Scarcity of listed AI firms propelled Newborn Town’s HK IPO outing

Liu Chunhe, founder and CEO of Hong Kong-listed social networking firm NewBorn Town

About one decade ago on a rainy night, a 24-year-old Chinese student was dragging a large suitcase, racing to catch a train at a railway station three miles away that would send him from Beijing to eastern China’s Jinan city to start one of his first businesses.

Liu Chunhe, the then year-two master student at the Beijing University of Posts and Telecommunications (BUPT), did not know that he had set off on a journey to build a company that would list in Hong Kong a decade later and boast a market capitalization of over HK$3 billion ($386 million).

Newborn Town, an AI-based mobile app development and mobile advertising firm he created at a university lab in 2009, now serves nearly 800 million users across over 200 countries and regions, mainly in Asia, the Americas, and Europe. The company raised HK$175 million ($22.51 million) in an initial public offering (IPO) in Hong Kong on December 31, 2019, after its retail tranche became 1,440 times oversubscribed.

The IPO performance benefited from the “scarcity” of publicly traded AI companies, said Liu Chunhe, founder and CEO of Newborn Town in an interview with DealStreetAsia. “Despite that AI remains as a darling of investors, not many companies in the field are offering their shares on the public market mainly because it is too hard for them to break even.”

Liu, now 34 years old, tries to draw a clear line between his profitable Newborn Town and other 90 per cent loss-making Chinese AI companies including Megvii, which revealed a stunning net loss of 5.1 billion yuan ($735 million) in the first half of 2019 as shown in its prospectus filed with the Hong Kong stock exchange last August.

These cash-burning companies still struggle from commercializing AI despite the market scale in the country is projected to reach 71 billion yuan ($10.23 billion) in 2020, according to the Internet Society of China.

Indeed, the world will take some time to see more IPOs of companies developing core AI technologies like computer vision and machine learning. This is probably why Newborn Town, which generates revenue from the mobile advertising business, uses AI as a value-add to lift efficiency instead of a vital underlying technology like its homegrown peers CloudWalk Technology and SenseTime, whose products and solutions would simply become unusable without AI.

Beijing-based Newborn Town provides global users with free mobile apps in the fields of the user system, fitness, media & entertainment and gaming with nearly zero in-app purchases, in exchange for mobile traffic that the firm can monetise by selling in-app advertisement spaces to advertisers. The company charges advertisers by the number of times the ads have been viewed by or displayed to mobile device users.

Its major businesses lie in the global mobile app and programmatic mobile advertising markets, which reached $365.2 billion and $60.7 billion in 2018, respectively. Newborn Town takes up small shares in both markets due to fierce competition from a few top players, according to Chinese market research firm iResearch, cited in its prospectus.

The company became profitable in 2016 and generated revenue of HK$205 million ($26 million) in the first half of 2019, up 58 per cent from the year before, according to the prospectus.

To some extent, the dazzling IPO debut is also “a natural outcome” as the political and economic environment in Hong Kong and worldwide slightly calmed down by the end of 2019. Investors in the Hong Kong capital market nowadays “understand and embrace” new economy and advanced technologies, said Liu.

Liu spoke to DealStreetAsia about his entrepreneurial experience, Newborn Town’s Hong Kong IPO, and a growing trend of Chinese companies going overseas. The interview was conducted in Chinese. Below are the translated and edited excerpts:

What do you think are the internal and external factors that contributed to Newborn Town’s strong debut on the Hong Kong stock exchange?

First, the political and economic environment in Hong Kong and globally was relatively stable by the end of 2019. The Hong Kong stock market regained attraction as not only Newborn Town but also many other new offerings saw decent IPO results.

Second, many people in the past might think that the Hong Kong market neither have nor understand advanced technologies, so such companies usually choose Nasdaq as their prior listing destination. During the roadshow, Newborn Town – as an AI-based mobile app developer and mobile advertising platform services provider – actually encountered a lot of investors who have a thorough understanding of our technology and business model. This means that Hong Kong understands the new economy and advanced technologies, and they are embracing the ascendant development trend of AI.

What do you see as the benefits of an AI-enabled company to go public in Hong Kong?

Newborn Town benefits from its [AI startups in public market space] scarcity. Despite that AI remains as a darling of investors, not many companies in the field are offering their shares on the public market mainly because it is too hard for them to break even. Even for China’s top-notch AI companies, they are still burning money and struggling from figuring out profitable business logic.

Do you consider it a small or big goal achieved after the IPO of Newborn Town?

Neither. Entrepreneurship is no easy path. It takes the devotion of a whole life.

What do you consider as the three most important turning points of Newborn Town’s development in the past decade?

Before 2013, Newborn Town was at the exploration stage in which we tried out all potential business directions, including programming education, that helped us gather and nurture founding members. Li Ping, another co-founder of Newborn Town, was one of my students at that time.

Between 2013 and 2016, we built Solo Launcher, our first customer-oriented mobile app designated for the overseas market. The mobile app was launched on May 9, 2013, to serve as a user interface for Android device users and provide a simpler and faster user experience with their devices. The product quickly roped in many users, granting the company with several funding rounds and a rapidly expanding talent pool in the three years.

In 2016, a large number of companies in the mobile advertising field collapsed due to mistakes in business strategies, since they were too firmly entrenched in developing utility apps that provide tools [for app development, management and distribution, while ignoring the market demand for apps that carry content]. Unlike these bankrupt companies, Newborn Town always bears a sense of staying alert to adversity even in times of prosperity. Soon after the debut of Solo Launcher, we started to mull a mobile advertising service targeting corporate clients, which led to the birth of our programmatic advertising platform, Solo Math, in October 2014.

Newborn Town carried out upgrades in a couple of main areas in 2016 that I consider being “two engines” supporting our future development: First is the combination of businesses serving both individual customers and corporate clients, which ushered us into a larger market with a more complete business system. Second is the addition of a product line to develop mobile apps that deliver content rather than only providing app development functions.

The CBA system, which translates into “consumer + business + AI,” represents a comprehensive ecology of Newborn Town’s businesses. The to-consumer (to-C) side is our growth pole, while the to-business (to-B) side is a stabilizer to ensure the company’s general development.

Someone used to put forward an equation to describe our business model: C * B (AI). It means that the combination of to-C and to-B services is not just a simple add-up. Instead, the two sides can coordinate with each other to lead to a superimposed effect, while AI can further strengthen such impact.

In your prediction, what would be the development curve of the AI-enabled mobile advertising industry in the future? Are we going to see more consolidation in the global industry in the next three to five years?

A: [There] could be [more consolidation in the industry].

I can give my predictions from two major aspects: Market scale and industry efficiency. First of all, I believe that China’s mobile internet companies will enjoy more benefits from the nascent development of mobile internet in many countries and regions, including Southeast Asia, India, the Middle East, and Africa. Mobile internet in these markets is more or less alike the Chinese market in three to five years ago, so their market scale will grow significantly in the following years.

Industry efficiency is another benchmark to evaluate the future market as the industry development will be very different, based on how efficient it could be in reaching out to and serving users. The best way to lift efficiency is through the development of technologies like AI – which is now powering Newborn Town’s whole ecology – and other advanced technologies such as 5G and blockchain. We are optimistic about their potentials in disrupting the industry.

What will be Newborn Town’s major business focus in the next 12 months after the IPO?

In terms of the to-C side, Newborn Town will keep expanding the user base and introducing more products to diversify our offerings. The company also plans to upgrade mobile advertising services and forge more partnerships with corporate clients on the to-B side. The expansion of our client data and the iteration of AI technology will also become a focus.

Personally, I will continue to pay considerable attention to the development of social media products.

Newborn Town has helped China-born brands like short video platform VMate and gay social network app Blued in their overseas expansion. What are the advantages you are seeing for Chinese companies and products to compete in the overseas market?

Chinese internet companies nowadays are developing around the world, and some of them even play dominant roles in the overseas market.

Their major strength lies in the fact that China’s mobile internet industry is one of the global leaders in aspects like technological and product development, investment, ecology, innovation, and application. It is a natural move for Chinese companies to “export” their products and services when they’re leading the industry worldwide, similar to what happened in the automobile industry in Europe, Japan and the United States.

Meanwhile, Chinese companies are good at localizing their businesses. The previous globalization of the internet-led by companies including Google, YouTube and Facebook – deliver their products to global consumers under the exact same name, user interface, and operation standard [as what they have applied in their home markets]. In contrast, Chinese companies worship “localization” as a management principle so much that some overseas users even mistake their products as invented by local firms.

In addition, local players are usually not the direct competitors of Chinese companies in the internet field. In the countries and regions that I just mentioned [Southeast Asia, India, the Middle East, and Africa], the internet ecology is still taking shape and not many local entrepreneurs and startups could be seen in the market, so the competition mostly comes from companies in developed areas like Europe and the United States [which have little inherent advantages in the local market than players from China]. Chinese companies are indeed competitive judging from their current development status.

However, competition from local companies will undoubtedly grow as we’re seeing the rapid development of upstarts including Paytm, Grab, and Tokopedia. This is very much similar to what happened in China in the past few years. But it will hardly scare away Chinese companies from entering the market because – in the internet industry – such decision is dependent on if the local market and demographic dividend are large enough, rather than if there is competition in the market because there will always be.

Chinese startups and investment companies are said to be more frequently looking at opportunities in the emerging market in the past two years due to reasons like domestic economic slowdown and over-valued technology industry. Are you also seeing more Chinese companies mulling business expansion overseas?

Indeed, but my feeling is more like that Chinese companies start to consider internationalization as “a standard-setting” since their inception, instead of “an alternative” in their later stage of development. Prominent examples include Nasdaq-listed online media publisher 36Kr, China’s largest ride-hailing platform Didi, and Trip.com, an online travel agency rebranded from Ctrip.

As the Chinese economy slows down, Hong Kong’s civil unrest continues, and the trade disputes between China and the U.S. remain unsettled, do you think these environmental factors will create challenges for the future development of Newborn Town?

I don’t think so.

After years of accumulation in China’s internet field, plus the great opportunity in the emerging market, I think the market is still flourishing. I heard of the same saying of “capital winter” in China almost every year since I started my entrepreneurial journey, but how come it is always a winter? Instead of worrying about the future environment, I would rather create a future myself.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.