Date
12 December 2017
Inside A Lenovo Group Ltd. Store Ahead Of Third Quarter Earnings

The Big Picture: KINGSOFT-XUNLEI DEAL

Chinese software developer Kingsoft Corp. (03888.HK) has agreed to buy 31.94 million preferred shares in Xunlei Ltd., a Shenzhen-based firm involved in video downloader software and content business, for US$90 million, in a deal that could bring significant benefits to both the firms. 

Kingsoft will hold 9.98 percent stake in Xunlei if all the preferred shares are converted into common stock, according to a filing to the Hong Kong stock exchange. Xunlei’s major shareholders and founders include its chairman Cheng Hao and chief executive Zou Shenglong.

Kingsoft said it can forge cooperation with Xunlei by becoming one of its shareholders, and that the cooperation could result in more business opportunities for both parties.

At the end of last year, Xunlei Group recorded a book value of about US$79.3 million, according to Kingsoft’s regulatory filing. Its net profit rose to US$10.7 million last year from US$0.5 million in 2012.

Observers say the deal is not surprising. Mainland media have reported that Kingsoft’s sister company Xiaomi Inc., a smartphone maker, has acquired some shares in Xunlei for about US$200 million early last month. Xiaomi is currently using Xunlei’s video downloading technology in its mobile phones and will apply the technology on its digital television set-top box.

In fact, Xiaomi’s chairman Lei Jun has had a long business relationship with Xunlei chairman Cheng Hao, a former Baidu engineer, since their first meeting in 2004. At the time, Cheng showed how the Xunlei downloader software can help speed up the downloading of Kingsoft’s online game. Lei is said to have been stunned by the amazing test result.

Xunlei, which failed to go public in Nasdaq in June 2011, may push forward its plan to float in the United States in the second quarter of this year, Sohu.com reported previously. In 2011, the deal scrapped as Xunlei faced copyright problems with its video content. Also, market sentiment was poor at that time.

Based on a simple calculation after the latest Kingsoft deal, Xunlei’s total valuation could be about US$900 million.

However, the road for Xunlei to list on the Nasdaq may not be as smooth as expected, some observers say. Although Xunlei may have resolved all the copyright problems over the past three years, its downloader is facing another problem — pornography.

As Xunlei provides downloader software for free, it has to gain revenue by providing sponsored content, which includes a lot of restricted items. It is certainly a risk factor that should be stated in the listing prospectus and may affect investors’ confidence in the company, observers say.

At the moment, pornographic content is restricted in China as the Communist Party feels that such content “erodes” people’s minds. Many porno websites have been shut down by the police over the past decade.

Banks face tougher NPL reserve requirement

Chinese lenders are facing tighter reserve requirements as part of efforts by the banking regulator to contain bad loans, Shanghai Securities News reported Friday, citing unnamed sources. In guidelines issued in March, the China Banking Regulatory Commission told banks to set aside more reserves and strengthen oversight of their bad loans by setting annual thresholds for non-performing loans (NPLs) and NPL ratio. In 2013, bad loans by commercial banks were 592.1 billion yuan (US$95.34 billion) and the NPL ratio was 1 percent, up from 492.9 billion yuan and 0.95 percent, respectively, a year earlier. Local regulators should conduct timely stress tests in the sector and banks should adopt contingency plans, the report said.

–Contact HKEJ at [email protected]

JP/RC

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