Cheetah Springs Onto NYSE With Help From Friends

By newsdoug on May 9, 2014

Chinese tech firms making IPOs in New York are calling on some wealthy friends to help them succeed as mainstream investors rapidly lose interest in the group. That’s my conclusion following the modestly successful pricing and debut for security software maker Cheetah Mobile (NYSE: CMCM), which comes as a small positive sign for the market. Cheetah relied on some big-name friends to help its listing succeed, including controlling shareholder Kingsoft (HKEx: 3888), as well as smartphone sensation Xiaomi and leading Chinese search engine Baidu (Nasdaq: BIDU).

A flood of Chinese tech firms have rushed to make IPOs in New York after a window of strong investor sentiment opened in the second half of last year, ending a 2-year downturn for the sector. But that strong sentiment has rapidly faded in the last 2-3 weeks, leading companies to sharply pare back their fund-raising targets and price their offerings at the lower end of their ranges. To support its offering, Cheetah was reportedly calling on Baidu, Kingsoft and Xiaomi to buy up to a quarter of its IPO shares. (Chinese article)

In the end, Cheetah raised $168 million in its New York listing, a far cry from its initial target of $300 million and even substantially less than its most recently stated target of $200 million. The trio of Baidu, Kingsoft and Xiaomi had reportedly committed to investing $50 million in the deal, meaning that Cheetah was only able to raise around $120 million from real investors without ties to the company.

On a more positive note, Cheetah was able to price its offering at $14 per American Depositary Share (ADS), which was actually at the higher end of its previously stated range of $12.50 to $14.50. (English article; Chinese article) Its shares initially jumped as much as 17 percent when trading began in New York, but then they rapidly faded and ended up a modest 0.7 percent at $14.10 on their debut day.

I suspect that Baidu probably dumped most or all of its stake in Cheetah on the first trading day, though its investment was so small that perhaps it will hold onto the shares for a little longer to show its support. Even if it did hold the stake, it probably won’t keep it for long since Cheetah’s shares are almost certain to creep downward during its first few weeks of trade due to flagging investor interest in Chinese tech companies.

Another China tech IPO will hit the market on the final trading day this week when shares of online travel agent Tuniu make their trading debut. (Chinese article) Media have reported that Tuniu has set a price range of $9 to $11 per ADS, and could raise up to $100 million through the offering.

Like Cheetah, Tuniu’s listing could also find an important supporter in leading online travel agent Ctrip (Nasdaq: CTRP), which was reportedly contemplating an investment in Tuniu’s IPO as part of a strategic tie-up. If that investment comes, we could see Tuniu’s shares price similarly to Cheetah’s in the middle to top of their range, and the stock could also post some small gains on its trading debut.

As to the bigger picture, this latest performance from Cheetah reinforces the view that the current IPO window for Chinese companies continues to narrow and will probably close completely within the next week or two. Companies like Cheetah only managed to do respectably due to strong third-party support from cash-rich friends, and anyone who lacks such backing could do much worse. That could bode poorly for many of the current backlog of listing candidates, including online cosmetics firm Jumei.com, which could become the next company to make its offering and trading debut as early as next week.

Bottom line: Cheetah’s IPO performed respectably due to strong support from the company’s backers, but its shares will edge lower in the next few weeks as sentiment cools towards Chinese tech firms.