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Potential Douyin IPO excites and confuses as parent ByteDance juggles priorities

Chinese internet company Beijing Byte Dance Telecommunications Co. Ltd.'s plan to list its domestic version of TikTok Inc., Douyin, could be a hit with investors but negatively impact the parent's other apps, experts told S&P Global Market Intelligence.

After months of speculation that the whole company could come to market, ByteDance confirmed in late October that it is considering listing only part of its business, without providing details. Internal discussions are focused on a Hong Kong IPO of its short video app Douyin, according to an earlier Reuters report.

Listing the "Chinese TikTok" separately would give investors a clearer idea of the app's value and of ByteDance's market cap, but it would also raise questions about the future of the company's other projects, analysts said.

ByteDance is known as an "app factory" in China, with frequent new releases. Its software portfolio includes newsfeed Jinri Toutiao, video-sharing apps Douyin, Douyin Huoshan, TikTokvand Xigua Video, car information service Dongchedi, photo-editing app FaceU and content-generating platform Pipixia.

"By going [public] as a group, there is a risk that one product may 'subsidize' the other, especially if profitability varies greatly and leads to a situation where one product weighs the other down and carries a negative valuation,"said Bryan Tan, partner and head of technology, media and telecom at law firm Pinsent Masons in Singapore.

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Listing the apps one by one has its merits as a strategy, said Michael Norris, research and strategy manager at AgencyChina. Investors can focus on niche business dynamics and unique growth stories, he said.

Douyin's dominant market position makes it "the perfect candidate to be the first company ByteDance takes public," Norris said.

The short-video sharing app saw over 477 million monthly active users in July, according to research institution iiMedia. Its rival Beijing Kuaishou Technology Ltd. ranked second with nearly 371 million monthly active users in July.

Meanwhile, advertising revenues from Douyin and Jinri Toutiao together contributed around 67% of ByteDance total revenue of 120 billion yuan in 2019, TechCrunch reported in August.

"It has taken the mantle from Toutiao as ByteDance's largest app. By our estimation, Douyin also eclipsed Toutiao's advertising revenue this year," Norris said.

Douyin's valuation will therefore be close to the total for ByteDance, experts said.

"If the ByteDance achieves [its goal to bank $25 billion in revenue this year] ... we're expecting Douyin's stand-alone valuation somewhere in the range of $70 billion to $90 billion," AgencyChina's Norris said.

U.S. scrutiny of TikTok may impact Douyin's valuation, Pinsent Masons' Tan said. "This is mainly a perception and sentiment issue whereas in reality, the Chinese business is not affected," he said. "I would expect ByteDance to address this issue head-on if raised in the bookbuilding exercise."

Rival Kuaishou is reportedly eyeing an IPO in Hong Kong with a valuation of around $50 billion.

ByteDance could use some of the proceeds from an IPO of Douyin to buy out early investors in the group such as SoftBank Group Corp. and KKR & Co. Inc., Tan said.

The money raised will also go into the short-video app's R&D, and in particular on e-commerce and online gaming initiatives, he said.

Listing a single product instead of the whole company is risky, though, experts said.

"[Listing one product] really doesn't make sense to me," said Matthew Brennan, author of Attention Factory: The Story of TikTok and China's ByteDance and co-founder of consulting company China Channel.

If the internet company spins off Douyin, "it will be a less compelling story for investment into apps like Jinri Toutiao and others," he said.

An older app, Jinri Toutiao's user growth has slowed and the app increasingly relies on user data from the Douyin platform, Brennan said. Separating Douyin will deprive ByteDance's other apps of this valuable data, he said.

Meanwhile, Brennan said Chinese internet companies tend to conceal the "true" growth drivers from competitors who may seek to replicate their strategies. Listing Douyin means revealing more about the technologies and business model behind it, and so may not benefit the rest of the company, he added.

As of Nov. 3, US$1 was equivalent to 6.68 Chinese yuan.