Netease.com and Sohu.com, China's second and third biggest internet portals, are going head to head in a battle for investment dollars as they prepare to list their shares for the first time on Nasdaq. It's a contest that could set the benchmark for what investors are prepared to pay for second-tier internet companies in Asia, analysts say.
Sohu, which kicked off its roadshow in Hong Kong today, raised the price range of its offer to between $16 and $19 a share (from $13 to $16 a share), suggesting demand for the 4.6 million new shares may be greater than anticipated. At the new price, the company could raise as much as $87 million. It has also set aside 690,000 shares in an overallotment option. The listing is scheduled for 12 July.
Netease, which is planning to sell 4.5 million American depositary receipts (ADRs) for between $14 and $17 each, will set a final price Friday morning, Hong Kong time. At the top end of the range, the company could raise $76.5 million.It had planned to list in May, but was forced to delay the sale after the Chinese government imposed limits on foreign investment in domestic internet companies. Both Netease and Sohu offer similar services: news and information, chat rooms, community sites and online retailing.
"I think both will get funded, the question is, which is going to be the first one to achieve profitability," says Pratik Gupta, an analyst at Salomon Smith Barney in Singapore. "This is going to be an interesting test of what the market is prepared to pay for the number twos and number threes."
Investors more cautious
Investors have become less willing in recent weeks to pay for internet companies that rely for their revenue on advertising and whose path to profitability may be obscure. Both Sohu and Netease fall into this category. They will have to burn a lot of money over the next couple of years to stand a chance of making a profit, investors say.
"I'm not sure I'd want to buy into an internet stock without profits right now," says Adrian Fu, investment manager at Investec Guinness Flight. "And these companies are quite expensive when compared with Daum Communications in Korea." Daum is an internet portal that aims to sell ADRs on Nasdaq for about $18 each.
On the other hand, China as a whole is relatively attractive to investors, and Sina.com, the number one portal, hasn't suffered to the extent of many of its US and Asian peers. Its stock was last trading at $27.06, down from a 52-week high in May of $54.05 but up from its IPO price in April of $17. Although similar, Netease may have an edge over Sohu, partly because it is getting to the market first and partly because of its management, investors say.
"I think Netease's management team is a little stronger than Sohu's team," says Winson Fong, senior portfolio manager at SG Asset Management, who doubts he'll invest in either company because he doesn't like portals in general. "Sohu has been quite successful in its marketing and promotion, and the chief executive has a high profile because he speaks good English. The chief executive of Netease can't speak much English. He's a sofware guy, a local Chinese, but he knows what he's doing."
Netease chief executive, King Lai, was hired earlier this year to help speed up the company's growth. He replaced founder William Ding, who became chief technology officer. Lai was formerly chief executive in Taiwan of advertising agency Saatchi & Saatchi Advertising. Sohu's chief executive is Charles Zhang, who founded the company in 1997. He formerly worked at the Massachusetts Institute of Technology as its liason officer with China. Zhang has a PhD in experimental physics from MIT.
"I'm don't actually think investors are going to go crazy over either of these companies, at least not in the current environment," says Tim Sun, an analyst at BNP Prime Peregrine in Hong Kong. "But Netease is probably superior in terms of traffic to its site and management."