China’s YY raises $81.9 million from Nasdaq IPO

The social network draws strong demand to become only the second Chinese company to list in the US this year.
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YY users create virtual hangouts for concerts and other activities
<div style="text-align: left;"> YY users create virtual hangouts for concerts and other activities </div>

YY, a video-based Chinese social network, has raised $81.9 million from its US initial public offering, after fixing the price at the bottom of the indicative range.

Last year’s accounting scandals have damaged the reputation of Chinese companies in the US market, but YY successfully countered the negative sentiment to become the first Chinese company to list in the US since Vipshop Holdings’ $72 million IPO on the New York Stock Exchange in March, according to Dealogic.

No other Chinese companies have completed an IPO in the US so far this year.

The deal attracted robust demand, which led the book to be covered multiple times, a source said yesterday. While it could have priced higher, the company and the bookrunners decided to price at the low end to increase the likelihood that the stock will perform well in the aftermarket, the source noted. There were around 80 accounts in the book.

Indeed, in early US trading on its debut, the stock jumped more than 10%. The IPO was priced after the close of the US markets on November 20, and the stock started trading on Nasdaq the following day.

The demand came from sovereign wealth funds and long-only investors, as well as specialist investors in the US, the person said, adding that the top 10 accounts received most of the allocations.

Guangzhou-based YY, which has 400 million registered users and nearly 70 million monthly active users, sold 7.8 million American depository shares (ADS) at $10.50 each, raising $81.9 million.

The deal was marketed with a price range between $10.50 and $12.50, implying a maximum deal size of $97.5 million. The range valued the company at a 2013 price-to-earnings ratio of between 12.6 times and 15 times, according to the source. The offering represents 13.5% of the company.

There is a greenshoe option of up to 15%, or an additional 1.17 million ADSs, which could increase the total deal size to $94.2 million.

For comparison, investors will likely look at other high-growth Chinese internet companies such as Tencent, and Baidu. Hong Kong-listed Tencent is currently trading at a 2013 P/E of around 22.7 times, while is quoted at around 11.6 times, and Baidu at around 15.6 times, according to Bloomberg data.

YY chose to list in the US because of the liquidity and the availability of capital in the market there, sources have said. There is a better investor base for internet companies in the US, according to one source. Although, the fact that it doesn’t meet the profit requirements in Hong Kong and Shanghai probably also played a part.

YY plans to use the IPO proceeds to invest in its voice and video technology and infrastructure, to expand its product development and services offerings, and to expand its sales and marketing activities.

The company’s social network allows users to create and organise groups centred around a wide range of online activities, including video games, karaoke, music concerts, education, live shows and conference calls.

In 2011, YY had an 84.2% share of its market in China, in terms of user time spent, according to an iResearch Report quoted in the prospectus. While the basic use of its platform is currently free, YY said it monetises its user base through internet value-added services, such as sales of “virtual roses”, and through online advertising.

Among the risk factors, the company highlighted its earlier losses and said investors should consider its prospects in light of the risks and uncertainties that early-stage companies in evolving industries in China may be exposed to, including possible volatility in the share price.

The Nasdaq Composite Index is up about 12% since the start of the year. Vipshop currently trades about 90% above its IPO price of $6.50, after dropping more than 15% in its trading debut and falling to as low as $4.26 in the first several days.

Citi, Deutsche Bank and Morgan Stanley were joint bookrunners for the deal.

¬ Haymarket Media Limited. All rights reserved.
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