Spinning off Douyin is the best choice for ByteDance

On October 26, 36Kr released an exclusive news saying, “ByteDance is considering promoting the Douyin business to be listed in Hong Kong alone. Goldman Sachs and other investment banks have communicated with ByteDance.”

The relevant person in charge of ByteDance responded to this, saying that some business listing plans are under consideration, but they have not yet been finalized.

On July 31 this year, Reuters quoted people familiar with the matter as saying that ByteDance is considering listing its Chinese business in Hong Kong or Shanghai, with a valuation of more than $100 billion. ByteDance declined to comment on this rumor.

Compared with the attitude in July, ByteDance’s response this time clearly expresses that the listing is a certainty, but it is only a question of whether the spin-off is Douyin and when it will be listed.

Why TikTok?

Aside from exclusive sources, ByteDance’s “partial business” is also the most likely to mean Douyin.

ByteDance has never been in a hurry to go public. One of the important reasons is that ByteDance has never been short of money. Whether it is the large sums of funds frequently invested by external investors or the cash flow brought by its own products represented by Toutiao and Douyin, secondary market financing is less urgent for ByteDance.

Spinning off Douyin is the best choice for ByteDance

Even if TikTok, the main overseas business of ByteDance, was blocked by various countries this year, the entire group has not yet reached the point of listing due to lack of money. Therefore, ByteDance is more likely to spin off businesses that have an impact on its strategy or market competition after listing, while ensuring that the secondary market valuation does not shrink.

Among the 11 products listed on the official website of ByteDance, Xigua Video is still growing, and its market penetration rate is far from that of the head video platform. The competition with the second echelon such as Station B is fierce, and the prospects are uncertain. Knowing the car emperor, online education and other brands are currently not highly recognized, need to be developed, and do not have the conditions for listing. Only Toutiao and Douyin (including Douyin Volcano version) are capable of listing separately to attract capital.

Spinning off Douyin is the best choice for ByteDance

Toutiao, as the starting product of ByteDance, initially played a huge role in attracting traffic. However, with the advent of the short video era, Douyin’s traffic quickly surpassed Toutiao and became a new traffic portal. In addition to continuing to do a good job of news feed, Toutiao’s most important function has become a hub for interconnection and drainage between ByteDance’s products.

Spinning off Douyin is the best choice for ByteDance

▲In September 2020, Douyin’s monthly active number was about twice that of Toutiao.Source: Analysys Qianfan

TikTok clearly has more stories to tell. The 5G era is about to bring people more imagination space for the short video industry, and the performance of entering the e-commerce field is also worth looking forward to. Douyin is even more famous among the people than its parent company ByteDance, and it is the best choice for listing.

The spin-off of Douyin will also help ByteDance continue to fight for control of TikTok.

On September 27, a federal judge in Washington, D.C. ruled that the First Amendment to the U.S. Constitution (denial of freedom of speech; violation of the rights to freedom of the press and assembly), especially considering that the Trump administration has not provided sufficient evidence of endangering national security , rejected the Trump administration’s TikTok ban, allowing ByteDance’s overseas business to see a new lease of life.

In order to continue to receive judicial support from the United States, ByteDance needs to keep the judges’ trust in its separation of overseas business and Chinese business, and TikTok and Douyin, as the main overseas and domestic businesses respectively, are the key to separation.

The operation of listed companies is more open and transparent, which facilitates market supervision. After Douyin goes public, the evidence that ByteDance’s business at home and abroad is isolated will be stronger.

Douyin’s listing may also be inseparable from the influence of its old rival Kuaishou.

On the evening of October 22, a first-line report from Tencent News confirmed last month’s rumor that Kuaishou planned to go public in Hong Kong in the first quarter of 2021. Kuaishou is said to be valued at about $50 billion.

According to the statistics of iiMedia Research, after the number of monthly active users of Douyin surpassed that of Kuaishou in 2019, the gap between the two has widened.

Spinning off Douyin is the best choice for ByteDance

However, the pressure from Kuaishou cannot be underestimated. Douyin has been under the pressure of Kuaishou in the e-commerce field that is developing. This year’s Double Eleven, Kuaishou’s GMV target is 250 billion yuan, and Douyin’s is 200 billion yuan.

Therefore, the “Shake Fast” battle will continue, and the capital market is an important second battlefield. By directly sending Douyin to the capital stage, excluding the group factor, Douyin and Kuaishou can stage a head-to-head confrontation.

It can obtain direct financing from the secondary market, and can compete with old opponents head-on. At the same time, it has disclosed its own operations as a silent response to Trump’s suppression. ByteDance to send Douyin to the market is not only a matter of course, but also necessary for the form, why not do it?

Why choose Hong Kong stocks?

Assuming that it is indeed Douyin that is going to be listed, where will ByteDance choose as the first listing place for its products?

The U.S. stock market’s attitude toward Chinese stocks, the Trump administration’s suppression of ByteDance products, and the existence of TikTok have basically ruled out Douyin’s options for listing in the U.S. Although the policies of the Growth Enterprise Market and the Science and Technology Innovation Board have cleared the obstacles for Douyin to be listed in the mainland, considering the main purpose of Douyin’s listing, Douyin is more likely to be listed on the Hong Kong stock market.

At present, the Hong Kong stock market still has a huge advantage in attracting foreign capital. As a company with global influence, ByteDance has attracted the attention of investors all over the world, and its listing on the Hong Kong stock market is convenient for investors from all over the world to enter.

In the stereotype of foreign investors, Hong Kong-listed companies are subject to stricter audits and supervision than mainland-listed companies, and public information is more trustworthy. This will help ByteDance gain the trust and support of more overseas investors through Douyin, which in turn will help ByteDance strive for overseas rights and expand overseas markets.

As for the possibility that Douyin, like Ant Group, chooses A+H to go public at the same time, I am afraid it is not realistic.

In the “2020 Hurun Global Unicorn List” released this year, Ant Group ranked first with a valuation of 1 trillion yuan, and in the latest valuation, Ant’s valuation has reached about 2 trillion yuan. Although ByteDance, the parent company of Douyin, ranks second, its valuation is only more than half that of Ant, at 560 billion yuan.

Even if the valuation has also risen in the past two months, the valuation gap between ByteDance and Ant Group may be a trillion-level gap, while Douyin is only a business of ByteDance, and the gap with Ant Group is even greater.

According to media reports, the financing target of Kuaishou’s listing is US$5 billion. According to the market share and business situation of “Douyin”, Douyin’s financing target will not exceed US$10 billion, while Ant Group’s financing target is US$200 billion. . Douyin does not have the problem of insufficient market funds that Ant Group may face when listing on a single market.

To sum up, the Hong Kong market is the best choice for Douyin. As for the listing of the sword, in order to better compete with Kuaishou, Douyin should also plan to submit an IPO application early next year.

What Douyin’s listing means for ByteDance

Douyin, as the most important business segment of ByteDance, has more significance for the group to go public.

According to media reports, in 2019, the total revenue of ByteDance exceeded 120 billion yuan, and the net profit exceeded 20 billion yuan. ByteDance’s full-year revenue target for 2020 is 200 billion yuan.

ByteDance’s absolute revenue is astonishing, but it’s not even close to its rival Tencent, which it has been chasing. According to the announcement issued by Tencent Holdings, Tencent Holdings’ annual revenue in 2019 was about 377.3 billion yuan, and in the first half of 2020, Tencent’s revenue has exceeded 200 billion yuan.

Considering the late establishment of ByteDance and the status of a chaser, the current performance is not bad. Especially from 2016 to 2019, the compound annual growth rate of ByteDance’s total revenue was as high as about 171%.

ByteDance’s high growth in recent years has been largely driven by a surge in its active users. Now the total number of monthly active users of ByteDance’s products has exceeded 600 million, and the slowdown in growth rate is inevitable. The traffic growth dividend is gradually disappearing, and overseas business has suffered serious setbacks. Expanding domestic business and promoting domestic traffic monetization is the best choice for ByteDance to maintain high revenue growth, increase profits, and remain attractive to capital.

Expanding the game business, entering online education, and focusing on developing e-commerce are all recent attempts that ByteDance has begun to make, and each of them has mature competitors. There is hope for ByteDance to break through, but no matter what the result is, the process is bound to be long, and the protracted battle of multi-faceted attacks will consume a lot of resources.

Funding in the secondary market is neither urgent nor unimportant to ByteDance. In the process of expansion, more capital support allows ByteDance to invest more freely as planned to deal with opponents’ counterattacks.

Douyin carries the main traffic of ByteDance and most of the hope of the e-commerce sector. In the context of high capital recognition, Douyin directly finances from the secondary market, which can reduce the capital demand for indirect financing of the group, and even obtain all the funds needed for development from the secondary market. In this way, the Group can allocate more resources in other businesses.

However, the performance of Douyin after its listing is not a certainty. This year, the return of JD.com and NetEase, and the listing of “Frozen Capital Kings” such as Ant Group and Arowana have sucked up huge amounts of capital. The global economic winter has not yet passed, and it is not optimistic how much capital is left to latecomers such as Kuaishou and Douyin.

At this stage, how well the market will recognize Douyin in the future, whether Douyin can compete faster in the secondary market, and how the upcoming Double Eleven will perform are the keys. I wonder if Douyin is ready for the e-commerce debut?

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