Tencent Holdings, China's largest instant messaging service provider seeking an IPO worth up to $199 million, is expected to face margin squeeze as marketing and development expenses increase, its chairman said on Sunday.
The firm, 50 percent held by South African media group Naspers before the initial public offering, expects its net profit to increase at least 37.8 percent to 444 million yuan ($53.65 million) in 2004.
"In the past four to five years, about ten companies including MSN, Yahoo and ICQ wanted to compete with us, but through improving our service platform, we still maintain our market leading position," 32-year old chairman Ma Huateng said in a video news conference.
Tencent's Hong Kong public offering will start on Monday.
Its net margin fell to 41.7 percent in the first quarter of 2004 from 45.9 percent in the same period last year. Goldman Sachs, which sponsors the issue, estimated that the net margin will continue to fall on rising development and marketing expenses.
Netease, which launched a mobile instant messaging service in late 2003, has already attracted 12 million or eight percent of Tencent's total accounts in the first quarter.
To maintain its popularity, Tencent plans to use 65 percent of the IPO proceeds to acquire interactive entertainment businesses, and spend eight percent of its revenue on new services such as online gaming, said Ma.
Tencent is selling 420 million shares or 25 percent of its enlarged capital at 11.1 to 14.8 times its earnings in 2004, or HK $2.77 to HK $3.70 per share.
Its Nasdaq-listed rivals Sohu.com Inc, NetEase.com Inc and Sina Corp are trading at forecast price earnings multiples of 18 to 32 times, according to Reuters Estimates.
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