China’s Instagram Gets Ready to Go Public

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1:55Early last year, I downloaded Xiaohongshu, the Chinese social media app, known internationally as Red Note. Back then, TikTok was about to be banned in the U.S. And fears that it would shut down for good sent millions of mostly Americans looking for alternatives. Many of them landed on Xiaohongshu. Hello, everybody. We're from TikTok, from America. Posting my first video to Red Note as an American TikTok refugee. Hello, everybody. We covered the Xiaohongshu craze on the Big Tic Asia at the time. But not long after we reported the story, President Trump announced he would delay the ban on TikTok.

2:36He ended up delaying it several times. And most of the Americans who'd migrated from TikTok to Xiaohongshu went right back. And in January of this year, ByteDance, TikTok's parent company in China, agreed to spin off its U.S. operations, securing TikTok's future in the States. TikTok is safe! Well, it's official. President Trump just announced a U.S. buyer for TikTok. But the Xiaohongshu app stayed on my phone, and pretty quickly, it became a part of my routine. When I'm not hosting this show, I cover tourism for Bloomberg and use Xiaohongshu to look for story ideas and even help me plan trips.

3:17It is day seven out of 10 of my road trip around New Zealand, so I wanted to answer some of the most commonly asked questions. Or work on my tennis game. OK, so today we're going to look at a two-hand backhand slice. So it's more like this. Cha Hongxu, many people compare it to Instagram or Reddit, but really it's become the de facto search engine for mainly younger people who are looking for travel tips, lifestyle hacks, restaurant recommendations, that sort of thing. Robert Lee leads the coverage of China's tech sector for Bloomberg Intelligence, the company's research arm. He doesn't use the app himself, but he has been tracking its rise.

3:55So at the last count, it's got, in fact, probably close to 400 million active users, mainly within the borders of China itself. That's smaller than other Chinese social media apps like WeChat, which has roughly 1.4 billion users. But Rob says investors are keenly interested in Xiaohongshu because it offers users something different from the competition. It has an authenticity and a much, much lower reliance on these paid KOLs, as they call them in China, or key opinion leaders. These are the influencers of China. They've certainly carved out a significant niche on the Chinese social media scene, a sector which is intensely competitive.

4:38And now, after more than a decade building its brand, Xiaohongshu wants to turn that niche into a significant market share. Red Note, Xiaohongshu, said to be preparing for an IPO in Hong Kong by the end of June. Once you've got that captive user base and once they're using it very actively, there is scope to monetize in other avenues. 400 million users is great, but there's significant scope to expand that. One reason Xiaohongshu might be eyeing a listing right now is timing. Hong Kong's IPO market has been on a tear. Companies have raised about$20 billion so far this year, and it's on track to hit a six-year high.

5:20A lot of that momentum is coming from Chinese tech and AI companies hitting the market. But Rob says Xiaohongshu, with its loyal user base and healthy profit margins, could stand out from the pack if it goes public. If you look at the broader China tech sector, it's a sector that's really been plagued by issues of oversupply. We don't have the numbers on Xiao Hongxiu at the moment, but it's not exposed to any of those negatives. And I think this is an IPO, famous last words, which could actually go down really well. It will be a breath of fresh air. This is the Big Tech Asia from Bloomberg News.

5:59I'm Wan Ha. Every week, we take you inside some of the world's biggest and most powerful economies. in the markets, tycoons, and businesses that drive this ever-shifting region. Today on the show, Xiaohongshu's push to go public, why now could be the right moment, and what it says about confidence in China's tech sector.

6:24Rob, what is Xiaohongshu and how are people using it? So the business was founded in 2013, more as a travel recommendation site, something similar to along the lines of TripAdvisor as it was. But it's since evolved into, I'd say, China's leading lifestyle-orientated platform with a big influence on travel and lifestyle hacks and recommendations. And it's very well positioned, again, with this younger, predominantly female demographic in China, particularly as well within the more affluent population in the Tier 1 cities, so largely the big coastal cities and other southern regions and eastern regions of China.

7:08Within that demographic, it's a ubiquitous part of daily life and something people very actively use and rely on. Around 64 % of their users are female, and a further 34 % were below the ages of 25. China's female internet users are an in-demand demographic because they hold higher monthly spending power than the overall online population. That's according to research published by Bloomberg Intelligence. Female users also spend slightly more time online, close to six hours a day, logging 174 hours a month. That's compared to 169 hours for men. And Xiaohongxu isn't just good at driving clicks. It's good at turning them into sales.

7:57Xiaohongshu's ad conversion rates in 2024 beat competitors across several sectors, including beauty and health. We're not talking about purchases costing thousands of dollars. It's these sort of relatively small ticket items, I think, that are being sold. So, yeah, from an advertising point of view, this is a really attractive demographic to try and tap into. Rob says one of the reasons that apps able to capture the attention and wallets of these young people is ironically because that sector of the population is struggling right now. Many countries in the world feature very high housing prices at the moment.

8:37So unless you have a wealthy family behind you or you're in a very wealthy job or you've saved up big deposit, it's quite hard to get on the housing ladder. And also the job market for younger people is quite tough at the moment. And then we've got, you know, all this external stuff, whether it's global warming, the conflict in Iran, etc. There's perhaps a lack of good news or whatever. You want to try and cheer yourself up. You want to focus on the things that make you happy. So the cheer me up sales. Exactly. Purchases. Exactly. Now, we all need a little bit of that. But it just so happens that Xiao Hongxiu is directly targeting that demographic with a big focus on these lifestyle products.

9:19Let's talk a bit about their financials. What do we know about how they're doing as a company? This is a big unknown because there are no published quarterly results or annual reports. So based on best estimates, and I do stress this as unconfirmed sources, I think the company was due to generate net profit of around$3 billion. But I think the results speak for themselves anyway in terms of their growing presence on the Chinese social media scene. The way that we can monitor that indirectly is looking at more traditional platforms like Weibo. So Weibo has been around for decades. Xiaohongshu has captured advertising dollars.

9:59It's been at the expense of more traditional platforms like Weibo. And if you look at their financial performance over the last few years, it's just flatlined. And in fact, it's declining. Weibo. Yeah. Because of Xiaohongshu. I would say that was one reason. Probably also ByteDance's Douyin platform as well. Advertisers are going to spend their dollars where consumers' eyeballs are. So it's not on these legacy platforms. It's on growth platforms like Xiaohongshu. Xiaohongshu is good at keeping people scrolling. But it wants to be more than just a recommendation engine. Right now, if users see something they like, they can buy things on Xiaohongshu or on third-party sites.

10:39But the goal is what Rob calls a closed-loop e-commerce system, where consumers can discover a product and buy it all without leaving the app. Most internet businesses or social media businesses in China are mostly reliant on advertising to generate their revenue. If we look at the textbook of the generic internet model, you want to capture your user base. I've just stressed the fact that the authenticity of their reviews, the trusted nature of their community is key. obviously from a corporate point of view, that opens up opportunities to monetize. So the company is pushing into e-commerce, not to compete head-to-head with the likes of Alibaba, etc., but really to try to recommend related purchases to what the individual is particularly interested in.

11:28And this month, Xiaoxu is expanding its e-commerce push overseas. It launched a shopping feature called Red Shop in its app. Consumers in the US, UK and Australia, as well as a handful of Asian countries, are now able to buy directly from some Xiaohongshu merchants. And to what extent are they working with e-commerce platforms like Taobao or JD.com or Pindoldo, as well as some of the brands out there? Xiaohongshu is partnering with them on the fulfillment side. The infrastructure is already there. It's a make or buy decision. And given their greater focus on smaller ticket items, more artisanal products, they're not competing head to head.

12:13I mean, JD.com, for example, does dominate electronics purchases online in China and much bigger ticket items. Xiaohongshu is not competing in that marketplace. How does Xiaohongshu fit into the China tech landscape at the moment? For those who look at the China market, well, you know, tech is all the rage these days and particularly AI. But if you look at the broader China tech sector, even though Chinese companies are making good progress, you know, there's oversupply in the industry and that's impacting profitability. There's also been a number of vicious price wars, particularly in the e-commerce sector.

12:49So that has really, and without exaggerating, decimated the profitability. Companies like you've already mentioned, Pinduoduo or Alibaba and JD.com has put enormous pressure on them. So I think, again, we don't have the numbers on Xiaohongshu at the moment, but it's not exposed to any of those negatives.

13:14What Xiaohongshu's IPO could mean for Hong Kong. global investors and confidence in China's tech sector. That's after the break.

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16:17Xiaongshu is gearing up for its next chapter, a potential IPO in Hong Kong with a confidential filing that could happen as soon as the end of June. The company based in Shanghai is backed by tech giants Tencent and Alibaba, and Bloomberg reported the listing could rank among Hong Kong's largest in recent years. Rob, how big do we think this could be in terms of this Xiaowongshu IPO? What's their valuation now? It's very difficult, again, for us to place a valuation on it because we don't have full access to financials. And we're only going on unconfirmed reports of the recent fundraising rounds.

16:53That's Robert Lee from Bloomberg Intelligence. I think one of the rounds last year went to a valuation of 30 billion U.S. dollars. Unconfirmed, the more recent round placed a valuation of 50 billion U.S. dollars. But I imagine if this company really has momentum behind it and it's coming to market at the moment, they undoubtedly will be seeking a higher valuation than that. And again, if you look at two smaller AI plays, which are far, far smaller than this company and heavily loss making, this is Jupoo AI and also Minimax, which since their IPO in January have gone up multiples. I think at the last count, Jupo AI's valuation is around 100 billion US dollars, which is phenomenal for a company that will lose around 600 million dollars operating loss in the current financial year.

17:39So there's a lot of hope being placed in that business at the moment. Now, Xiaohengshu is profitable. It's tangible. But at the end of the day, it's up for the market to decide. Now, there were reports that Xiaoyang Xu had confidentially filed for a U.S. IPO back in 2021, but the process failed after Chinese regulators voiced concerns about the listing venue in the U.S. Why is Hong Kong the right place now? This is a Chinese company. The vast bulk of their users are in within mainland China. Hong Kong's part of China and also Hong Kong is China's window on the world if you like. So therefore it gives an opportunity for Hong Kong-based investors and then also through the Stock Connect allowing mainland Chinese investors to participate and also for foreign investors.

18:32So you know on that basis it would seem the ideal place to seek a listing. And then you're right as Well, I think it's less likely that we're going to see mainland Chinese companies listing in international markets, given the backdrop of geopolitics at the moment. Back in 2020, Beijing cracked down on Chinese tech and later tightened rules around overseas listings, citing data security and capital outflow concerns. For companies like Xiaohongshu, that's left Hong Kong as one of the main viable options to go public. and that's helped drive a bit of a rebound with listings in the city picking up, led largely by Chinese tech and AI firms.

19:14Hong Kong is back after all the challenges we've had in recent years. The IPO market is really rampant. There are so many companies looking to come to market still. If you're in a broking industry, it should have been a pretty good 12, 18 months. So I think it's very strong signaling for Hong Kong itself. and also that China is open to the world and China is a true innovator. Because I suppose if we'd had this conversation 15 or 20 years ago, I think most people would have said, you know, China's good at manufacturing things, but a lot of their products are a little bit of copycat. They're not that great at innovation.

19:55They may be good at reverse engineering. And I think maybe there was some truth in that. But increasingly, Chinese companies, for various reasons, are truly innovating, particularly within the software space. Rob says when you step back, this all ties into a much bigger story about China's economic strategy and its push into advanced tech. If you look at the overall government strategy, China is looking to the high-tech sector as a future driver of GDP growth. And this is for economy which has historically, or the last 20 years, been very dependent on fixed asset investment, very dependent on the property markets.

20:33So it's looking to diversify the economy, move away from those traditional drivers of economic growth to upskill the population and looking really solidly to the high tech sector as a future of economic growth or as the government often terms it new productive forces. So therefore that will require capital. And whilst China has got massive foreign currency reserves and others, it still requires external capital. Rob, the U.S. has made it more difficult for Chinese companies to list in the States. Are international investors then bringing their money this way? There was talk that a number of big U.S.

21:15funds were instructed internally not to add to their positions, really, because of internal decisions, but also the geopolitical backdrop. At the end of the day, what are active fund managers there? They're there to generate a return for their shareholders, for their pension holders, for their unit holders. And I think at the end of the day, money talks. I think if there are enough attractive Chinese companies coming to market with attractive growth stories that are appropriately priced, because you look at the multiples that companies are trading on out here versus Nasdaq, it is a significant discount, then that will attract capital flows into the Hong Kong and China market, despite the politics.

21:57SONIA DARA, Ph.D.: Xiaoyi Shu's IPO is obviously a big story here for Hong Kong and China, if it proceeds. Why do you think or how do you think this matters for the rest of the world, for American investors, for London investors? I think there are high quality names here, but given the predominance of challenges across the sector at the moment, price wars, oversupply, etc. Again, for a market which is substantially underperformed globally and regionally, with interesting companies like Xiangshu coming to market, I think can hopefully redress the balance and bring new life to the market, perhaps.

22:38new blood coming in. But at the end of the day, every stock market lives or dies on the new companies coming to market.

23:08helps people find the show. Thanks for listening. See you next time.

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