360 privatization: Returning to A-shares to speculate and raise money or to reconstruct value?

After the war of words between Xiaomi and LeEco attracted continuous attention, 360, which recently launched a super low-priced smartphone for 399 yuan, announced its privatization and once again became the focus of the industry. In fact, this year, many Chinese concept stocks including China Mobile Games, Jiayuan.com, E-House China, Taomi, and Jiubang Digital have announced that they have received privatization invitations. According to statistics from relevant institutions, since the beginning of this year, 11 Chinese companies listed in the United States have announced plans to delist from the United States, with a total transaction amount of US$13.4 billion. So why do so many Chinese TMT companies listed in the United States announce privatization? Here we might as well take 360 ​​as an example to briefly analyze the main reasons behind Chinese companies choosing privatization after delisting from the United States.

According to the explanation in the internal email of Qihoo 360 Chairman Zhou Hongyi, the main reason for delisting from the US and privatizing is that its market value does not match the company's value, which means that 360's current market value of about 8 billion US dollars is underestimated. However, if we observe a little, we will find that since the second half of last year, especially since August 2014, 360's stock price has fallen from more than 100 US dollars, hitting a 52-week low of 44.56 US dollars and has remained so to this day. Today, 360's stock price is almost halved compared to its peak. It can be said that 360's performance in the US capital market represents the situation of some Chinese TMT companies in the US market. Of course, this does not rule out the prejudice and malicious short-selling behavior of some US short-selling institutions against related Chinese companies (this is also one of the main reasons why some Chinese companies choose to delist from the US and privatize).

But we should also see that the stock prices of many Chinese companies once soared after they were listed in the United States. However, since these companies generally lacked innovation, had relatively single profit methods, and had opaque finances, and even falsified, investors quickly abandoned the stocks of these companies. The prices of some Chinese concept stocks even fell below the issue price. At the same time, although the profit levels of companies represented by Amazon and Facebook were not high, they were still sought after by investors in the United States because they had mature governance structures, innovation and broad development prospects. Of course, we are not denying that Chinese TMT companies lack innovation or have single profit methods. We just need to be objective and comprehensive when looking at the delisting and privatization of Chinese TMT companies (including 360). After all, among the delisted Chinese companies, many were forced to delist due to lack of innovation and broad market prospects.

In addition, this round of delisting and privatization of Chinese TMT enterprises is also related to the current relevant policies of the Chinese government (such as vigorously advocating the Internet) and the favorable conditions of the A-share market. I believe that these factors also played a certain role in 360's decision to delist and privatize. In this regard, some analysts believe that 360 will choose to list on the domestic A-share market after privatization, and the market value of the listing will be much higher than its market value in the US market before delisting. Of course, a higher market value means more capital injection (including for enterprises and shareholders), so in this sense, not only 360, but most of the Chinese companies that choose to delist in this round should have such ideas and plans, and there is nothing to be ashamed of. The key question is whether the capital injection can really get the corresponding return? And this is inseparable from the company's future development strategy and business model.

Specifically for 360, judging from its recent actions, the mobile market is undoubtedly the key strategic focus of its future business, and judging from its entry into the market with ultra-low-priced smartphones, its intention to replicate its original business model for PC antivirus software is quite obvious. That is, to spread the cost through scale until the software or hardware as a carrier or entrance is free. However, we believe that the free strategy adopted by 360 in the PC antivirus software market will be difficult to succeed in the mobile Internet market with smartphone hardware as the entrance, or there will be a lot of variables.

First of all, compared with the one-time investment cost of software, the cost of smartphone hardware is continuously amortized, that is, the corresponding cost must be paid for each mobile phone sold. Although the cost will decrease as the number increases, the cost of hardware always exists.

Secondly, the way to make profits through software, applications, services and distribution channels is closely related to factors such as software application quality, price, uniqueness of distribution channels (application vendor distribution and user acquisition), and diversity (distribution channels of competitors). Therefore, it is almost impossible to accurately calculate the break-even point of 360's future free hardware (such as smartphones) strategy. Of course, we have not yet taken into account the factors that may weaken the effect of this model through the response strategies that competitors may adopt. However, there is a comparative calculation method that should be relatively simple, that is, Google Android, which is the largest mobile ecosystem at present (also with scale as an advantage).

As we all know, Google Android currently occupies nearly 90% of the global smartphone market and has nearly 1 billion users, so it should be the largest mobile ecosystem. Even so, according to estimates from Goldman Sachs, Google's mobile search business revenue in 2014 was US$11.8 billion, of which 75% (US$8.9 billion) came from website searches using iPhones and iPads. So Google's search business revenue on Android devices in 2014 should be around US$3 billion. Adding the US$7 billion in revenue generated by Google Play, the Android ecosystem brought Google about US$10.5 billion in annual revenue, and the average Android ecosystem user brought Google about US$10.5 in revenue per year. Of course, Google itself does not give away mobile phones for free. In other words, Google does not have the same scale of mobile phone hardware costs as its ecosystem.

Another fact that cannot be ignored is how big is the gap between 360 and Google in terms of ecosystem size and quality? Because this determines the ultimate profitability of the mobile ecosystem that 360 will build in the future. According to Zhou Hongyi's internal email, 360's revenue last year was 8.6 billion yuan. Based on the number of active PC and mobile users of about 1.2 billion, each user generated 7.16 yuan in revenue for 360, which is only about 1/10 of Google's. The industry knows that 360's revenue currently mainly comes from the PC side, and the revenue efficiency of the PC side is much higher than that of the mobile side. As 360 gradually shifts its focus from PC to mobile in the future, its revenue efficiency is bound to decrease. In addition to the disadvantages and uncertainties of 360's low-cost hardware and even free mobile business model analyzed above, how big is 360's future development and profit space? How to combine it with valuation? This is something that industry insiders have to think about and weigh seriously.

Through a simple analysis of 360's stock price fluctuations before delisting and its development strategy after privatization, we believe that in the current wave of delisting and privatization of Chinese companies, although there are indeed companies whose market value is underestimated and they are seeking a reasonable market value in China, there are also companies that are speculative and impetuous due to unclear business models or insufficient competitiveness. So after this round of delisting and privatization, whether it is the speculation and impetuosity of Chinese TMT companies that dominates, or the reconstruction of real corporate value, it still needs to be proved by the companies themselves.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.