of NetEase Cloud Music, first announced the IPO back in May this year. The plan was then put on hold in August, amidst the government’s clampdowns on tech firms, casting uncertainty on the shares of businesses within the tech industry.
Interestingly, though, the listing finally went ahead even when the authority tightened regulations around handling data. As well as when the country expects to see stiffer rules on requirements of cybersecurity review for companies seeking to be listed in Hong Kong, with a draft law regarding this aspect released by the Cyberspace Administration of China (CAC) earlier on 14 November 2021.
The Cloud Village’s prospectus acknowledges some potential risks under this harsher regime while intending to assure investors by saying the company has not been involved in any investigation, nor has it received any notice or inquiry relative to the new rules.
On the other hand, the prospectus also reveals a steady growth of the music division, with its monthly active users climbing from 173.2 million in the first half of 2020 to 184.5 million during the same period in 2021. The company also aims to keep the number growing, by investing the net proceeds from this IPO in improving aspects including technological capabilities, user experience, and content offerings.
However, it is worth noting that the company has yet to deliver profit, and even saw a hefty deficit of more than 7 billion RMB ($1.1 billion) between the year 2018 and 2020 despite a consecutive increase in revenue during the three years.
This is due mainly to costs coming from fierce rivalry with music entertainment services offered by the tech giant Tencent. These financial results also raise doubts over NetEase Music’s ability to grow in this competitive market, with a lack of profits dissuading further investment and questions looming over the long-term viability of the business.
The dual effects of government scrutiny and competition against rivals would understandably be a source of restrains. A favourable strategy for stable growth in such a situation is always seeking solutions internally, that for services like NetEase Music is to optimise usability and innovate content. If they are able to make their product greater and appeal to more users to switch to their platform, then they can expect sustained growth within this industry.
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