Renren shares in free fall, more Chinese IPOs in the pipeline

 

Moran Zhang/Graph provided by Thomson Reuters

Renren Inc. broke below its initial public offering price of $14 Wednesday, plunging 12 percent to $13.04 in midday trading before closing at $13.49, posting a negative total return of 4 percent. The first week’s dismal performance for Renren following its IPO has aroused concerns about other Chinese IPOs waiting in the pipeline.

Beijing-based Renren, known as the Facebook of China, sold 53.1 million American Depositary Shares (ADS) on May 4, at the high end of the revised estimated price range of $12 to $14. Shares popped at the opening of trading that day to $19.50, before settling back to $18.01 at the close, up 29 percent.

The following day, Renren said its underwriters had bought an additional 7.97 million ADSs to cover their short positions and meet potential investor demand for more securities, boosting the IPO’s total size to 61.1 million ADSs.

But that’s where the good news ends. The head of Renren’s audit committee resigned the day before pricing because of publishing wrong information about the number of users the company has in its IPO prospectus.

“I was in the Renren offering and sold at $19.50” on the first day of trading, said Scott Sweet, senior managing partner of research firm IPOBoutique.com. “I flipped the stock as soon as it opened because there was too much going on with the accounting issues. It was a mess.”

So what happened? And how did the investment banks get taken off guard?

The key words “China” and “social networking” have garnered enormous attention from investors. Being the first Chinese social networking website listed on the New York Stock Exchange, Renren enjoyed a first-mover advantage.

This also means it was difficult for investment bankers to find the right comparable publicly traded companies, whose metrics could be used during the valuation process. Therefore, it is not surprising to see that Renren was valued at 72 times last year’s revenues, compared with a multiple of 25 for Facebook Inc.

But once accounting issues came to light, confidence in Renren fizzled. The company doesn’t have the same accounting standards and scrutiny that U.S. companies have, Sweet said, which can lead to inflated numbers. Renren had a net loss in 2010 of $64.1 million, an improvement from a $70.1 million loss in 2009.

Finally, investor demand for the Chinese company may have been inflated as well.

“Renren’s IPO was massively oversubscribed,” said Sweet. At an estimated 45 times the number of initial shares being offered, there appeared to be “massive interest” on the part of investors that seemed to disappear as soon as trading began.

This week’s calendar shows the following Chinese IPOs:

Jiayuan.com International, China’s Match.com, which made its debut today on the NASDAQ offering at $11, was down more than 4 percent, closing at $10.52.

China Zenix Auto International Ltd., the equivalent of a “Wheels R Us”, and Phoenix New Media Ltd., a new media company providing premium content on an integrated platform across Internet, mobile and TV channels in China, are expected to be priced on Wednesday evening and traded on the New York Stock Exchange on Thursday morning.

“Right now I would buy Chinese IPOs with the mindset that this is an investment that is considered highly speculative,” Sweet said.

On a personal note, I mock-traded Chinese IPOs for an investment group in my business seminar at the beginning of the year. On paper, my returns exceeded 30 percent. For me, the key to trading Chinese IPOs is patience, unless you’re one of the lucky clients to get in on the offering price. Follow the stock and wait for weakness before buying. Buying on the first day can make you vulnerable to institutional investors’ profit-taking. Someday I’ll put real money on the line!

 

Moran Zhang/ Data provided by Renaissance Capital
Graph provided by Renaissance Capital

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