Tencent's China Literature surges as much as 100% in Hong Kong debut

Key Points
  • Tencent's online publishing platform China Literature made its debut in Hong Kong on Wednesday
  • China Literature's stock rose as much as 100 percent above its issue price of HK$55 per share
  • Reasons for investor optimism included the company's affiliation with Tencent and the earlier solid performance of ZhongAn Online — a recent major tech unit to IPO in Hong Kong
Tencent-backed China Literature pops on its debut

Shares of online publishing and e-book company China Literature got off to a roaring start on their first day of trade in Hong Kong, surging as much as 100 percent in the morning session.

The company raised a total of 8.3 billion Hong Kong dollars ($1.1 billion) after pricing its 151 million share offering at HK$55 ($7.05) — the top of its range — apiece. Ahead of its debut, shares of China Literature had been overbought by more than 600 times.

As of 1:00 p.m. HK/SIN, shares of the online literature platform traded at HK$105 — that's about 90 percent above its issue price.

Part of the reason for the astronomical jump in the company's share price has been its affiliation with internet giant Tencent, which owns around 62 percent of China Literature's issued shares.

"The key point is Tencent," Kenny Wen, a Hong Kong-based strategist at Sun Hung Kai Financial, told CNBC.

As online literature was not as large of a phenomenon in Hong Kong as it was on the mainland, Hong Kong retail investors unable to understand China Literature's underlying business proposition were likely buying the stock based on name recognition, he indicated.

For those investors, there was the hope that "China Literature may be another Tencent," Wen explained.

China Literature generates revenues from intellectual property licensing, the sale of physical books and charging readers for access to its online content library. Some 6.4 million writers and 9.6 million works were available on its platform at the end of June this year, the company said in its prospectus.

Wu Wenhui, co-chief executive officer and executive director of China Literature, pauses during a news conference in Hong Kong, China, on Oct. 25, 2017.
Anthony Kwan | Bloomberg | Getty Images

Another reason for the surge in share price was the greater willingness of investors to place bets amid upbeat sentiment in Hong Kong markets, Wen said.

In addition, ZhongAn Online P&C Insurance's solid IPO performance in September likely made investors optimistic about China Literature's prospects, he added. ZhongAn Online, which drew parallels because it was a relatively large tech firm, saw its shares rise as much as 18 percent on its first day of trade.

While the online literature segment is fairly competitive, with players such as Alibaba Literature and Baidu Literature keen on getting a slice of the pie, China Literature's share of the market is fairly sizable: The company claimed it had a 48.4 percent share of the mobile digital literature market in its prospectus.

Still, whether or not the company's business model ultimately proves successful remains to be seen.

"On one hand, people are genuinely convinced [about China Literature] as there are not many listed competitors," said Kevin Leung, director of global investment strategy at Haitong International Securities Group.

The Chinese government usually allowed for one major player in each internet industry, Leung explained, pointing to Tencent, Alibaba, Baidu as examples. "[P]eople do see China Literature as the chosen one for the cultural and literature industry," he said.

Despite that, Leung pointed out that investors on the other side of the spectrum were worried that China Literature's business model could be easily replicated.

Leung added that even though the shares were currently expensive, high momentum stocks have outperformed value stocks this year. While he expected China Literature's stock to remain strong in the near future, Leung said accumulating shares would be better when prices eased to around $80.