NetEase Is Returning Home to Go Global. Yeah, Really

(Bloomberg Opinion) -- So get this. A U.S.-listed, Cayman Islands-domiciled, Chinese internet company is seeking to sell shares in China, so that it can become more internationalized.

That's among the bizarre rationales for NetEase Inc.'s offering in Hong Kong, 20 years after the company first debuted on the Nasdaq. The elephant in the room, which gets the briefest of mentions in its 458-page prospectus, is that NetEase is among a raft of Chinese companies that may be booted from U.S. bourses entirely.

In his letter to shareholders, William Ding, the founder and chief executive officer, outlines the future of NetEase. Among the plans: going global while solidifying its position in China. He's putting shareholder money where his mouth is. Around HK$9.6 billion ($1.2 billion), or 45% of the expected HK$21.3 billion to be raised in the initial public offering this week, will go toward strategies to make the business more international, the document says. A mere 10% will be put toward general corporate purposes, including mergers and acquisitions.

According to Ding, NetEase has been exploring the world over the past few years, though “some people might not have noticed these efforts.” He's right about that.

The world's second-largest mobile games company, behind Tencent Holdings Ltd., has launched more than 50 mobile titles since 2015, but garners a mere 11% of gaming revenue outside China. With a huge team of developers and a 20-year history, you'd think that if NetEase was truly going global, it would have a bit more to show for it by now.

So, the money to be put toward globalization is around 165% of the sales reaped overseas last year. It's not like NetEase needs even a dime of that Hong Kong IPO cash. It had around HK$82 billion in cash and equivalents at the end of March, almost four times the amount to be raised in the new share sale. It generated free cash flow of HK$18.2 billion last year.

But when you're asking investors for HK$21 billion in cash that you don't really need, “going global” is a much better sales pitch than, “We might get kicked off one of the world's major stock exchanges.”

You can't really blame NetEase for that. It's among dozens of companies left in limbo as the Beijing-Washington spat escalates to the point of Congress passing laws requiring U.S.-listed Chinese companies to be transparent. As the prospectus notes, Beijing doesn't allow Chinese auditing firms to be subject to the inspection of the U.S.'s Public Company Accounting Oversight Board. That leaves NetEase in a race to list elsewhere, soon to be joined in Hong Kong by Nasdaq-traded e-commerce company JD.com Inc.

The problem with doing an IPO two decades after doing an IPO is that you can no longer crib from that youthful “the future is ours” playbook. You're saddled with the realities of being a middle-aged internet company in a huge market that's peaked.

While NetEase is a global leader, with titles such as the “Westward Journey” series and “Knives Out,” the market is slowing — from average annual growth of 13.4% over the past five years to 8.8% in the next four years, according to estimates from researcher Newzoo, which NetEase cites.

That's why you play fast and loose with metrics like monthly active users, as NetEase does by double-counting some customers who may have logged into its Youdao education platform from multiple devices. Or talk up a new sector called innovative businesses. Even though that division, which includes music and live-streaming, accounts for 36% of the workforce and costs, it contributes just 19% of revenue. What's more, it garners a third of the gross margin level of the rest of the company.

Which brings us back to a share sale that NetEase doesn't really need, and a reason for that cash which doesn't really exist. Rather than raising money to be a power abroad, this IPO looks more like a Chinese company wanting to come home.

Reminder: Hong Kong is part of China.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.