The China Gold Rush: Upcoming Internet IPOs in 2011

In the 1850s, Chinese laborers flocked to California in chase of the economic opportunity created by the Gold Rush and later the construction of the railroads. The results were not always as advertised: gold did not path the streets and many toiled under harsh conditions for cruel masters. The biggest winners were the shopkeepers who sold the “picks and shovels” to miners dreaming of gold.

Today, Chinese are returning to America in pursuit of riches under considerably different circumstances. In 2010, New York has welcomed 39 Chinese firms to its NYSE and NASDAQ stock exchanges, surpassing the previous record of 37 in 2007. 2011 could well obliterate all previous records, again. While many US tech companies are in no rush to IPO (see Facebook, Twitter, Zynga, etc.), it still seems to be the dream for Chinese firms. This post reviews the multitude of recent (5) and upcoming (9) Chinese internet IPOs.

The mere mention of “China” and “internet” has investors in a frenzy. Stock tip sites are full of half-baked parallels that betray an ignorance of the Chinese internet: ”YouKu is the Netflix of China.” Most IPOs have fared well, some exceedingly so, though the stocks are also highly volatile (one recent IPO, Mecox Lane, has already crashed and is being sued by investors).

Parallels exist to the 1999 Silicon Valley bubble. China’s 2010 internet IPOs are also high in potential but low on profits. Two sober analyses include, “China IPOs: How Do You Say ‘Bubble’ In Chinese?” and “Why I’m Short Youku, The Most Overvalued Stock In The Universe.”

The nature of the IPOs also reflects the maturation of the Chinese internet: there’s a strong shift from gaming to e-commerce. My informal review in Nov. 2010 found 7 of the 15 Chinese internet firms listed on NYSE/NASDAQ to be either completely or heavily dependent upon massive multiplayer online games (MMORPGs). Few of the new IPOs are gaming firms, as Chinese netizens are coming to trust the internet for shopping, not just entertainment. The rise of e-commerce also assists content sites that rely upon the revenues of online advertising.

Recent IPOs:

• Sky-Mobi (MOBI) – Mobile application downloads. One of the few IPOs that disappointed from the outset.
• Youku (YOKU) – Online video site. In comparison to YouTube, relies more upon syndicated than user-generated content. Despite heavy losses on its balance sheet, YouKu beat its rival Tudou out of the IPO gate and soared past expectations.
• DangDang (DANG) – Online retailer. Yes, DangDang’s business model is similar to Amazon, but its market share is not at all. DangDang faces fierce competition from Taobao, JingDong (360 Buy), Newegg, and Joyo (Amazon China). Of e-commerce transactions in 2009, Taobao had 75.3%, Tencent’s PaiPai 10.3%, 360Buy 2.5%, Tom Group’s Eachnet 0.8%, and DangDang had 0.7%, according to the research firm Analysys.
• Mecox Lane (MCOX) - Apparel retailer. An apparel brand that is moving its catalog sales online, similar to Ctrip’s combination of offline and online retailing. After a strong initial IPO, the stock crashed upon Q3 results, prompting an investor lawsuit.
• ChinaCache (CCIH) - Internet service provider.

Upcoming (likely in 2011):

• VANCL – Online apparel retailer. My favorite case of the rising clout of e-commerce in China. VANCL is a low-mid range online-only brand that has blanketed the Chinese internet with its performance-based advertising. It shatters the conventional wisdom that Chinese don’t trust the internet and have to touch it to believe. VANCL founder Chen Nian sold his previous company to Amazon: Joyo.cn (now Amazon China).
• Taobao – E-commerce giant. I’ve heard of a Taobao IPO from several employees, though this has long been rumored. Taobao dominates e-commerce in China (up to 75% market share) and is pushing to develop its B2C (TMall) on top of its robust C2C. Taobao part of the larger Alibaba Group, which also includes AliPay and Alibaba itself. A Taobao IPO could also open the door for Yahoo to sell its 40% stake in the Alibaba Group, a key objective for the Alibaba Group.
• Tudou – Online video site. Fewer videos streamed than YouKu, but also fewer losses as Tudou concentrates on containing costs and monetizing the most profitable content. The IPO was delayed around a swirl of rumors around its founder, Gary Wang, ranging from his supposed violation of the silent period to an ownership dispute with his ex-wife.
• RenRen – Social network. RenRen is a copy of Facebook, with a few local features and a focus on monetization via advertising. It is the leader among Chinese networks focused on real-life relationships. It will be spun off from its parent company, Oak Pacific Interactive.
• Taomee – Children’s social network. 30 million Chinese children (or their parents) pay small monthly subscriptions for its popular Mole and Seer social networks (self-reported numbers). Taomee plans to “conduct its ‘beauty parade’ for investment banks in the first quarter of 2011, said a source familiar with the situation,” says Reuters.
• Jiayuan – Dating site. Revenues are primarily via subscriptions of men seeking women for serious relationships (…or so they claim).
• Zhenai – Dating site.
• Sunity – Gaming (MMORPGs). Sunity filed its F1 in November, but has not yet listed, indicating that the SEC may have unaddressed concerns. Gaming companies in general, traditionally the dominant moneymakers on the Chinese internet, face a slight realignment as growth has slowed to “only” about 25%, a rate Western firms would still kill for.
• Qunar – Travel search. Similar to Kayak, though it monetizes via advertising and “featured placements” rather than commission. Supposedly mulling an IPO in the second half of 2010.
• 58.com A listing site.
• China’s Groupon clones are also candidates for IPOs, including La Shou (reportedly raised a second round of 50 million USD), Meituan, and Nuomi (also owned by Oak Pacific Interactive). China’s internet giants (Taobao, Tencent, Dianping, etc.) have also launched their own Groupons to profit off the model.

Indeterminate Future (or never)

• Dianping – Online reviews. Similar to Yelp, although over half of its revenues now come from its Groupon clone.
• 360Buy (JingDong) – Online retailer. 360 Buy is now in a price war with DangDang. 360Buy forecasts sales of 24-26 billion RMB in 2011, up over 100%. The majority of it sales remain in 3C (computers, communication, and consumer electronics). It plans to wait to IPO until its ‘mature’ in 2013.
• Kingsoft – Internet security software. Plans to IPO “in next 3 years.”
• PPLive – Online P2P video. Plans to IPO in “1-2 years.”
• Kaixin001 – Social network. On Oct. 12, 2010, CEO Cheng Binghao stated Kaixin001 will IPO, though I’m skeptical. Traffic to Kaixin001 has dramatically slowed down or declined, depending on who you ask (I’ll soon write an update on China’s social networking landscape).

Selling Picks and Shovels

A gold rush mentality still applies, says Mark Natkin, managing director of Marbridge Consulting in Beijing: “China is an extremely rapidly developing economy that has undergone tremendous change in the past 20 years, you could almost say that there hasn’t been time to establish universally accepted ethics or business practices. There is a certain Gold Rush or ‘land grab’ mentality in China.”

Whether investors find fool’s gold or the real deal, one thing’s for sure, those selling the shovels–IPO advisers, analysts, law firms, and China tech blogs –are guaranteed winners. Goldman Sachs, underwriter of the YouKu IPO, made a cool $70 million paper profit off its over-allotment option.