KONTAK PERKASA FUTURES – Hong Kong’s highest flying stock is coming back to Earth.

For most of this year, Tian Ge Interactive Holdings Ltd., a Chinese provider of video chat rooms, was the top performer among the some 500 companies on the Hang Seng Composite Index. A fine for pornographic content did little to dent investor enthusiasm for the stock, whose market value swelled to more than $1 billion at its peak. Fueling gains were bets the company would receive buyout offers like rivals YY Inc. and Momo Inc.

Now, the shares have tumbled 25 percent since their May 3 peak as speculation the company would be taken private fizzled and doubts grew about the company’s ability to maintain profit growth. Chief executive officer and founder Fu Zhengjun says Tian Ge can withstand increasing competition from behemoths like Tencent Holdings Ltd. and Sina Corp., buoyed by 200 million yuan ($30 million) of spending this year on marketing.

“At this stage everyone’s burning cash,” Fu said in an interview in Hong Kong. “Our competitiveness lies in our 10 years of experience. In the future there may only be two or three companies that can be profitable; the others are just also-rans.”

While the firm is not interested in privatization for now, it is considering spinning off its investment companies outside of its chat-room business for a mainland listing, he said. To diversify, Tian Ge has invested in peer-to-peer lending and cosmetic surgery.

The stock closed Tuesday at its lowest level since March 18. The shares doubled from the start of the year through May 3, compared with a 6.6 percent loss by the Hang Seng Composite Index, before slumping. Tian Ge now trades at 42 times reported earnings, down from a peak of about 56 times.

In Tian Ge’s basic business model, users enter its live-streamed chat rooms to watch an Internet celebrity — often a comely woman — sing and to buy virtual gifts. While most rooms focus on performances, there are also others with themes including stocks, divination, elderly matchmaking, and English debate. The concept uses resources in top-tier cities to serve users in third- and fourth-tier cities, which have fewer entertainment options, said Fu.

The stock surged earlier partly because its similarity to YY and Momo drove speculation that Tian Ge would receive buyout offers after those companies did, said Johnny Wong, a Hong Kong-based analyst at Jefferies Group LLC. The two firms’ U.S.-listed shares plunged in May on signs Chinese regulators were seeking to curb domestic backdoor listings of overseas-traded shares.

Bigger Rivals

“Tian Ge’s stock is already quite expensive given its current business projections,” Wong said. “But in the short term the price may be supported by other factors.”

The firm is also facing tougher competition. Its flagship platform 9158 had 563,000 active users in April, a fraction of the 15.5 million for YY and 13.8 million for Douyu, a game streaming site that counts Tencent and Sequoia Capital among its investors, according to data compiled by consultancy Analysys.

The rally peaked on May 3, when shareholder Li Jingyi offered to sell her 6.2 percent stake at as much as a 12 percent discount, according to a term sheet seen by Bloomberg News. The deal wasn’t completed, and the shares slumped as much as 7.6 percent the following day.

Adding to the challenges, Tian Ge was among firms penalized by the Chinese government in April for pornographic content. The company has been fined 20,000 yuan, and doesn’t expect further punishment for now, said Fu.

“Competition is more intense now because both startups and Internet giants want a piece of this business,” said Ma Shicong, a Chengdu, Sichuan-based analyst at Analysys. “Tian Ge’s challenge is shifting its focus from personal computers to mobile and monetizing mobile. Innovating new business models is key to whether these companies can prevail amid the competition.”

Source : bloomberg.com