Roadshows began in Hong Kong yesterday (October 6) for a $62 million to $74.4 million IPO of e-commerce operator China Finance Online. The JPMorgan-led deal is being marketed at $10 to $12 per share and will comprise 6.2 million ADRs, of which 80.6% will be primary and 19.4% will be secondary.
There is also a 15% greenshoe and two co-managers Jefferies Broadview and WR Hambrecht. Pre-shoe the company will have a freefloat of 28%.
The deal is on a fairly accelerated schedule and will price on the US West Coast next Thursday and begin trading on Nasdaq the following day.
Fund managers say it is being marketed on a P/E range of 17 to 20 times 2005 earnings. Based on a potential market capitalization of $260 million, this valuation assumes a 2005 profit forecast of $13 million.
Like many Chinese e-commerce plays, the company has so far enjoyed an incredibly strong growth trajectory since its website www.jrj.com.cn was launched in April 2001. JRJ is an abbreviation of jin rong jie, which means financial industry in Chinese and the company specializes in online financial and listed company data and research.
At the end of its first year's operations it turned in a net loss of $644,000. By the end of 2002, however, it had swung round to a net profit of $202,000, which then jumped spectacularly in 2003 to $1.19 million.
By the first half of 2004, it had already eclipsed the whole of 2003, registering net income of $1.46 million. Fund managers say the company is now on target to make about $4.8 million by the end of 2004.
Near-term earnings growth is fairly visible since the company collects cash from its subscribers upfront and then amortizes each subscription on a month-by-month basis. However, the company's 2005 profit forecasts are still ambitious and provide fund managers' main source of downside risk.
Timing of the deal also seems particularly fortuitous, although the incredible volatility of the Chinese internet sector means this can probably be attributed more to luck than skill. As one market player puts it, "These IPO's behave more like options than stocks. They're more volatile than most of the tech sector."
China Finance's immediate predecessor is a case in point. China's largest online recruitment agency, 51job.com, has richly rewarded investors that purchased its IPO nearly two weeks ago.
The Morgan Stanley led deal was priced at $14 per ADR on September 27. Literally one day later the stock popped and climbed just over 50%. It is now 88% above its IPO price to close trading in New York this Tuesday at $26.70.
Yet when the lead first tried to launch the deal at the end of July, it faced considerable investor indifference and was pulled back before the end of pre-marketing.
Since then the whole sector has returned to favour and comparable stocks such as online travel agency Ctrip.com has risen by about 16% since the beginning of August, while online gaming company Shanda Interactive is up about 63% over the same period.
Shanda priced a $153 million IPO in mid-May via Goldman Sachs, but was unlucky and got caught in a mini-meltdown of Chinese internet and SMS stock prices. Having priced at $11, the stock has now doubled and seen its valuation inflate from 14 times 2004 earnings at launch to 33 times today.
51job.com priced at 22 times 2005 earnings and is now trading at a lofty 35 to 37 times. In comparison to its Mainland comparables, China Finance looks like a bargain so long as fund managers believe it can meet its growth forecasts.
The company is primarily being benchmarked against other Chinese e-commerce providers that run subscription business models. In its own niche sector, there are very few listed comparables.
In Asia there is just one listed internet-based financial information services provider - Jakarta-listed Indoexchange, which is loss making and down 50% on a 12 month basis. But it may soon be joined by a second operator, since Panpac-owned Shareinvestor based in Singapore is said to be planning a listing via OCBC.
As of June 2004, jrj.com had 1.7 million registered users and in the preceding 12 months had picked up 26,400 new subscribers and 11,400 repeat subscribers. Its business model is based on a subscription based service that offers clients six service packages.
Its most comprehensive service package is priced at $1,450 per annum and represented 68.3% of all subscription revenue during the first half of the year. Its client base is said to primarily comprise high net worth individuals.
"Many high net worth individuals in China don't like other people managing their money and prefer to trade the markets themselves," explains one specialist. "jrj.com's premier service is not cheap, but it is cost effective against other financial information providers such as Bloomberg."
Its net profit margins are also high, running at 66% during the second quarter. This is because the costs of its data feeds are fixed so that for every new user the overall cost per user decreases.
In its F1 filing, the company said that its "technology platform allows us to retrieve real-time stock quotes from both the Shanghai and Shenzhen Stock Exchanges; historical financial data and information on listed companies, bonds and mutual funds from data providers; research reports from 42 securities advisory companies and 36 brokerage companies; commentaries from approximately 160 licensed individual securities advisors and news feeds from 267 news publishers and media companies."
Pre deal, venture capital companies IDG Technology and Vertex were the major shareholders. The former currently holds 40.4% of the shares and the latter 21.4%. Chairman Jun Ning owns 7.3%.