China IPOs

US appetite for Chinese internet IPOs defies weak profits

China's internet industry has become a darling with investors in the US, but the risks involved in buying these companies are hard to ignore.
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Renren is China's leading social-networking portal
<div style="text-align: left;"> Renren is China's leading social-networking portal </div>

The frenzy of US IPOs from Chinese internet companies continues. Following Qihoo360 and 21Vianet’s popular initial public offerings, Renren, a Chinese Facebook clone, is said to have increased the offering price of its new share sale.

Others are riding the wave. Phoenix New Media, an internet, TV and mobile-news provider, is looking to raise $178.7 million when it lists on the New York Stock Exchange, while International, an online-dating platform operator, is seeking to raise $85.2 million from a Nasdaq offering. Renren’s domestic competitor, another copycat of Facebook, is also preparing a share sale.

These new issuers will likely find good demand in the US IPO markets, even though most of the companies are not profitable, despite years of rapid growth. Some don’t even seem to have a clear idea of basics such as how many users they have. In Renren’s IPO prospectus, released on the US SEC website on April 15, the company said its “monthly unique log-in users increased from approximately 17 million in December 2008 to approximately 24 million in December 2010”, which indicated a 41% jump.

However, the growth became 53% 12 days later, when Renren said the number of monthly unique log-in users was actually closer to 26 million in a revised IPO prospectus filed to the SEC on April 27.

The Chinese government’s strict supervision of the industry is another worry for the investors. In an effort to “maintain a stable and harmonious society”, Chinese authorities can close down any business that produces content or promotes activity that fails to please party bosses.

However, for ardent China bulls, the country’s 457 million internet users are enough reason to buy in. Indeed, with six million new users jumping online every month, China’s internet population is mushrooming, according to McKinsey & Company, a consulting firm.

China could have as many as 750 million people online by 2015, the firm said in a report released last week. Between now and 2012, an additional 100 million people could be logging on to the internet from their mobile devices, up from 233 million today; China already has the largest number of mobile internet users in the world.

There are currently a total of 11 Chinese internet companies listed in the US. China Dangdang, China’s answer to Amazon, closed the biggest deal so far when it raised $313 million in an offering managed by Credit Suisse and Morgan Stanley late last year. Seven Chinese companies have raised a total of $600 million from IPOs in the US so far this year, according to Dealogic.

Phoenix New Media is selling 12.76 million American depositary shares (ADSs), including 11.5 million primary and 1.26 million secondary, at between $12 and $14 each. 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.

Phoenix expects the net proceeds from the offering to be approximately $135 million and it plans to use the proceeds for content acquisition and production, and for product and technology infrastructure development.

The company is controlled by Hong Kong’s Phoenix Satellite Television, a Beijing-backed Mandarin television broadcaster that is partly owned by China Mobile Communications and News Corp.

Deutsche Bank, Macquarie and Morgan Stanley are managing the deal.

Jiayuan, the online-dating platform operator, is seeking to raise $85.2 million by offering 7.1 million ADSs at $10 to $12 each. Each ADS represents 1.5 ordinary shares.

As of the end of March this year, the web operator had a total of 40.2 million registered user accounts, with an average of 4.7 million monthly active user accounts in the first quarter of 2011.

It started charging fees for messaging services provided on the website in October 2008.

Jiayuan had a net loss of Rmb13.9 million in 2008, and net income of Rmb5.7 million and Rmb16.7 million ($2.5 million) in 2009 and 2010, respectively.

BoA Merrill Lynch and Citi are leading the IPO.

¬ Haymarket Media Limited. All rights reserved.
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