Baozun prices $110m IPO below expectations

Investors viewed the pricing of the e-commerce company's ADRs as too dear, despite backing by backing by Alibaba and SoftBank.

Baozun, partly-backed by Alibaba, has priced its shares below expectations in its New York initial public offering.

The e-commerce company raised $110 million in its Nasdaq flotation on Thursday after selling shares at $10 per unit, several dollars below the bottom indicative price range marketed during the company's roadshow. Sources close to the deal said that the valuation was too high, which led investors to push for a lower price.  

The lower price also reflects general skepticism from US investors on Chinese internet companies, fearing a potential slowdown in the mainland.

Slight market volatility this week didn’t help sentiment leading up to the IPO. The Nasdaq Composite Index slid 0.13% this week up to May 20 while the S&P 500 Index fell 0.16% in the same time frame.

Baozun initially sought to sell 11 million American Depository Receipts — all primary — at a price range between $12 and $14 per share under the joint leads of Morgan Stanley, Credit Suisse and Bank of America Merrill Lynch.

But investors — namely a few large institutional investors — were not convinced the shares of the Alibaba-backed e-commerce company merited the price tag. “The valuation was too high,” one source close to the deal told FinanceAsia.

A second source noted that several large long-only institutional investors in particular were only interested in the deal at $10 per share. “There were a couple of investors that were more price sensitive,” the second source said. “And they were key to bring in.”  

It reflects the caution US investors are taking with Chinese internet companies generally, as they fear a larger slowdown in the mainland.

Once the price was settled at $10, the issuer had no trouble covering the book, with roughly 70 lines participating in the deal, which consisted of a fairly even mix of long-only institutional investors and hedge funds.

Although sources maintain the order book was “well-oversubscribed”, a number of potential investors — mainly fund managers — voiced concerns about the deal being made up of fast money.

Other fund managers said they didn’t think the deal was very strong, despite the endorsement of Alibaba. Alibaba owns 23.5% of Baozun, while SoftBank holds 17.8%.

As one of Hong Kong’s first ADR share sales of the year -- online platform Wowo floated its shares in April --  investors are more cautious than usual, the second source noted. “It’s [one of] the first ADRs of the year. And I think people tend to be a bit conservative,” the second source said. Wowo floated its shares in an ADR sale in April. “Some of the market backdrop doesn’t help either.

In addition, some recent US IPOs have performed poorly, which didn’t help sentiment. Etsy, the online marketplace, went public on the Nasdaq on April 16. Shares jumped from $16 at the open to $30 in its debut. But after posting disappointing earnings on May 19, shares plummeted 18.1% to $17.20 on May 19. Shares closed at $21 on May 20.

Etsy’s shares fell after the company reported quarterly losses that exceeded expectations. Net loss for the first quarter of 2015 totalled $36.6 million, compared with a $500,000 net loss for the same period a year earlier. The company attributed the loss to higher restructuring costs on its online marketplace, which should lower its future tax bill.

Despite the recent volatility, sources maintain that investors are positive on the underlying fundamentals for Baozun and Chinese e-commerce in general.

China’s e-commerce market remains underpenetrated and online sales are gaining popularity. Bain & Co forecasts the mainland’s online market will grow by 32% each year until 2015. Of the 1.35 billion people living in China, 618 million currently use the internet, but only 302 million use it for shopping, according to the China Internet Information Centre.

Shanghai-based Baozun aims to raise money to boost efforts to develop its online platform as it anticipates a surge in Chinese demand for branded goods online. It helps companies set up an online presence in China, and also assists with warehousing of products and other logistics.

"When Nike wants to come to China, [Baozun] helps them set up an online presence. They also help with warehousing and logistics," the second source said. "They do a lot of the back end for these brands."

Proceeds from the IPO will go towards sales and marketing; research and development for technology infrastructure and warehousing and fulfilment infrastructure.


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