Ximalaya aims high in third listing attempt

China’s leading podcast platform could become one of Hong Kong’s hottest tech offerings in recent years, boasting a huge base of loyal users and a recent move to profitability

Key Takeaways:

• Ximalaya has filed to list in Hong Kong, after reportedly being pressured by Chinese government officials to withdraw an earlier U.S. IPO application in 2021
• China’s leading podcast platform was profitable on both a net and adjusted basis for the first time last year as it focused on cost controls while maintaining modest growth

By Doug Young

After an aborted listing attempt in New York back in 2021, followed not long after by another IPO application in Hong Kong that went nowhere, leading podcast provider Ximalaya Inc. is hoping its third IPO application, this time also in Hong Kong, will get investors talking. Quite a bit has changed for this company, whose name is the same as the Himalaya mountain range, since its last two applications.

Most notably, Ximalaya’s growth has slowed sharply as it faces growing competition and focuses on cost control. But equally significant, the company has become profitable on both a net and adjusted basis, a feat that has continued to evade many global peers including giant Spotify (SPOT.US).

Ximalaya’s story is a familiar one for many Chinese tech firms, which have started to prioritize profitability over simply growing. That new focus is increasingly important for Chinese tech companies seeking to attract offshore investors who are becoming more skittish about a Chinese economy where growth has slowed sharply in the last few years.

At the same time, Ximalaya is a purveyor of user-generated content, an extremely difficult area in China, which requires platforms to monitor their material and remove anything deemed too sensitive. The definition of what’s considered too sensitive is growing even tougher in the current climate, where even mentions of the slowing economy can be considered verboten.

Ximalaya faces a major challenge in monitoring its huge volumes of content due to its sector dominance. The company had 488 million audio tracks with 3.6 billion minutes of content on its platform at the end of last year, and its users spent a staggering 1.8 trillion minutes listing to that content last year, according to its IPO listing document filed last Friday.

The company’s 303 million monthly active users (MAUs) are quite the loyal group, spending an average of 130 minutes – or more than two hours – per day listening to Ximalaya’s content. While that’s high, we should note the figure is actually down from the 144 minutes each day that users spent listening to its podcasts in 2021.

But no matter how you slice it, the company is hugely influential due to its audience of heavy listeners that’s equal to about one-quarter of China’s population. That influence was reportedly what led Chinese government officials to pressure the company to yank its earlier application to list in New York in 2021 and move it to Hong Kong.

Data security has become a major point of concern in both China and the U.S. lately, with each worried about the potential for large volumes of local user data held by certain companies to fall into the hands of a rival government. Such concerns are driving the current U.S. effort to force China’s ByteDance to sell the U.S.-based operation of its online video sensation TikTok.

Listing in Hong Kong should help Ximalaya to avoid such data security concerns, though nothing it can do will lower its Himalayan-like challenge of monitoring the huge volume of content on its service.

Big-name underwriters

As is customary with Hong Kong IPO filings, there’s no fundraising amount given in the company’s initial listing document. But the A-list of underwriters, led by Goldman Sachs, Morgan Stanley and domestic powerhouse CICC, hints that this could be quite a big deal.

Spotify, one of the company’s closest listed peers, currently trades at a price-to-sales (P/S) ratio of 4.1, while Chinese online video sites Kuaishou (1024.HK) and iQiyi (IQ.US) trade a bit lower at 1.78 and 0.91, respectively.

Somewhat ironically, both iQiyi and Kuaishou have lower multiples even though they’re profitable, while Spotify is losing money. That shows there’s currently a large China discount in the market due to concerns about the slowing economy, and also the greater potential for companies to run into regulatory trouble.

A P/S ratio of about 2, slightly higher than Kuaishou in acknowledgement of Ximalaya’s market-leading position and first-to-market status among Chinese podcast companies, would give Ximalaya a market value of about $1.7 billion. That means its IPO is likely to raise well over $100 million – a relatively large sum in the current market – if it succeeds this time.

As we’ve noted already, the company’s profile is a bit different now from its two earlier filings, with a far sharper focus on profitability over growth-at-any-cost. After reporting 44% revenue growth in 2021, the growth rate dropped sharply to 3.5% in 2022 and just 1.7% last year, when the figure reached 6.16 billion yuan ($850 million).

Subscriber growth showed a similar slow-growth trend, with monthly paying users rising just 6% to 15.8 million last year from 14.9 million two years earlier. The company is still China’s clear podcast leader with 60.5% of the market for mobile listening last year. But here, too, we should also note that share has been dropping steadily, and compares with 71% in the first half of 2021 when it made its earlier listing applications.

While revenue growth hasn’t been climbing too quickly these days, the company’s operating costs have shrunk dramatically since its earlier filings. Its sales and marketing expenses fell around 20% to 2.07 billion yuan last year from 2.63 billion yuan in 2021, while it slashed its administrative expenses by more than two-thirds to 468 million yuan last year from 1.41 billion yuan over the same period.

That focus on greater efficiency helped the company to boost its gross margin to 56.3% last year, up more than 4 percentage points from 51.9% in 2022. The company became profitable on a net basis in 2022, but still lost money on an adjusted basis, which excludes costs related to changes in the value of its shares and employee-based stock compensation. But it achieved profitability on both a net and adjusted basis last year, with figures of 3.74 billion yuan and 224 million yuan, respectively.

At the end of the day, Ximalaya looks like one of the more interesting China tech offerings to come to market lately, both due to its market-leading position and also its profitability. The underwriting by big names like Goldman Sachs and CICC is also a positive, meaning the listing could attract some strong investor interest if it succeeds in listing on its third try.

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