iQIYI — China’s Netflix — Stumbles After Huge IPO

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The second-largest initial public offering (IPO) of the first quarter went off as planned Thursday, when Chinese video streaming firm iQIYI Inc. (NASDAQ: IQ) sold 125 million American depositary shares (ADSs) at $18 per ADS, raising $2.25 billion. After opening at $18.20, things fell apart and the new issue closed its first day of trading down 14%. Each ADS is equal to seven ordinary shares.

The company is controlled by China’s largest internet search firm, Baidu Inc. (NASDAQ: BIDU), which holds about 93% of the company’s voting power. Based on the IPO price, iQIYI has a market cap of around $13.67 billion, and Baidu will retain ownership of more than 80% of the class A common stock.

iQIYI posted revenue of $2.57 billion in 2017 but also posted a net loss of about $553 million, up from a loss of $462 million in 2016.

The company’s chief financial officer, Xiaodong Wang, said that the company plans to turn to producing original content in order to attract more subscriptions. In 2017 subscriptions accounted for about 35% of total revenues.

Wang said, “If you want more subscribers, you need more original content — it’s the same strategy as Netflix.” What Wang did not mention is that such a strategy is very expensive. Netflix plans to spend $8 billion on original programming in 2018 alone. That’s an increase of 25% for the company’s 2017 budget.

Netflix’s production budget puts the company in the same class as traditional TV and movie firms like Time Warner, Fox and Disney.

iQIYI has about 60 million paying subscribers in China, compared with about 110 million global Netflix subscribers, of which 53 million are U.S. subscribers. Clearly there’s room for the Chinese firm to grow in a country with almost half a billion households.

After posting a first-day high of $18.52, ADSs dipped consistently throughout the rest of the day to close at $15.55, down 13.6%. Nearly 80 million shares traded hands Thursday.