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China’s iQIYI to Seek Financial Injection, Overseas Growth (EXCLUSIVE)

iQIYI, a video streaming company that is often referred to as China’s Netflix, needs to raise new finance. Equally, there is an imperative for it to grow internationally.

The two issues go hand in hand. That’s because its powerful growth surge in China has slowed dramatically, and so far has not yet yielded the profitability the company needs.

The company reported 105.8 million paying subscribers for the financial quarter ending September 2019, putting it narrowly ahead of closest rival Tencent Video (100.2 million) and probably a larger distance ahead of Alibaba’s Youku platform, which does not disclose its subscriber data.

But as China’s big three generalist streaming platforms have raced each other to convert casual users into paying subscribers, they have chiefly used content, especially original shows and local productions, as a weapon to attract and retain users, and to differentiate one platform from the other. At each company, content costs have climbed over several years, and stood in the way of positive cash flows.

iQIYI’s latest financial report revealed net losses $516 million (RMB3.7 billion), in only the three months between July and September, up from RMB3.1 billion in the third quarter of 2018. Annualized losses are running at over $2 billion per year.

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“We will raise new money within the next half year,” CEO and founder Tim Gong Yu, told Variety, though he gave no details of either the value or the timing of the fund-raising exercise. “Most likely through the issue of bonds or convertible bonds, to the public.”

Convertible bonds have been a popular capital raising route for Chinese tech companies that are listed in the U.S., as iQIYI has been since March 2018. In many cases the firms were not able to raise as much as they wanted from their IPOs. In others they are simply cash hungry. But being loss-making makes it hard for them to borrow large sums. Bonds that are convertible into shares at a higher, future price can work well in a rising market and are akin to receiving a loan today while issuing equity some time over the horizon.

iQIYI’s shares were initially listed on the NASDAQ at $18 per ADR, and quickly soared to over $42 by June the same year. Since then, as profitability has proved elusive, the stock has retreated to the low $20-$25 range. But an early 2020 surge has seen the ADRs add more than 8% in the first two days of trading.

Gong says he is optimistic that business conditions may improve soon. “I think that cash flow from mainland China will go better (in 2020),” he told Variety. “(Due to) less competition. And the price of the (content) license fees will go down.”

That has been argued before, notably when 2019 film and TV production was expected to slow down in the wake of the industry’s painful 2018 tax problems. And 2019 was also supposed to have seen costs reversed as a result of the government mandating caps on star salaries and on the talent component of per episode production budgets. The reality was that the impact of the dampening measures was slow to kick in.

Gong argues that China’s big three streaming players now largely see the content cost problem the same way. After having gained traction through years of heavy content investment, they each now need to grow their businesses and to increase subscription fees.

Although China’s entertainment market is nowhere near as developed and mature as that of the U.S., and still has plenty of upside, growing the company’s subscriber numbers in China by another 100 million is going to be slow. Revenue growth in the October to December quarter were forecast by the company at –2% to +4%.

“Given that, if we want to raise money, we need to go overseas,” Gong said.

International expansion has officially been part of iQIYI’s remit for the past three years, but the strategy is only now beginning to take shape. The company has been on the ground in Taiwan through a partnership, as Taiwan does not permit the direct operation of mainland media firms. In November last year, its partnership with Astro in Malaysia began operations, and this week iQIYI announced the hiring of former BBC executive Kelvin Yau to kick off activities in Thailand.

“We have been in Taiwan for three years. And have probably done better there than Netflix. Perhaps Netflix thinks that the Taiwan market is too small (to bother with). But culture is also very important. We think we can use the lessons learned from Taiwan in other Asian markets,” said Gong.

“We see that Hollywood content is very popular in many local markets. We don’t have that advantage. Our strength comes from being an Internet company. From having massive data,” said Gong.

“Historically, (Chinese entertainment companies_ have focused on distribution to local channels and cinemas. With OTT we can serve global users. So we have solved the channel problem. Now we have to address the content and marketing problems. We want to have original content from Japan, Korea, Thailand and mainland China. We expect to be co-producers, as well as a licensor.”

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