HONG KONG -- Chinese game developer NetEase said on Wednesday that it had filed for a Hong Kong initial public offering of its music-streaming unit which people familiar with the deal said could raise about $1 billion.
Cloud Village is poised to use the funds to expand as it gears up to take on bigger rival Tencent Music Entertainment Group in the fast-growing music streaming sector in China. NetEase holds a 62.5%-stake, with Alibaba Group Holding and Baidu also backing the company.
In a Hong Kong stock exchange filing, NetEase said that Cloud Village's "business is expected to undergo relatively rapid business expansion and would be appealing to an investor base that focuses on high growth opportunities in the music streaming business, different from the relatively more diverse business model of NetEase group."
The company is the biggest competitor to Tencent Holdings's New York-listed music subsidiary.
Cloud Village had an active user base of 180 million people last year, compared with 615 million monthly active users in the first quarter of 2021 for Tencent Music. Alibaba shut down its own Xiami Music service earlier this year.
But the end of Tencent's exclusive China copyright deals with major music publishers, including Sony Music Entertainment, Universal Music Group and Warner Music Group, amid Beijing's recent crackdown on the anti-competitive practices of the country's major online platforms has paved the way for Cloud Village to chip away at its rival's dominance.
Xiami had earlier said it failed to keep pace with market growth because it missed out on licensing rights for major artists.
Tencent Music executives said on an earnings call this month that the company had received increased scrutiny from Chinese regulators. Reuters has reported that Tencent Music could face a fine, be forced to give up remaining exclusive music rights or sell some of the music apps it has acquired.
Cloud Village previously focused on developing new musicians to offer an alternative to Tencent's larger music library. However, since last year the three major global music publishing groups have started licensing songs to the company. Sony Music announced earlier this month that it had entered "a direct digital distribution relationship" with Cloud Village.
NetEase said it will retain a majority stake after the IPO in Cloud Village, which began as NetEase Cloud Music in 2013.
Cloud Village has had four funding rounds since 2017 that raised a combined $1.4 billion, according to data compiled by Crunchbase. Online search operator Baidu was among investors that put in $600 million in 2018, the data shows.
Alibaba and Jack Ma-backed private equity group Yunfeng Capital together invested $700 million in the last funding round in September 2019, giving Cloud Village a valuation of $5.3 billion, according to the database.
Two people familiar with the IPO plan said the company hopes to more than double that valuation in the share sale, with its user base increasing and regulatory pressure on its rival.
Cloud Village's revenue surged to 4.9 billion yuan ($764.3 million) in 2020 from 2.3 billion yuan a year earlier, and 1.1 billion yuan in 2018, according to its IPO application. It posted a net loss of 3 billion yuan last year, up from 2 billion yuan each of the previous two years. The company said it was investing in its brand and content and was not focused on profitability yet.
The company said it plans to use its IPO proceeds to invest in music, technology, acquisitions and for general corporate purposes.
The IPO in Hong Kong comes as offerings in the city are off to the best start ever to a year. However, offerings since March have struggled to generate the big demand that listings prior to March had. Twelve out of 17 debuts since the end of February are trading below their offer prices.
Shares of Tencent Music have dropped 52% since a recent peak in March. The company has been preparing for a possible secondary listing in Hong Kong, according to people familiar with the situation.