Zhihu Aims to Become the First Internet Company to Have Primary Listings in US, Hong Kong

Data particle over the city at night in cyberspace

Hiroshi Watanabe/DigitalVision via Getty Images

Another Chinese company jumps on the dual-listing train to Hong Kong, this time via an online Q&A platform Zhihu Inc.NYSE:ZH) (2390.HK), often referred to as the Quora of China. But this double entry is a bit unlike the many that have come before, and if it succeeds, Zhihu will become China’s first internet company with primary listings in both the US and Hong Kong.

Zhihu’s offer application was approved after a successful hearing in Hong Kong last Friday, paving the way for a primary IPO. All US-listed internet companies in China to list Hong Kong stocks have so far done so through secondary listings – a simpler process than what Zhihu is trying to do, but also one with some additional drawbacks.

Despite periods that can sometimes take months between the regulatory green light and an actual equity offering, Zhihu is determined to strike while the iron is hot. It’s uploaded its IPO prospectus on Monday and began accepting public subscriptions for its shares the same day.

Zhihu has a weighted voting rights (WVR) structure and plans to offer 26 million Class A shares, all of which will be sold by early investors. Approximately 10% of the shares are earmarked for the public portion of the IPO at a price up to HK$51.80 ($6.64), with shares being sold in lots of 100 costing HK$5,232. The deal will value the company at HK$16.4 billion.

Zhihu’s double primary entry means that his entries in the US and Hong Kong will have equal status, unlike existing double entries with names like Ali Baba (BABA) (9988.HK) and Baidu (BIDU) (9888.HK), with the US being primary and Hong Kong secondary.

A primary listing is subject to stricter legal requirements, while a secondary has a lower bar and may be exempt from certain requirements. That means companies like Zhihu must meet the same requirements as a traditional IPO. Despite Zhihu losing money in the past three years — something that would normally disqualify a company from listing in Hong Kong — Zhihu is allowed to go public in Hong Kong under an exemption that allows such listings to continue if the company passes market capitalization tests. , revenue and cash flow, and comes from the emerging internet sector of the new economy.

Regulatory pressure in US, China

With such a dual listing, Zhihu’s shares in the US and Hong Kong cannot be traded on the two markets, which could lead to widely diverging valuations. But the Hong Kong-listed shares can be bought by mainland Chinese investors through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect programs – something not allowed for companies like Ali Baba (BABA) (9988.HK) with secondary lists.

At the same time, the US Securities and Exchange Commission (SEC) is enforcing a law that would allow Chinese companies to be delisted unless they reach an information-sharing agreement with the Chinese securities regulator. As a result, many US-listed Chinese companies have offered Hong Kong shares as insurance. Some companies like Nio (NIO) (9866.HK) have already created dual primary listings and internet business bilibili (BILI) (9626.HK) is trying to convert its current status of secondary listing in Hong Kong to a dual primary listing.

But even if a dual primary listing in Hong Kong provides the only reprieve from US pressure, Zhihu will still face regulatory risks in its home market of China. The Beijing Branch of the Cyberspace Administration of China summoned company officers to his office in December after Zhihu repeatedly allowed unspecified “illegal” material on his site. Zhihu escaped without a fine or more severe punishment, but he still has to be on his guard to avoid such conflicts.

Founded in 2010, Zhihu runs a series of online content communities in China. It began offering advertising services in 2016 and last year generated 1.16 billion yuan ($182 million) from that portion of its business, its largest source of revenue. In 2019 it is switched to a “three revenue engines” model and also unveiled a paid membership plan that gives subscribers access to exclusive knowledge services and community features. At the end of December last year, it had 5.08 million monthly subscribed members and that company’s revenue had increased from 88 million yuan in 2019 to 668 million yuan last year.

The company has also expanded its professional training and e-commerce business, increasing content commerce solutions revenue from 640,000 yuan in 2019 to 970 million yuan last year. With the addition of these two new business areas, the company reported sales of 2.96 billion yuan last year, with an average annual growth rate of 110% since 2019.

Looking for profit

All of these efforts are part of Zhihu founder Zhou Yuan’s quest to “turn good content into good income.” But the company is still in the red as rapidly rising revenues were more than offset by faster rising operating costs.

Last year, its marketing costs rose to 1.63 billion yuan, which is equivalent to half of its sales, as it spent a lot to improve its brand profile and add users. The costs of providing cloud services and expanding the content ecosystem have also grown as the user base grows, with R&D and administrative costs increasing by 88% and 133% respectively last year. The bottom line was that the company’s net loss rose 150% to 1.3 billion yuan last year.

As it continues to lose a lot of money, Zhihu has faced net cash outflows for the past three years. By the end of last year, it had 2.16 billion yuan in cash and cash equivalents and warned of more outflows in the future. Since the new Hong Kong IPO will only help current shareholders make money without raising new funds for Zhihu himself, investors may be concerned about the company’s dwindling cash.

Zhihu went public in the US last March at a bid price of $9.50. But its shares fell to $1.39 as the threat of a forced delisting in the US loomed. US stocks fell 12.9% on Monday after it launched its IPO in Hong Kong to finish at $2.23. bilibili (BILI) and Kuaishou (OTCPK:KUASF) (OTCPK:KSHTY) (1024.HK) are two unprofitable companies with comparable companies that can be used for comparison. Their price-to-sale ratio (P/S) is now 3.2 times and 2.89 times higher, respectively, than Zhihu’s 2.64 times, showing that investors are less enthusiastic about the company.

That caution is reflected in the lukewarm reception for the public portion of Zhihu’s IPO in Hong Kong. A tally of data from eight major brokers shows it eventually received funded subscriptions worth HK$63 million, or less than half of the funding it hopes to raise through the public portion of the offering.

It looks like Zhihu’s losing streak will continue for a while. In the meantime, even a Q&A specialist like Zhihu can’t answer the question of when it will become profitable and how long the current money stack can take before it needs to raise new funds.

Revelation: No

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Editor’s Note: The summary bullet points for this article were chosen by the editors of Seeking Alpha.


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