JD.com IPO Bumps Up, Chunkong Gets Yanked

By newsdoug on May 23, 2014

E-commerce giant JD.com (Nasdaq: JD) has formally ended its IPO process with a solid trading debut, capping a surprisingly strong performance despite signs that investors were rapidly losing interest in Chinese Internet stocks. But in a much lower profile move, smaller IPO candidate Chunkong Technology has quietly delayed its own New York offering plan, becoming the first formal casualty of fading sentiment. Chukong’s decision looks particularly significant because the company operates in the mobile gaming space, which is supposed to be one of the fastest-growth areas in China’s tech world.

These 2 separate developments reinforce a message I’ve been repeating these last couple of weeks, namely that investors are getting more selective about which Chinese tech IPOs they buy into. The biggest institutional investors are increasingly focused on the blockbuster deals like JD’s, meaning smaller companies like Chukong will have to struggle for attention and may ultimately not get the valuations they want. That trend is likely to grow as e-commerce leader Alibaba gears up for what’s likely to become the world’s biggest tech IPO in years.

In many ways, JD’s surprisingly strong performance was probably due at least partly to growing excitement about the Alibaba deal, which some believe could raise as much as $15 billion. JD is a distant second to Alibaba in China’s overall e-commerce market, but is still a very significant player in the important B2C space that sees online merchants sell their products to consumers.

Despite weak pricing for several new offers over the last few weeks, JD ultimately priced its American Depositary Shares (ADSs) even higher than its originally planned range, raising $1.8 billion and valuing the company at about $25 billion. The shares ultimately priced at $19, and continued to show signs of strength by climbing 10 percent to finish their first trading day at $20.90. (English article; Chinese article)

There’s not much more to say about the offering, since so much has been written about JD already. I would expect the shares to track modestly upward as excitement builds towards Alibaba’s IPO. After that, the burden will fall on JD to show that it can become profitable on a sustained basis, in part by boosting sales through its recently formed equity tie-up with Internet giant Tencent (HKEx: 700). (previous post)

While the Alibaba IPO could mark the official end of the current window for new Internet offerings, signs that winter is approaching were already in the air with word that Chunkong has shelved its previous listing plans. (English article) According to the reports, which cite an internal company e-mail, Chukong decided to scrap the listing after getting a relatively low valuation of $540 million.

The reports say too many investors saw Chunkong as a pure game developer, which is a very boom-bust business that depends on development of popular new titles. To change that, the company plans to spend the next few quarters separating its game developing business from its platform operation unit, which is more stable since it depends on a wider range of games from other developers. Chunkong had originally made its first public IPO filing in April, aiming to raise up to $150 million.

In the bigger picture, Chukong definitely qualifies as an IPO that would have generated far more excitement late last year or back in March or early April when investors were gobbling up every new Chinese tech offering they could find. But in the current climate, Chunkong and other less-known mid-tier players could suddenly find themselves as orphans without a home, and have to delay their listing plans. Accordingly, I would only expect one or two more major new listings before Alibaba’s, which will mark the formal end of the current flurry of new IPOs.

Bottom line: JD.com’s shares are likely to track upward in the run-up to Alibaba’s mega IPO, which will mark the end of the current window of new listings by Chinese tech firms in New York.