Facebook may not be for sale but one of its Chinese equivalents, Renren, is now available to bidders. Though it won’t be coming close to Facebook’s stratospheric $50 billion valuation, Renren plan to be the first social-networking site to go public, in a $500 million IPO on Nasdaq before the summer.
Renren has plenty to be excited about, if recent listings are anything to go by. Online retailer DangDang saw its shares open at $24.5, 53% above the $16 IPO price (although that infuriated company executives, see WiC94). Similarly, Youku, China’s leading online video site, rose more than 100% on its first trading day.
Such giddy pricing leads to talk of China’s very own internet bubble. And as is so often the case with share offerings that shake free of their fundamentals, internet investors start with the bigger picture in outlining their optimism.
At the heart of their logic: that China already has the largest number of internet users (450 million) but at a low penetration rate (34% of the population, compared with 78% in Japan and 81% in South Korea).
Hey presto! That means plenty more of the online pie to chew on – and China’s e-commerce market is expected to triple by the year 2015 to $159.4 billion, says Forrester Research. Internet companies then argue that investors can reasonably expect a rapid move into profitability as these revenues take off.
Wishful thinking? Sceptics say that China’s internet stocks are stirring up nasty memories from the dotcom bubble in 1999. Many of the tech firms to go public recently have also been showing bubble-era valuations, focusing on potential but with little profit (so far) to back it up.
Take Youku. The company reported early this month that it had lost Rmb37.7 million ($5.7 million) in the fourth quarter of last year. Still, its shares already stood at $39.9, more than triple its IPO price (to be fair, the stock did drop after the results announcement – but only by 4%).
“What’s going on here?” asks Gady Epstein at Forbes. The US stock market has poured billions into Youku, he says, despite the fact that “no one pays to watch its videos, there are very strong competitors and, oh, it is still losing tens of millions of dollars a year.”
Epstein’s evidently not a fan at these valuations.
By contrast, the Financial Times Lex column thinks that investors are confident that growth in internet usage, viewing hours and revenue-per-minute will outpace future expenses in bandwidth, servers and content fees.
Dangdang, touted as China’s answer to Amazon, is not going to win over many valuation cynics either. Yes, the online book retailer has made it into the black, but net margins of 1% over the past two years is hardly a lucrative proposition. No matter: the stock was trading at $27 as of this Wednesday, on a PE multiple close to 508. Amazon itself is available at a multiple of 53 times earnings, according to Bloomberg data.
Not all the Chinese dotcoms are home runs. Shares of Mecox Lane, a Chinese online retailer that went public on the Nasdaq in late October, have crashed, dropping 43% below its listing price. The company and its underwriters are now being sued by investors, says Reuters.
No doubt there will be more turbulence ahead, even as Chinese internet usage rates continue to climb. At the Zero2IPO China Venture Capital & Private Equity Annual Forum held in December in Shanghai, Feng Tao, president of growth capital firm New Margin Ventures, warned that the rising valuations were a “tumour in the industry,” adding that they were not sustainable.
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