Chinese Facebook sends request for capital

The IPO of Renren.com, the largest social networking site in China, offers investors the opportunity to buy into the world's most populous internet market, where social networks are highly regarded.

Social networking is not a new phenomenon in China. Guanxi, or social connections, have long been at the heart of the country’s complex social order and are considered important in every realm of Chinese society, from the rarefied heights of officialdom to everyday street life.

It should therefore come as no surprise that one of the world’s first social networking websites to go public hails from China. Renren, a booming Chinese Facebook clone, is preparing for a US initial public offering later this year and is expected to raise around $500 million in a deal arranged by Credit Suisse, Deutsche Bank and Morgan Stanley, according to sources.

Renren, which means “everyone” in Chinese, is commonly compared to bigger Western rivals such as Facebook and LinkedIn, which are also preparing to go public, but the Beijing-based site operator offers something unique: The opportunity to buy into the world’s most populous internet market.

From close to zero web surfers 10 years ago, China’s internet community reached 457 million users by the end of 2010, with social networks a big driver of internet adoption.

Renren’s website is literally a copycat of Facebook, which is blocked in China. Like other Chinese internet companies (such as Baidu, a Chinese clone of Google), Renren follows the business model of its biggest Western rival and copies its features, though in some cases adding a few twists to meet local tastes. Such blatant imitation is, apparently, no impediment to raising capital in the US. Bankers working on the deal even refer to it as “the Chinese Facebook”.

That said, Facebook itself is not completely missing from China. Indeed, Chinese users are the fastest-growing community on the only website to have spawned a blockbuster movie, thanks to virtual private network providers that allow Chinese internet users to access the internet with an overseas IP address.

But the total number of Facebook users in China – probably less than a million – is tiny compared to Renren’s more than 160 million registered users. That, in turn, is small compared to Facebook’s 500 million worldwide, but investors will be betting that China’s centuries-old obsession with social networks could be a potential goldmine. For many Chinese, especially young professionals, success is closely tied to the size and prominence of one’s social network.

But how will investors profit from buying into that network? Analysts say the fact that Renren operates in a fast-growing sector in a fast-growing economy could help its profit earnings. The site is currently a dominant player in China’s online market, helped by the company’s strategy of targeting university graduates and young professionals – another trick it learned from Facebook.

As a result of this growth, Renren has doubled its advertising revenue each year since it started selling space in 2008, according to a company statement.

Markets have responded positively to the news. Shares in Softbank, Japan’s third-largest mobile phone operator, which owns a 40% stake in Renren, rose 4% last Monday when the news of Renren’s IPO was made public.

Other Chinese internet companies’ US listings have enjoyed similar success. Youku.com, China’s largest online video company, soared 160% in its trading debut on the New York Stock Exchange after it raised $202.9 million in an IPO in December last year. In the same month, shares in China Dangdang, the country’s largest online book retailer, rose more than 92% on the company’s first trading day in New York after an IPO that raised $272 million.

Although shares in Youku dropped nearly 4% on Monday after the company’s disappointing results announcement, the stock still stood at $39.9, more than triple its IPO price of $12.80, indicating investor confidence in the company’s future.

US-listed shares in Baidu, which processes 80% of China’s online searches, have gained 800% since their trading debut in 2009.

Other overseas-listed Chinese dotcom groups have also done well, such as Hong Kong-listed Tencent, which operates the largest instant messenger service QQ and raised HK$1.55 billion ($199 million) in a popular IPO in the city in 2004. The stock has surged more than 50-times its original IPO price of HK$3.7.

¬ Haymarket Media Limited. All rights reserved.

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