iQiyi Taps Baidu Roots With IPO Plan
Boosted by the big success of the IPO for its money-losing Qunar (Nasdaq: QUNR) online travel unit, Internet search leader Baidu (Nasdaq: BIDU) is reportedly aiming to test investor appetite for a similar offering next year for its loss-making iQiyi online video unit. Frankly speaking, I don’t think this plan looks very good for a number of reasons, led by the fact that money-losing firms aren’t very attractive in general to investors. Qunar has been the only money-loser of 5 Chinese tech companies to make New York IPOs in the last 2 months, and I wouldn’t be at all surprised if investors were attracted to the firm chiefly for its strong ties to Baidu, its controlling stakeholder.
Media are reporting that iQiyi’s CEO Gong Yu was in the US last week to meet with several investment banks that could potentially underwrite the offering. (English article; Chinese article) There are few other details in the reports, though one does point out that iQiyi has been in regular contact with US financial markets since its inception 2 years ago. Industry watchers will know the company has boosted its position since that time, and is now the country’s second biggest video sharing site following Baidu’s purchase of rival site PPS earlier this year for $370 million.
To better understand the prospects for an iQiyi IPO, we should look at the performance of Qunar since its IPO more than a month ago, and also at the recent performance of Youku Tudou (NYSE: YOKU), China’s leading online video sharing site. Qunar made its listing at the end of October, selling its American Depositary Shares (ADSs) at $15 each.
Qunar notched a very strong debut, with its shares more than doubling on their first trading day before ending at $28.40, up nearly 90 percent. But the story has been more subdued since then. The company’s shares have mostly traded in the $25-28 range, and last closed at $27.70. Some might say the fact that Qunar has been able to retain most of its first-day gains is a good sign.
But I would argue the company’s shares are still feasting on the premium of their association with Baidu, and that they will come down gradually after the company posts another big loss in its next reporting quarter. For the record, Qunar reported an $8 million net loss in the third quarter of this year, up sharply from its $1.4 million loss a year earlier, as it spent heavily on marketing and product development.
Next we should look at Youku Tudou, the only other US-listed online video site, which has steadily lost money in its brief life as a listed company. Youku Tudou’s net loss nearly doubled to 219 million yuan in the third quarter, though it wowed investors with its forecast that it would finally become profitable on a non-GAPP basis in the fourth quarter. (previous post) The company’s shares have performed relatively well this year, nearly doubling from the $16 level at the beginning of the year to their current level of around $29.
So now that we’ve taken a look at both Qunar and Youku Tudou, let’s try and apply some of what we’ve seen to iQiyi. The Qunar experience shows that Baidu’s name is a valuable asset for any of its units that go public, even if those units are losing money. But association with such a name only has limited value, and after a while investors will want to see positive results. The Youku Tudou case shows that video companies can be profitable, but that such profits don’t come easily. All that said, I suspect that Baidu, encouraged by the Qunar success, will push iQiyi to IPO in the first half of 2014, and that the offering could debut strongly but struggle to maintain positive momentum.
Bottom line: iQiyi is likely to IPO in the first half of 2014, and could debut strongly but quickly lose momentum due to its loss-making status.
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