Netflix Could Benefit From iQiyi IPO

Dubbed the “Netflix of China,” a company called iQiyi Inc. is going public in the U.S. amid more pressure in the digital media sector and as Chinese consumers have a growing appetite for streaming their content.

Beijing-based iQiyi, owned by Chinese tech giant Baidu Inc. (BIDU), has filed to trade on the Nasdaq with an initial public offering (IPO) of $1.5 billion, although the company says that amount is likely to increase. It is targeting a market valuation of about $10 billion.

For Netflix (NFLX) itself, the move does give large institutional investors better access to a competitor via U.S. exchanges. After all, like Netflix, iQiyi offers similar on-demand content like movies and television shows.

But Netflix also benefits from iQiyi’s success. That’s because last year the two companies struck up a licensing deal that allows Netflix to tap into an area where it was previously banned. China, along with North Korea and Iran, was one of only a few companies excluded in Netflix’s international expansion about two years ago.

Baidu owns about 70 percent of iQiyi. But, even though it’s the most-viewed video service in China, the company’s costs are growing as it tries to compete in an increasingly tight media market. iQiyi has more than 50 million subscribers and growing, but its net losses grew to $591 million last year, up 22 percent from the year prior.

Still, iQiyi’s revenue is climbing as it holds its top-spot in China’s online video sector, above Tencent’s (TCEHY) Tencent Video and Alibaba Group’s (BABA) Youku. Revenue increased 55 percent in 2017 from 2016. That’s in part because Chinese viewers are increasingly accepting subscription plans for their streaming services instead of only viewing free content supported by advertising.

According to Bloomberg data, the 21 China-based companies that listed on U.S. exchanges last year drew a total of about $3.9 billion in their offerings. These companies, including Xiaomi and Tencent Music, are after capital as they pursue growth.

For Baidu, analysts like MCM Partners’ Ryan Roberts believe spinning off iQiyi will be a positive move. Lead underwriters for the IPO include Credit Suisse, Goldman Sachs, and Bank of America Merrill Lynch.

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