22 January 2019

Internet security plays could pay off big time

With cyber security becoming a major challenge in the modern age, given the array of sophisticated tools and surveillance programs in the hands of spying agencies and expert hackers, China is seeking to beef up its internet protection systems and software. In line with the goal, Beijing is encouraging domestic software firms to step up their game and come up with new products.

Hoping to seize the opportunities, several Chinese internet security software developers are mulling new financing plans to fuel their businesses, with some firms expressly trying to sell the anti-spying concept to global investors. Among such companies is Beijing-based Kingsoft Corp (03888.HK), which plans to spin off its security software business KIS Group and list it in the United States.

Should the IPO plan succeed, it will mark the second fund-raising activity for KIS Group since 2013. Last year, Tencent Holdings Ltd. (00700.HK) subscribed US$46.9 million worth of preferred shares in KIS, giving the internet giant 18 percent stake in the security software firm. Based on last year’s transaction, KIS is valued at US$522 million.

KIS competes directly with Qihoo 360 Technology (QIHU.US) in China’s internet security software market. While Qihoo is giving away free software to users and relies on advertising revenue, KIS draws support from its alliance with Tencent, which has more than 700 million instant messaging service users, and from close ties with Xiaomi, the smartphone brand owned by Lei Jun, who is also non-executive chairman of Kingsoft.

Both firms have shown strong growth momentum in the recent past.

In the third quarter last year, KIS saw its revenue surge 144 percent from a year earlier to 171 million yuan (US$28.26 million). While still lagging behind Qihoo, its monthly active users on mobile terminals hit 123 million in the period. Qihoo, meanwhile, generated revenue of US$187.9 million, a 124 percent increase from a year earlier. Smartphone users of 360 Mobile Safe, Qihoo’s primary mobile security product, reached a record 408 million in September 2013.

Both Qihoo and KIS should benefit from the Chinese government’s information technology policy which aims to build the nation’s own internet security technology. Beijing wants to leverage domestic products to protect its internet, rather than use foreign software products.

The impressive performance and encouraging prospects have given good reasons for investors to bet on the China security software market.

Qihoo’s share price recorded more than 195 percent jump in the past 12 months. That should provide strong support for the KIS listing, which could be either on the Nasdaq or the New York Stock Exchange.

According to a regulatory filing, the overseas listing of KIS will adopt a dual-class share structure so that Kingsoft can still maintain control over the company and consolidate its financial results following the IPO. The shares offered in the IPO will have limited voting rights, while stock available to founders and existing shareholders will have more voting power.

That would help the Kingsoft management retain good control over the unit after the share sale, as well as provide comfort to Chinese authorities who wish to keep local security software firms securely in the hands of the Chinese. 

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EJ Insight writer

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