Netease Youdao will go public

In the early morning of October 16, Beijing time, Netease Youdao submitted an updated IPO prospectus to the U.S. Securities and Exchange Commission on Tuesday, setting the IPO price range to $15 to $18 per American Depository stock.
According to the documents, Netease Youdao will provide 5.6 million ADSS in the IPO, and each ADSS represents one class a common stock. In addition, Netease Youdao has also granted the Underwriters additional placement options, and the Underwriters can purchase up to 840000 additional ADSS within 30 days. If the Underwriters fully exercise the additional placement option, the largest amount raised by Netease Youdao’s IPO is about $116 million.
After the completion of the IPO, the outstanding share capital of Netease Youdao will be composed of class a common shares and class B common shares. Netease Corporation (NASDAQ: ntES), Netease Youdao CEO and director Zhou Feng and a certain minority shareholder who is an employee of Netease Youdao will beneficially own all the issued Class B common shares, and will collectively exercise 92.1% of the total voting rights of the issued and outstanding share capital immediately after the completion of this offering, provided that the Underwriters do not exercise the option to purchase additional ADSS, and also to ORBIS inv. Certain investment funds managed by Assessment Management Limited (collectively referred to as “ORBIS”) issue and sell class a common shares.
In addition to voting rights and conversion rights, Netease has the same rights as the holders of class a common shares and class B common shares. Each class a common share has 1 vote, and each class B common share has 3 votes. The holders of each class B common share may at any time convert it into one class a common share, which in no case shall be converted into class B common share. Upon the sale, transfer or disposal of any class B common shares by the holder to any non affiliated company of such holder, each class B common share will automatically and immediately convert into one class a common share.
According to the original prospectus previously submitted by Netease Youdao, the company plans to apply for listing of American Depository shares representing its class a common shares on the New York Stock Exchange, with the stock code of “Dao” and the tentative amount of financing used as a “placeholder” of $300 million. Netease Youdao has appointed Citigroup, Morgan Stanley, CIC, Credit Suisse and HSBC as underwriters of IPO transactions.
The prospectus shows that at the same time of this offering, Netease Youdao will conduct private placement simultaneously, and ORBIS fund, the largest institutional shareholder of Netease, promises to purchase a total of 125 million US dollars of class a common shares from Youdao.
Netease Youdao disclosed the relationship between the company and Netease in the prospectus: Netease Youdao obtained loans from Netease group that can normally be repaid within one year to fund its business operation. As of June 30, 2019, Netease Youdao has outstanding short-term interest bearing loans to Netease of 878 million yuan (128 million US dollars), accounting for a large part of current liabilities. The company faces some risks related to the Netease relationship, including potential conflicts of interest that may occur in many areas between Netease and Netease Youdao.
Netease Youdao also disclosed the company’s financial information in the prospectus: in the six months ended June 30, 2019, Netease Youdao’s net revenue was 545.5 million yuan (about 79.9 million US dollars), an increase of 67.7% compared with the same period last year’s RMB 327.2 million yuan. In the first half of 2018, the intelligent learning business represented by online courses became the largest revenue source. In the six months ended June 30, 2018 and 2019, Netease Youdao had a net loss of 82.8 million yuan and 167.9 million yuan (approximately US $24.5 million), respectively.
Netease Youdao’s net revenue in 2018 was 731.6 million yuan (about 106.6 million US dollars), an increase of 60.5% compared with 455.7 million yuan in 2017. In 2017 and 2018, Netease Youdao had a net loss of 163.9 million yuan and 209.3 million yuan (approximately US $30.5 million), respectively.
Founded in 2006, Netease Youdao is the third independent financing brand of Netease after Netease cloud music and Netease Weiyang. In April 2018, Netease Youdao announced the completion of its first strategic financing, without disclosing the financing amount. The financing was led by Muhua investment and invested by Junlian capital, with a post investment valuation of US $1.1 billion, making it one of the Internet Unicorn clubs in China.