Baioo prices low as Candy Crush hits confidence

Baioo Family Interactive priced near the bottom end of its indicative price range as volatile technology stocks flustered retail investors.

Baioo Family Interactive's initial public offering of shares priced near the bottom end of its indicative range on Thursday after weaker US technology stocks rattled retail investors.

The Chinese children’s online game operator sold 706,106,000 primary shares – with an overallotment option of 105,914,000 shares – at HK$2.15 a share, the low end of the initial price range of HK$2–HK$2.60 when books opened Wednesday. This prices the deal at $196 million, rising to $225 million if a greenshoe option is exercised after shares list next week.

The company had sought to raise $250 million to help develop new mobile-internet educational games and to expand its current range of both online and offline products, including print media and film production.

Baioo’s forward p/e for 2014 is 16 times, which banking sources say is reasonably in line with its peers.  

Bankers were confident Baioo – the latest in a hot streak of Chinese technology companies seeking to float shares – would garner sufficient institutional and retail interest, and as such, did not seek cornerstone pledges. But rocky performance in March by US technology stocks – Facebook dropped 11% last month while Twitter was down 15% – coupled with a double-digit percentage loss for King Digital Entertainment on its market debut last week, helped to dampen retail sentiment.

Candy Crushed

King Digital, the maker of the incredibly popular Candy Crush game, held the largest US technology IPO since Twitter’s November debut. Bankers say King Digital was oversubscribed multiple times by investors and priced in the middle of the range. But shares plummeted 16% on their first day of trading. 

The Candy Crush debacle occurred as bankers were on the road drumming up interest for Baioo and undoubtedly had a negative effect on retail investors, a notoriously fickle segment, particularly in Hong Kong.

“There wasn’t a strong retail take-up,” one banker close to the deal told FinanceAsia, explaining why Baioo priced at the lower end of its range. “Some Hong Kong [and US] tech stocks had some volatility recently, which made some investors a bit more gun shy,” he said.

As the focus switched to the institutional tranche towards the end of the bookbuild, bankers narrowed the guidance to between HK$2.10 and HK$2.20. Interest was decent amongst long-only institutional investors, technology-focused funds and hedge funds in Asia and the US.

Those analysing the company have a number of benchmarks to choose from.

Four of Baioo’s comparables have a blended three-year p/e of 18.8 times. One of them – US-listed Taomee Holdings – has an estimated 2014 p/e of 20.87 times. Forgame Holdings, which raised $206 million in a Hong Kong listing last September, has a forward p/e 2014 ratio of 10.46 times. IGG Holdings, meanwhile, is trading at an estimated p/e of 16.11 times and internet tech giant Tencent has a current forward p/e at 38 times, according to Bloomberg.

Strong underlying story

Candy Crush saga and volatile internet stocks aside, Baioo’s fundamentals are strong, bankers maintain.

The China Internet Network Information Centre (CNNIC) estimates that internet penetration reached 42% in China in 2012, up from just 8.5% in 2005. The country's online gaming market, meanwhile, grew at a compound annual growth rate (CAGR) of 27.6% from 2010 through 2012 and by 24.5% in 2013 alone, CNNIC's numbers show. It is forecasting similar growth of 24.8% this year.

Children’s internet usage has been surging also. China internet specialist iResearch Consulting Group estimates that the number of child internet users increased at a CAGR of 9.4% from 2011-2013. It expects that number to continue growing at an annual rate of 6.9% in 2014-2016, taking China's non-adult internet penetration rate to 64.6% in 2015 from 49.8% in 2013.

One syndicate report forecasts that Baioo will achieve a sales and normalised net profit CAGR of 34.8% and 30.4%, respectively, over the next two years, on the back of both existing virtual worlds and new ones that it intends to launch in the second half of this year.

Bankers argue that Baioo’s focus on service operations and maintenance as opposed to game development – which is highly competitive and has low entry-barriers – reduces the risks typically associated with entertainment businesses.

Aside from Baioo, a number of other Chinese technology companies are eager to list their shares in the upcoming months. China’s largest Twitter-like service Weibo, owned by New York-listed Sino Corp, is seeking $500 million ahead of its US IPO, while e-commerce conglomerate Alibaba Group, the most anticipated IPO since Facebook, wants to raise $15 billion.

There are a number of risks involved when investing in technology companies in China, namely centred around regulation and censorship. But the country is in the process of liberalising its financial services industry and easing restrictions for investors, which is expected to eventually carry over to internet and technology companies.

Citi and Deutsche Bank were joint global coordinators on the deal, while JP Morgan, CICC and CIMB acted as joint bookrunners.

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