After an initial stampede for shares in Chinese internet companies, investors are now worried that another tech bubble is on the way after recent US IPOs from China’s internet players have failed to perform in secondary market trading.
Shares in Chinese dating website Jiayuan.com International, which raised $78 million, fell on their Nasdaq debut. Renren, the Chinese Facebook clone that stormed the US market with a $743 million offering, has also tumbled to below its IPO price despite a 29% spike on its first day of trading. NetQin, a Beijing-based mobile phone security service provider, also slumped on its US debut after an $89 million share sale.
The latest Chinese issuer, Phoenix New Media, launched on the New York Stock Exchange last Thursday and enjoyed a first-day bounce after pricing its shares below the initial indicated range, but lost some of the gains on Friday.
On the face of it, China’s US-listed web companies seem ripe for a market correction — most are start-ups, with all the risks that entails, yet trade at a premium to their much more established US counterparts.
Renren’s IPO price of $14, for example, values the company’s stock at 72 times its 2010 earnings, while Facebook’s equity valuation is estimated at 25 times. Renren soared to more than $18 on its first day of trading on May 4, but has tumbled daily since then and closed at $13 on Friday.
Some investors now fear a repeat of the late-1990s tech bubble, arguing that valuations are unrealistic given the uncertainties about these companies’ long-term profitability and sustainability. In addition, questions remain about corporate governance standards.
Optimists argue that China’s internet frenzy is different to what happened in the late 1990s. Investors now have a better understanding of how web companies operate, what makes them profitable and who their audience is — and what they see in China is a huge community of internet users that is growing bigger every day. In other words, companies such as Renren offer the opportunity to buy into the world’s most populous internet market, and that opportunity deserves its premium.
It remains to be seen if such optimism will be rewarded.
Weak profitability and poor management are not investors’ only concerns. The Chinese government’s strict supervision of the industry also poses potential risk. For example, the parent group of Phoenix New Media, Hong Kong’s Phoenix Satellite Television, often finds itself in a difficult position.
The group, which is partly owned by China Mobile Communications and News Corp, is the only overseas TV station with similar status to a domestic broadcaster, which has made it one of the most popular sources for news and information about the outside world. But it has to tread a fine editorial line to keep both its audience and the government happy.
Even so, the company’s IPO went relatively smoothly and made a strong debut. It raised $140 million by selling 12.76 million American depositary shares (ADSs) at $11 each after initially setting the price range at between $12 and $14.
The share price increased 23% to $13.5 in the trading debut on the New York Stock Exchange Thursday and ended at $13.2 on Friday.
The offering consisted of 11.5 million primary shares and 1.26 million secondary. Each ADS represents eight Class-A ordinary shares of the company.
The company had 222 million online monthly unique visitors as of March 2011. Its adjusted net income surged to Rmb90.6 million ($13.7 million) in 2010 from Rmb1.8 million in 2008, according to an IPO prospectus.
It plans to use the proceeds for content acquisition and production, and for product and technology infrastructure development. The offering was managed by Deutsche Bank, Macquarie and Morgan Stanley.
