Netease to seek US IPO for Youdao

Nasdaq-listed Internet company Netease is said to be preparing for an initial public offering in the US of Youdao, its online education brand, which is expected to raise at least US$300 million, according to Bloomberg. 

Guangzhou-based Netease develops and operates online PC and mobile games, email services, music-streaming services and e-commerce platforms. Founded in 1997, it has turned out to be one of the country’s most remarkable stories of resilience through the ups and down of the online industry.

Three years after its launch, Netease listed on the NASDAQ. But soon after the world ticked over into the year 2000, the “dotcom bubble” burst. Netease was hammered at the same time by allegations of financial fraud in the US. When the stock fell below US$1, it was suspended on NASDAQ for nearly four months. 

However, it turned out to be down, but not out. Online gaming proved to be a smash hit in China, and revenues started to recover. Today, gaming accounts for nearly two-thirds of the company’s profits and it is considered Tencent’s largest competitor in China’s mobile gaming market. Smash hits such as the Westward JourneySeries and Knives Out, have boosted its fortunes, and the company has also operating licensed online games for Chinese players such as Minecraft (Pocket Edition), and World of Warcraft.

Since 2016, Netease has also built an online shopping brand, Yanxuan, which now accounts for 28.6% of profits. Its focus is on fashion apparel, accessories, furniture and home appliances that it claims have been made by original manufacturers for top international luxury brands but sold at a much lower price. 

It was surprising to many analysts when Netease began to expand into the online-education arena, but the bet has proved prescient. Starting with an online dictionary service in 2006, Youdao has now attracted more than 800 million users. Of these, more than 17 million daily users log on to the company’s online educational apps, such as “Boutique courses”, Cloud Notes and various online prep classes for important certification tests. Netease also has more than 20 types of smart hardware products like dictionary pens.  

Since the start of the year, the online education business was considered equally important as gaming and ecommerce and was given an increased budget, according to Netease’s CEO, Ding Lei. The company has been trying out several different business models for Youdao, ending up with what they call “TEACH”: Tools, Educator, AI, Content, and Hardware. 

Netease is said to be working with Morgan Stanley and Citigroup Inc. on the preparation of the Youdao IPO as early as Q3 this year. It will be a key move after the education brand completed its first round of financing in April last year with a post-money valuation of US$1.12 billion, according to Bloomberg, citing an anonymous source. In 2018, Youdao saw a 60% increase in revenue, and more than 70% of Chinese university students have used Youdao’s apps and products while 80% considered the experience “rather satisfactory”.

The brand clearly has strong potential. Online revenue from parents with kids at kindergartens through high school could rise 38% a year through 2022, Bloomberg Intelligence cites iResearch as forecasting.

For the Chinese market, it is estimated that the number of users of online education services will exceed 220 million this year, up from 155 million in 2017, according to a report from the China Business Industrial Research Institute. Another report from iiMedia Research shows that the market size of online education has increased more than RMB200 billion from 2016 to 2018, and is expected to reach RMB433 billion in 2020. 

Netease’s push into the sector is also to differentiate itself from other top internet companies. Tencent still dominates the gaming market with RMB128.4 billion of annual income in 2018, three times Netease’s. Alibaba’s Taobao and Tmall, meanwhile, are dominant in the e-commerce arena. And its music-streaming business, Netease Cloud Music, is being challenged by rising costs for intellectual property and fierce new competitors such as QQ Music. Online-education, on the other hand, seems to be the arena where Netease has a lead. The big three – Baidu, Alibaba and Tencent (BAT) – have all invested in sector and launched online-education platforms, but none has been outstanding.

Still, it won’t be easy. Although the online-education business sounds promising, Youdao has to compete against new rivals including New Oriental Education & Technology Group, VIPKid and iTutorGroup. Once it is listed in the US, moreover, Netease will also face challenges from the rising tensions of the US-China tech war, no doubt.

Tell us what you think