Tudou Holdings, the owner of an online Chinese platform for uploading and sharing videos, finished 11.9% down on its first day of trading on Nasdaq. The decline came after the company early yesterday morning priced its initial public offering at the mid-point of the range for a total deal size of $174 million.
The bookbuilding coincided with a sharp sell-off in US and global equity markets during the past couple of weeks and, last week alone, nine companies, including two Chinese firms, cancelled their IPOs in the US. The deal also came just a few months after reports of accounting fraud and poor corporate governance at several Chinese companies listed in the US. While companies not directly under scrutiny have recovered somewhat, many investors remain cautious about Chinese stocks in general.
Even so, Tudou, which is viewed as a Chinese version of YouTube, attracted quite a bit of interest. According to sources, the deal was more than seven times covered and about 150 investors came into the transaction. No doubt the company got some help from the fact that it was offered at a substantial discount to its closest and slightly larger competitor, Youku.com, which has been listed in the US since December last year.
Youku has had a rocky ride. It surged 161% on its first day of trading and gained 425% in the first four months amid optimism about internet stocks, but since then it has been trending lower. The accounting scandal may be the key reason, but Youku and a group of pre-IPO investors also raised $539 million from a follow-on share sale in May, which put further pressure on the share price.
Despite the correction, Youku was still trading 87% above its IPO price when Tudou priced yesterday morning, which translates into 10.9 times its projected revenues for 2012, according to Bloomberg data. By comparison, Tudou priced at 4.7 to 4.9 times, depending on which bookrunner estimate you use. According to analysts, Youku has stolen a lead on Tudou in the past eight months because of its two capital injections — it raised $233 million from the IPO — and investors were likely hoping that Tudou would be able to expand at a faster rate now that it too has cash to spend.
Tudou’s share of online video advertising revenue in China dropped to 14% at the end of the second quarter this year from 16.6% at the end of last year, according to Chinese research firm Analysys International. Youku gained two percentage points to 23.4% during the same period.
But those who expected Tudou to quickly adjust to a similar valuation to Youku would have been disappointed by the first day performance. The stock fell as much as 19% early on before recovering and hitting a high of $27.75 in the afternoon. It then fell into the close again and finished at $25.56 — down 11.9% from the IPO price of $29. Meanwhile, Youku gained 12.9% after falling 8.1% on Wednesday, when some investors were said to be selling the stock short to buy Tudou instead.
The overall US market ended mixed with the Dow Jones index up 0.04% and the Nasdaq Composite down 0.5%.
The sell-off in Tudou was somewhat surprising after sources said more than 50% of the deal had been allocated to the top five accounts and more than 70% to the top 10 investors. There was also said to have been a handful of orders from long-only US investors on the final day that lifted the quality of the order book. Overall, the demand came from both long-only accounts and hedge funds, including a lot of tech specialists and other Hong Kong and China investors who know the sector well and were comfortable to buy even in a difficult market.
The demand was said to have been slightly overweight Asia, but in terms of allocations about 60% of the deal went to US-based investors.
Shanghai-based Tudou offered 21.2% of its share capital in the form of 6 million American depositary shares at a price between $28 and $30 each. As noted, the price was fixed at $29. Each ADS accounts for four common shares and 92.8% of the IPO was backed by primary shares. The offering also came with a 15% greenshoe option that could boost the total deal size to $200 million, if fully exercised.
The IPO was arranged by Credit Suisse and Deutsche Bank.
Like many other internet companies in the early stages of development, Tudou has yet to make a profit (the company is flagging that this won’t happen until 2013 — the same year that Youku is expected to become profitable), but it has posted rapid growth both in the number of users and in revenues during the past couple of years. The revenues come primarily from advertising — and online advertising is a business that is growing rapidly in China.
According to independent market research firm ZenithOptimedia, the internet surpassed newspapers as the second largest advertising medium in China after TV in 2010 and internet advertising spending is expected to grow to $9.7 billion in 2013 from $4.7 billion last year.
As of June 30, Tudou had 90.1 million registered users, up from 78.2 million at the end of last year and 35.6 million at the end of 2008. Net revenues (net of fees paid to third-party advertising agencies) increased to Rmb286.3 million ($45 million) in 2010 from Rmb26.2 million in 2008 and was up 166% year-on-year to Rmb79.4 million in the first quarter this year. Meanwhile, the company recorded a net loss of Rmb347.9 million in 2010 and Rmb336 million in the first quarter this year.
The company will use the proceeds to buy and produce new content and to expand its internet bandwidth capacity.
Tudou was initially aiming to launch the IPO at the end of last year, around the same time as Youku. However, the divorce of its founding chairman Gary Wei Wang prompted questions about the ownership of the company that needed to be cleared up first. With that issue now out of the way, the company was supposedly keen to complete the delayed IPO as soon as possible, even if the market backdrop wasn’t ideal.