Bottom line: Tencent's online literature unit is likely to make a Hong Kong IPO later this year, and should get a relatively strong reception due to strong backing and its market leading position for a product with stable long-term demand.

If you don't succeed the first, second and third times, then try again. That could well be the mantra for the digital literature unit of former online entertainment giant Shanda, which has gone through quite a few attempts at an IPO, only to stumble each time. This particular story has quite a few twists, which I'll review shortly. But the end result appears to be that the unit, previously called Cloudary, may finally succeed in its latest attempt to go to market, this time under its current parentage as the online literature unit of Internet giant Tencent (HKEx: 700).

I'll admit that this story is somewhat fascinating for me from a historical perspective, since the listing of Cloudary isn't like to be huge, though it still could be sizable. The offering itself should be somewhat attractive, since we haven't seen any similar major listings to date. What's more, the company's Tencent parentage should also provide a boost, since that link means that Cloudary automatically has a huge potential audience in the form of the 1.7 billion subscribers to Tencent's WeChat and QQ services.

All that said, let's begin with a look at the headlines, which have a Tencent top executive confirming that the unit, now called China Reading, is planning to make an IPO in Hong Kong. (English article) No fund-raising amount was given, but news reports are putting a likely range of $600-$800 million, which is relatively large for an Internet company. The company owns China's largest online library, with rights to over 10 million original novels across 20 million genres.

As a regular commuter in China, I can say with relative confidence that this kind of online literature is indeed a staple among the millions of people who travel on buses and subways in major cities each day. But that said, I do also sense such literature is past its prime, and is being replaced by newer fare like short videos and games.

With that observation in mind, let's quickly retrace some of the history I've alluded to at the top of this post, which indicates where this company has come from and where it might be going. China Reading was known as Cloudary in its earliest days, and was the online literature unit of Shanda, which was one of China's earliest major players in the online game sector.

Mass Defection

Cloudary was doing quite well, and made at least 2 attempts at a New York listing around 5 years ago when it was still under Shanda's umbrella, but failed for unspecified reasons. It was making another attempt to list, when it got hit by a crippling blow that saw a big section of its middle management team suddenly defect and open its own rival company. Such behavior is relatively common in China, even though it would almost certainly bring legal challenges in a more mature western market.

Shanda was temporarily stunned by the move, but later did the logical thing and took legal action against the new company. In the meantime, the high-flying Tencent decided the new company looked like a shrewd investment, and quite willingly gave the team of defectors major money to fuel their growth.

I didn't follow the company after that, but it appears that Shanda and Tencent eventually reached some sort of settlement that is now directly resulting in this IPO plan. The reports say that Tencent is only making the offering due to expectations from some of the company's shareholders, indicating the Internet giant would probably prefer to keep China Reading private if it could have its way.

With all that history in mind, let's close in the present with a guess as to whether this company will finally make it to market, and if so then how it will fare. The answer to the first question seems like a very probable "yes", since Tencent's backing and resolution of the previous disputes will both be strong catalysts. The fact that it's in the news means the offering could come later this year, and I expect it should get a relatively strong reception due to its strong backing and relatively stable long-term demand for digital literature.