Intraday low 13.61; Last trade 13.82. Get 'em below the IPO price! :)
Chinese internet IPOs: Icarus syndrome
Source: blogs.ft.com
May 11, 2011 12:05 pm by Kathrin Hille .
A week ago, management of Renren (RENN:NYQ), the Chinese social networking site, and their bankers must have breathed a sigh of relief: Despite many questions over the company’s valuation and its accounting practices, Renren had priced its IPO at the top of the range, and its shares jumped close to 30 per cent on the first day of trading.
But the party is over now. As of market close in New York on Tuesday, Renren had dropped back to US$14.62 per ADS, barely above its IPO price of US$14. To many who have been warning of a Chinese internet bubble, this weak performance is proof that this bubble may be about to burst.
Since late last year, Chinese internet companies have been racing to go public in the US. Kicked off by Youku, the internet video site, and Dangdang, the online retailer, companies operating in the world’s most populous internet market with 457m users were trying to get rich valuation multiples.
For Renren, even if it has lost most post-IPO gains, those border on the fantastic. The US$14 IPO price represents 72 times last year’s revenues, compared with a multiple of 25 for Facebook, the company whose service Renren replicated in China. Some commentators have pointed out that applied to Google, the Renren multiple would result in a share price of US$6,000 instead of the current market price of around $542.
The slide in Renren’s shares is not the first sign of trouble for Chinese internet stocks. Just ahead of its debut, Baidu and Sina, both established, soundly profitable businesses, experienced sharp corrections.
Baidu operates China’s largest online search engine, and Sina runs the country’s first online news portal. Both had seen almost unbroken rallies in their shares over the past year, which put Robin Li, Baidu’s founder and chief executive, at the top of China’s rich list.
Part of the problem is the fact that investors want to buy into the growth of social media and social networking worldwide, and there has so far been little opportunity elsewhere, with LinkedIn coming to the market only later this year, and Facebook not expected until 2012.
Therefore demand for the ‘hot’ Chinese internet stocks such as Renren has been strong – although the company is nowhere as dominant in its own market as Facebook is in the US, although growth has been sluggish in recent quarters, and also its prospectus carried dozens of pages of warnings about regulatory, competitive and accounting risks.
If better opportunities come along, or the belief in the short-term upside gets seriously shaken, Chinese internet stocks might therefore go out of favour in no time.
Those worst affected could be companies that are not public yet. The pipeline of potential Chinese internet IPOs is long and getting longer. Kaixin 001, Renren’s smaller rival which has been suffering a drop-off in users in recent months, has been preparing an offering to be underwritten by Citigroup and JP Morgan this year. Lashou, China’s largest group buying site, and Taobao, the country’s largest e-commerce company, are expected to go public next year.
While Taobao, as part of Alibaba Group, has nothing to fear, many of China’s technology start-ups could quickly wither if their path to Nasdaq gets blocked. |
