Investors report that Nasdaq-listed Sohu.com and Netease.com are preparing to issue convertible bonds early this week through Deutsche Bank, which has the mandate for both of the competing internet operators. News of their issuance plans is unlikely to come as much of a surprise given the stock price performance of both companies and the success of transactions last week for Sina Corporation and tom.com.
Market participants comment that all four have been keen to capitalize on the run-up in their share prices and a number of company directors have also been offloading shares over the past couple of months. Netease currently ranks as the best performing stock on the Nasdaq in 2003 and is up 2,514% over a 12-month period, while Sohu.com is up 2,425% and Sina 1,260%.
All three have now shot past their initial IPO prices and currently trade on heady valuations of eight to nine times book value.
Sina led the internet boom and to date has been the only one to drop the dotcom from its name. Morgan Stanley floated the company in April 2000 at $17 per share and last Friday the stock closed at $23.53. It currently has a market cap of $1.1 billion based on 46.9 million outstanding shares.
In June 2000, Sina was followed by Netease.com, which listed via Deutsche and Merrill Lynch at $15.50 per ADR. Having hit a low of 65 cents in September, the company was de-listed until January 2002 and closed Friday at $37.63. It too has a market capitalization of roughly $1.1 billion based on 30.2 million outstanding shares.
Finally, Sohu was listed in December 2000 at $13 per share via Credit Suisse First Boston. It closed Friday at $33.84 with a market cap of $1.1 billion and 35.13 million outstanding shares.
The turnaround in the stock prices of the three portals was initially driven by hedge funds and preceded the first signs of any profits. But the sector has been one of the few to benefit from the SARs crisis, with all three companies recording huge surges in the use of their SMS/MMS services. Indeed, it has been a shift away from relying on online advertising revenue towards SMS/MMS services and online games that bought the sector to profitability.
Sina was the first to break even in the fourth quarter of 2002 and recorded net income of $3.4 million in the first quarter of 2003. Non-advertising revenue jumped 412% over the same quarter the previous year to total 60% of the company's $18.1 million revenue.
During the first quarter, Sohu and Netease followed suit, with the former recording net income of $4.6 million and a 392% increase in non-advertising revenue to $4.5 million and the latter net income of $8.3 million and a 429% jump in non-advertising revenue.
Netease also announced on Friday that it is to buy-back New Corp’s remaining 27 million shares in the company for $4.6 million.
As well as being the first to list, Sina has also led the way in returning to the equity market to fund new acquisitions. Last week it completed an $80 million convertible via Credit Suisse First Boston and has since exercised a $20 million greenshoe.
The deal had a zero coupon, zero yield structure with par redemption in 2023. It is callable at par from July 2012 and puttable annually at par from July 2007 to July 2013, with a final put in 2018. The conversion premium came in at 27% to the stock's $20.31 close on June 30. Each $1,000 of principal amount will initially be convertible into 38.769 million shares.
According to analysts, underlying assumptions comprise a bond floor of 62.68%, theoretical value of 99.39% and implied volatility of 61.37%. This is based on a credit spread assumption of 1,000bp, zero divided, 2.25% stock borrow cost and 60% volatility assumption. Although the company is listed on Nasdaq analysts say that stock borrow is relatively limited.