Following the first-day surge for China’s Youku.com and E-Commerce China Dangdang in US trading last week, another Chinese company delivered a strong debut on the New York Stock Exchange overnight. IT services provider iSoftStone Holdings was up as much as 45% shortly after opening and finished the Tuesday session 27.8% higher.
The gains came after the Beijing-based company raised $140.8 million in an initial public offering that was priced at $13 per share. The final price was set at the top of the $11 to $13 marketing range.
Sources said the offering was multiple times subscribed with “a couple of hundred” investors piling into the deal amid continuing US enthusiasm for Chinese technology stocks. iSoftStone isn’t an e-commerce or internet content provider like Dangdang and Yukou, which are referred to as China’s Amazon.com and YouTube respectively, but provides IT services, consulting and solutions, and business process outsourcing services to companies in four key industries: technology; communications; banking and financial services; and energy, transportation and public sector. About two-thirds of revenues come from IT services.
This too is an industry that is expanding rapidly and iSoftStone’s revenues more than tripled to $134.4 million in 2009 from $36.4 million in 2007. In the first nine months this year, its top-line reached $135.2 million. Its net profit fell to $300,000 in the nine months to September from $9 million in 2009 as share-based compensation charges on options granted to directors, employees and consultants ate up a large portion of the income. Under non-US GAAP accounting, which among other things excludes share-based compensation, it posted a $10.7 million net profit in the nine months to September following a $13.4 million profit in 2009.
iSoftStone serves companies in Greater China as well as globally and, in the 12 months to September, its clients included 71 Fortune 500 companies, of which 48 were based outside the Greater China region. Key client relationships include IBM, Microsoft, Bank of China, China Life Insurance and UBS.
The massive first-day rallies for some of the recent listings of Chinese technology and internet companies in the US does seem exaggerated, or even downright ridiculous – online video provider Youku gained 161% in its debut last Wednesday and online bookseller Dangdang climbed 87% on the same day – but investors are clearly seeing potential for these industries and are seemingly happy to take a punt in the hope of finding the next big winner. And since most of these companies are quite small, there simply aren’t enough stock to go around.
Dangdang raised $272 million after lifting its initial price range once and then pricing $1 above the new range at $16. Youku too fixed the price above the range, at $12.80, and sold a total of $233 million worth of shares after the greenshoe was exercised on the first day of trading.
But, rather than just another hyped-up craze, it seems investors may in fact be choosing their investments quite wisely. According to Businessweek’s annual ranking of the best-performing technology companies, which was published on Tuesday, the fastest growing company in 2010 was Tencent Holdings. The provider of China’s most popular instant messaging service, QQ, even outpaced Apple in second place, which had a good year on the back of the launch of the iPad in April.
Tencent is listed in Hong Kong where its share price has gained more than 20-fold in the past five years, giving it a current market capitalisation of about $42 billion.
Third on the list is Chinese search engine provider Baidu, and two other companies from this region also feature in the top 12. Hong Kong-listed VTech Holdings in eighth place and US-listed Shanda Interactive Entertainment in 12th. VTech makes electronic learning devices and Shanda provides online games and other interactive entertainment media content.
iSoftStone sold approximately 10.83 million American depositary shares, or 21.4% of the company. Two-thirds of the shares were new, while the remainder were sold by venture capital investors AsiaVest Partners and Infotech. Fidelity is also an early investor in the company, but didn’t sell any shares in the IPO. Following the IPO, Fidelity owns 19.8% of the company, while AsiaVest has a 19% stake. Infotech holds 5.3%
The deal also comes with a 15% greenshoe option of all new shares, which could increase the total deal size to $161.9 million if fully exercised. Each ADS represents 10 common shares.
J.P. Morgan, Morgan Stanley and UBS arranged the offering.