What's the equity value of a state-owned media website that relies on tax breaks, government contracts and close ties to official agencies for profits?
People's Daily Online, according to a prospectus released January 9, intends to raise at least 527 million yuan by issuing 69.1 million shares on the Shanghai Stock Exchange before the end of 2012. The prospectus did not cite a proposed price range for the stock debut.
Some analysts and investors are second-guessing the IPO plan for the online division of the newspaper of the same name, a government and Communist Party of China (CPC) flagship that plans to become the first domestically listed Internet company with a traditional, state-run heart.
Government contracts accounted for 29.5 percent of the website's revenues in 2008 and 22.1 percent in 2009, People's Daily Online said. In 2010, the prospectus said, government assignments accounted for 21.7 percent of its total 332 million yuan in revenues and 79 million yuan profit.
Official business continued to bolster the company's bottom line last year, contributing 13 percent of total revenues in the first half of 2011 alone.
Preferential tax policies saved People's Daily Online about 20.2 million yuan in 2010 and 9.1 million yuan in the first half of 2011, the prospectus said, respectively accounting for 25.7 percent and 29.9 percent of total pre-tax profits.
The prospectus says the Ministry of Finance has been the website company's largest customer for several years. In 2001, the ministry hired the company to build and maintain the CPC news website. Since 2008, this contract alone has provided up to 70 million yuan in annual revenues. In 2010, the ministry paid 73.7 million yuan for construction and maintenance of the CPC site.
The prospectus includes a promise to boost government ties to ensure a steady supply of state contracts. "The company plans to apply to competent departments to have relevant government procurement costs paid directly to the company," it said.
Yet despite the Internet company's deep ties to Beijing bureaucrats, some investors eyeing the IPO have raised questions about the future of a company wedded to subsidies and preferential tax policies. A single change in policy, they argue, could shrink profits.
For example, the enterprise income tax incentives enjoyed by the company since January 2010 are due to expire on December 31, 2013. No one knows whether the preference will be extended beyond that date.
People's Daily Online "can't guarantee that policy will not change," said one stock analyst. "Even with People Daily Online's main revenue generator – the Chinese Communist Party news website – one can't rule out the possibility that in the future the Ministry of Finance won't turn it over to another company."
On the other hand, some analysts say a listing on the Shanghai exchange could more firmly cement policy support for the Internet company.
One investment source called the IPO a "special-approval listing" that's been specially backed by central authorities. Special treatment explains why the China Securities Regulatory Commission (CSRC) approved the listing in the first place, the source said.
The online company finished a share reform project last year and its earnings are not impressive by the standards of public companies, the source said. "The business itself has a difficult time standing out in the industry."
Some have criticized CSRC's decision. A Galaxy Securities Brokerage analyst, for example, said the People's Daily Online IPO approval underscores the advancing march of the state sector in China at the expense of the private sector. In his opinion, it's a trend detrimental to development of China's securities market.
According to the prospectus, People's Daily Online is "a news website established by central, provincial and municipal news units, with qualifications to publish and reproduce" information. That sets it apart from "commercial websites, established by non-news units, with authority to reprint but not to compose their own material," such as China's major web portals Sina and Sohu.
The website as well as news sites operated by the state-run Xinhua News Agency and broadcaster CCTV were among 10 targeted for share reform in 2009 under a State Council Information Office directive. The rest were regional news websites.
The People's Daily website competes for visitors against Xinhua, CCTV and other original content news providers, as well as web portals with aggregated news pages such as Sina and Sohu.
People's Daily Online lags far behind the portals in areas such as web user traffic and profitability. According to web analyst ChinaRank, for example, its Chinese-language page views averaged 18,251 unique visitors between mid-October and mid-January. Over the same period, Sina averaged about 200,000.
People's Daily Online's earnings in 2010 were only 12.4 percent of those for Sina. Moreover, its ad revenues amounted to 8.8 percent and revenues from mobile Internet value-added services were 6 percent of Sina's, respectively.
From a commercial perspective, Tencent Media Products Department Senior Product Director Qu Zhenzhong said all websites in China that offer news, whether or not the content is original, belong in the same class.
But another industry source said People's Daily Online has an advantage over competitors through its proprietary information services, including its original content, government information services, public opinion research and consulting. A separate source said the company can leverage its position as a government-run media organization to obtain and sell information at low cost.
Other businesses under the People's Daily Online umbrella — such as text messaging, mobile video and other mobile services — are not expected to add much to the company's value.
Limiting gains for news and portal websites in the mobile Internet arena, for example, are fees charged by telecoms such as China Mobile and China Unicom.
According to the prospectus, People's Daily Online posted a 32 percent gross profit margin in 2010 for its mobile business, similar to the margins reported by Sina and Sohu for the same period. Qu noted that "gross profit for this kind of business is high but net profit is extremely low because of high, rigid costs."
This fact has raised additional questions among investors sniffing around the IPO plan: The prospectus says People Daily Online plans to put more than 50 percent of funds raised in the IPO toward mobile Internet projects. Some investors have thus wondered whether earnings growth can be expected at all after the fund-raiser.