One day before the flotation of China Literature, the ebook business of Tencent, Lex said that “optimism is required to imagine a happy ending”. It was clearly in ample supply. To our chagrin, the shares more than doubled within a week.
Although the stock is now “only” 49 per cent above the offer price, it still looks expensive given the company’s profit prospects. Few will care. The bullishness reflects enthusiasm for Hong Kong-listed equities among mainland investors.
Lex argued against a high valuation for China Literature for two reasons: Firstly, operations and content are pricey to acquire and have cost structures more akin to old-economy newspapers than social media websites. Secondly, content is mostly distributed through the apps of controlling shareholder Tencent. Minority shareholders will struggle to defend the business against its parent’s ability to extract a rent for this.