Despite headwinds, investor appetite is so far healthy for China?s YY Inc. as it debuts on the Nasdaq today. This year has been difficult for internet IPOs, and Chinese tech companies have encountered major investor skepticism in the wake of high-profile accounting controversies.
The social media and gaming platform was trading at $11.43 at 11:15 am EST, up from its IPO price?of $10.50.
YY is attempting the first IPO of a Chinese company since April and priced its shares at the lower end of an earlier stated range of $10.50 to $12.50.??The number of Chinese IPOs in the US has gone from 41 in 2010 to 12 in 2011. In 2012 there has only been one, not counting YY?s: Vipshop Holdings, a flash sale website that raised almost 40% less than it sought. Other Chinese companies like China Auto and Shanda Cloudery had to scrap their plans for IPOs because of poor investor sentiment.
What?s the reason for the icy welcome? Investors have been wary of the transparency and quality of Chinese companies after a series of accounting scandals hit dozens of Chinese companies that had listed in the US through ?reverse takeovers,? going public via taking over a US shell company. Chinese companies are also hesitant to list overseas and are waiting instead for signs of new policies?from the country?s new leadership team announced last week.
A successful YY IPO could allow other Chinese companies to follow suit and diminish some US investor concerns. So how might YY do?
The company is growing. YY?s free online platform has 400 million registered users who talk with each other via voice, video and text. The company had net income of ?56.0 million ($8.9 million) in the nine months ended September 30, 2012, up from a loss of ?83.2 million in 2011, according to its prospectus. It?claims to have a market share of 84% of the rather niche market of ?online group voice communications in China??in terms of user time.
Fredrik Oqvist, founder of ChinaRAI, a research firm, writes:
Overall this IPO shows some promise. The company itself is solid and has a good reputation in China. The real question is if it can actually buck not one, but two trends of failing IPOs, those associated with tech and China. I?m quietly optimistic the company will do well? However, given the recent history of these IPOs a large pop on day one is probably a bit too much to hope for.
Concerns about YY include the fact that it only became profitable this year. From 2009 to 2011 (the company was founded in 2008), the company?s losses were ?50 million to ?80 million. Also, YY?is dependent on its games services, where users buy tokens to play. Its games component was 42.3% of total revenue for the year through the end of September. Other major Chinese internet companies like Tencent and Qihoo also host web games. If YY?s relationship with outside game developers falters and affects its pricing or selection, the entire business will feel it.
Also,?the corporate?structure?(p.5) will?put off some investors. A dual stock class structure means that existing shareholders will control 98.3% of votes in YY after the IPO, leaving public investors just 1.7%.
YY itself names key risks to investors in its prospectus (p. 16), including its ability to continue to entice users to pay fees (what it calls internet value-added service, or IVAS):
Our business plan relies heavily upon increased revenues from IVAS and online advertising, and our ability to successfully monetize our user base and products and services, and we may not succeed in any of these respects?
We have experienced a period of significant rapid growth and expansion that has placed? significant strain on our management and resources. We cannot assure you that this level of significant growth will be sustainable or achieved at all in the future.
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