IPOs: China Internets Set For Soft Landing On Wall St
Bottom line: Chinese Internet stocks are likely to see a soft landing after a correction period in the first half of the year, with leaders and high-growth second tier players likely to experience a rebound in the second half.
A new scorecard is casting a worrisome spotlight on the bumper crop of Chinese Internet firms that listed last year, pointing out that more than half are now trading below their IPO prices. The sagging prices continue a trend that I pointed out in my IPO scorecard at the end of last year. That trend has seen shares of many New York-listed Internet firms come back to their offering levels or lower as investors pocketed profits from strong post-IPO rises. (previous post) But rather than label this a reason for worry, I would argue instead this broader wave represents a rationalization of the market that will ultimately see the best-performing names rewarded and the money losers languish.
Let’s begin with a look at the report compiled by Bloomberg, which says half of the 14 Chinese Internet companies that floated shares in New York last year are now trading below their listing price. (English article) It adds that among the group of 14, the average share price for all companies is down 3.1 percent this year, in sharp contrast to a 6.1 percent rise for the Nasdaq composite index.
Bloomberg cites an analyst saying that investors are growing nervous as they start to take a closer look at these companies, a number of which have yet to earn a meaningful profit. It also notes that of 28 New York-traded Chinese Internet companies tracked, 16 reported financial results that fell short of analyst expectations for last year’s fourth quarter. At least 2 companies, including e-commerce titan Alibaba (NYSE: BABA), have also come under scrutiny by the US regulator since the start of the year for possible securities violations. (previous post)
Among companies whose shares are below their IPO prices, some notable cases include Sina Weibo (Nasdaq: WB), sometimes called the Twitter of China, whose shares are now down nearly 20 percent from their IPO price; and online cosmetics seller Jumei (NYSE: JMEI), whose shares are down 27 percent. Even Alibaba shares are down 20 percent since the start of the year following a surge in the months after its record-breaking IPO.
Of course all of this is history and investors are most interested in where the market is going next. I would argue that money losers like online video site Xunlei (Nasdaq: XNET) that can’t show a clear roadmap to operational profits over the next 1-2 years are likely to languish and could even become takeover targets.
Among the profitable companies, ones that can maintain growth above the 60-70 percent range should ultimately see their shares stabilize by the middle of the year and perhaps return to upward trajectories by the end of 2015. Many Chinese Internet companies still trade at quite pricey valuations even after the latest sell-off, which means only the truly fast-growing names will be able to justify those high levels.
At the end of the day, the big 3 of Alibaba, Tencent (HKEx: 700) and Baidu (Nasdaq: BIDU) always look like strong longer-term bets, as each is solidly profitable and a clear leader in its core area. Some second-tier up-and-comers also look good, including 58.com (NYSE: WUBA), often called the Craigslist of China, and Autohome (NYSE: ATHM), the leading website for car-related products and services.
When the history books are written, 2015 is likely to become the year of the soft landing for Chinese Internet stocks, as most return to valuation levels that are more closely aligned with US peers like Google (Nasdaq: GOOG), Amazon (Nasdaq: AMZN) and Facebook (Nasdaq: FB). That may actually be a good thing, as it will finally make the Chinese names understandable and thus more attractive to bigger institutional investors that purchase stocks based on fundamentals and can provide some longer-term stability to their prices.
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