Valued at 120 billion, Hillhouse Capital and Sequoia China "rushing" to invest in Xiaohongshu

Xiaohongshu, which has just turned losses into profits, has once again been favored by top capital. Recently, there have been reports that Xiaohongshu has completed a round of secondary share transfers, with the company's valuation rising from last year's $14 billion to $17 billion. In this round of secondary share transfers, Hillhouse Capital, Boyu Capital, CICC, and Sequoia Capital participated, with Sequoia Capital increasing its investment after entering last year.

Xiaohongshu once again favored by top capital.

Recently, it was reported by the media that Xiaohongshu has completed a round of secondary share transfers with a valuation of approximately $17 billion. When Securities Times reached out to Xiaohongshu for confirmation, the company declined to comment.

In this round of secondary share transfers, DST Global, Hillhouse Capital, Boyu Capital, and CICC made their first investments, while Sequoia Capital increased its investment in Xiaohongshu.

In fact, Xiaohongshu has always been a hot commodity in the primary market. According to incomplete statistics, it has previously completed 6 rounds of financing, with a total financing amount exceeding 6 billion RMB.

The background of this round of secondary share transfers is that the company achieved profitability in 2023. Meanwhile, the venture capital circle has been eagerly anticipating Xiaohongshu's IPO, but the company has repeatedly denied any plans to go public.

Hillhouse Capital, Sequoia Capital China

"Competing" for Xiaohongshu

Early investors in Xiaohongshu sold their existing shares at a valuation of $17 billion.

Specifically, the valuation of this round of secondary share transfers reached $17 billion, approximately 120 billion RMB. Well-known venture capital companies DST Global participated, Sequoia Capital China continued to increase its stake after investing in Xiaohongshu last year, and Hillhouse Capital, Boyu Capital, and CICC also made their first investments in Xiaohongshu.

Among the many investors this time, Sequoia, Hillhouse, and others are well-known star capital firms. DST Global is an investment group headquartered in Russia, which has previously invested in Facebook and Twitter. It has a strong presence in China's internet industry, with investments in companies like JD, Alibaba, Xiaomi, Didi, Toutiao, and Meituan.

In fact, Xiaohongshu has always been a focus in the primary market.

Founded in early 2013, Xiaohongshu received angel funding of hundreds of thousands of RMB from ZhenFund. The company has since received continuous support from star investment institutions.

According to incomplete statistics, before this round of secondary share transfers, Xiaohongshu had completed six rounds of financing, totaling over 6.3 billion RMB. Investors include Tencent, Alibaba, Temasek, Genesis Capital, Sky9 Capital, and GGV Capital, with a lineup of high caliber. Tencent, Alibaba, GGV Capital, among others, have made multiple additional investments.

It is worth mentioning that in 2021, the entire internet industry reached its peak valuation, with Xiaohongshu valued at $20 billion in a round of financing led by Temasek and Tencent. However, in September 2023, Sequoia Capital China invested in Xiaohongshu at a valuation of $14 billion. This means that while Xiaohongshu's latest valuation has declined from its peak, it has rebounded from last year.

Industry insiders believe that Xiaohongshu is not short of money, and this round of secondary share transfers is a "two-way choice" for both the company and investors. Early investors have exit demands, while new investors are willing to join, leading to this transaction Mystery Surrounding the Timing of the IPO

The reasons why Xiaohongshu (Little Red Book) has not gone public yet or why some impatient investors have chosen to exit.

Data shows that Xiaohongshu was founded in 2013 with its initial positioning as a "cross-border e-commerce" shopping sharing platform. The following year, it launched its self-operated e-commerce platform "Welfare Society," focusing mainly on fashion, beauty, and other female-oriented fields. Despite some setbacks along the way, Xiaohongshu still managed to achieve rapid growth.

In 2017, Xiaohongshu clearly defined its platform as a community-based platform, further upgrading to a "generalized life guide." Unlike the intense competition in e-commerce, Xiaohongshu's "grass-planting gene" has always given the platform a content-oriented direction with practical tools. Before users "transact," it influences their lifestyle and consumption decisions. This greatly subverted the traditional e-commerce platforms' operating strategies of using hard ads, soft articles, and brand promotion.

To date, Xiaohongshu has over 300 million monthly active users. According to data from QuestMobile, Xiaohongshu is the third-largest content platform in terms of user scale, after Alibaba, ByteDance, and Tencent ecosystems, with its potential commercial value beyond doubt. Perhaps for this reason, there have been frequent rumors about Xiaohongshu's IPO.

As early as 2021, Yang Ruo, a former Citigroup executive with an investment banking background, was appointed as the CFO of Xiaohongshu, seen by the public as a signal that Xiaohongshu is preparing for an IPO.

In April of the same year, there were reports that Xiaohongshu planned to go public in the US around mid-year, raising about $500 million to $1 billion. Some insiders mentioned that the company had secretly submitted an application for a US listing, but Xiaohongshu did not comment on this.

After the failed US IPO, in October of the same year, there were rumors in the market that Xiaohongshu was considering an IPO in Hong Kong. At that time, Xiaohongshu officially responded that they were in periodic communication with the capital market but had no definite plans at the moment.

In April 2023, media reports cited insiders saying that Xiaohongshu had secretly submitted an IPO application to the US Securities and Exchange Commission, planning to list in the US in mid-year, with an expected fundraising amount of $500 million to $1 billion. Goldman Sachs and Morgan Stanley are its joint underwriters.

The most recent rumor about Xiaohongshu's IPO was at the end of December last year, with market news stating that Xiaohongshu would launch a Hong Kong IPO in the second half of 2024 and plan to conduct another round of financing before the IPO. In response, Xiaohongshu once again stated that there are currently no plans for an IPO.

During this round of share transfers, the market also speculated whether Xiaohongshu was preparing for an IPO. However, based on the information currently known, Xiaohongshu has not provided a specific reason for the share transfer.

Achieving Profit in 2023

After years of burning cash, Xiaohongshu finally turned a profit in 2023.

Data shows that in 2023, Xiaohongshu's revenue soared to $3.7 billion, an 85% year-on-year increase, with a net profit of $500 million, far exceeding the initial expectation of $50 million at the beginning of the year. In the same period last year, it had a loss of $200 million From the perspective of venture capital, the significance of Xiaohongshu's turnaround is extraordinary, allowing more potential investors to see the commercial value and money-making ability of Xiaohongshu.

Specifically, the main reason for Xiaohongshu's profitability is the growth of its high-margin advertising business and the transformation of its e-commerce model.

In the second half of 2023, Xiaohongshu successively closed its self-operated platforms "Welfare Society" and "Little Oasis," and abandoned the self-operated model. At the same time, Xiaohongshu put forward the concept of "buyer e-commerce" and established an e-commerce model centered around buyers recommending products and a combination of shelves and live streaming e-commerce.

According to a research report by Huatai Securities, Xiaohongshu's e-commerce model is rooted in the grass-planting characteristics of its community, emphasizing the trust economy, focusing on product quality rather than simply pursuing traffic. By deepening its own content system, such as the community and live streaming, Xiaohongshu guides users to evolve from grass-planting recommendations to consumption.

Compared to traditional advertising models, Xiaohongshu's "grass-planting economy" not only has commercial attributes but also community attributes, and its acquisition scenarios are more inclined towards lifestyle scenarios. Based on a large user base and precise user positioning, the platform can conduct more precise vertical delivery, transforming users from passive recipients to actively generating consumption demand.

From the performance of the 618 Shopping Festival, Xiaohongshu's live streaming e-commerce has already achieved some results. According to official data, the order volume in Xiaohongshu's e-commerce 618 live streaming rooms was 5.4 times that of the same period last year, and the GMV of store live streaming was 5 times that of the same period last year, although specific GMV data has not been disclosed. In terms of the proportion of Xiaohongshu's e-commerce business, the GMV scale brought by buyer live streaming and product notes is comparable.

However, according to a research report by GF Securities, 80% of Xiaohongshu's revenue in 2022 came from advertising, with the rest mainly from e-commerce; in 2023, advertising revenue slightly decreased but still accounted for 70%-80% of total revenue, and the company's e-commerce business is still in a growth stage.

Currently, Xiaohongshu's advertising service system mainly consists of three service models: Dandelion Platform, Spotlight Platform, and French Fries Sales, corresponding to content production and marketing methods. These are the main ways Xiaohongshu monetizes its advertising.

It is worth noting that the closed-loop of Xiaohongshu's advertising + e-commerce has not been fully realized yet, and the platform still faces issues such as reaching the peak of grass-planting growth, difficulty in precise user data, and unbalanced platform resources