A new wave of offshore Chinese Internet IPOs that I’ve been expecting for a while now never seems to materialize, with only 2 major new offerings in the last year. I’ve mostly given up trying to predict when that wave will come, though we’re seeing some signs of a possible year-end flurry of activity with word of 2 new listing plans. According to the latest media reports, classified ads website 58.com and lottery website 500.com are both aiming to make New York IPOs by the end of this year, aiming to raise a combined total of up to $250 million.
Not surprisingly, neither of these companies was on my radar screen for potential IPOs, and both are engaged in relatively niche businesses. That’s a key factor in the current climate, because these kinds of niche companies are some of the only ones that are profitable — a major requirement from US investors who have become wary of Chinese firms after a series of accounting scandals a couple of years ago.
The only major New York IPOs from the last 12 months have come from 2 such niche companies: YY (Nasdaq: YY), a provider of commercially-oriented social network services; and LightInTheBox (NYSE: LITB), an e-commerce company that focuses on consumers outside China. Shares of YY, which just reported a 5-fold jump in its latest quarterly profit, have nearly quadrupled since their IPO late last year. LightInTheBox shares are also up a strong 70 percent from the price of their June IPO. The success of these 2 offerings shows there’s clearly s investor demand for profitable Internet companies in special niches away from overheated spaces like general e-commerce and video sharing.
Against that backdrop, let’s start with a look at 58.com, an online classified ad site somewhat similar to the popular Craigslist in the US. According to the latest media reports, 58.com is aiming to make an IPO in New York before the end of this year with a target of raising up to $100 million. (Chinese article) The reports say the company already has relationships with investment banks Credit Suisse and Morgan Stanley, though it could also choose other underwriters for the offering.
There’s not any other detail in the reports, though I would expect that 58.com is a profitable company. Frankly speaking, I’m a bit surprised that no other major players have discovered this area of the Internet yet, as classified advertising is a fairly straightforward business. The only Chinese listed companies in online classifieds so far all focus on specific areas, such as jobs and real estate.
The other IPO candidate, 500.com, is in the process of selecting investment banks for its planned New York listing to raise up to $150 million, according to other media reports. Again, there’s not much more detail in the reports except to say that 500.com now has more than 15 million users. The site looks quite interesting, and appears to let users find all kinds of information about and even place bets on the latest lotteries and other events such as sporting matches.
The fact that we’re suddenly getting news of 2 relatively large new offerings means that perhaps we could finally see a flurry of new activity for Chinese IPOs in New York at the end of the year. The fourth quarter of each year does typically often see a pick-up in IPO activity, as many companies try to list before the quieter period between the Christmas holidays in the West and Chinese New Year.
Of course we’ll have to wait and see some actual financials from both of these companies before we can better assess how their IPOs will be received. But word of these latest plans does seem like a cautiously positive signal, and I would expect to see both move forward and make moderately successful offerings by the end of the year.
Bottom line: 58.com and 500.com are likely to list in New York by year end, signaling a pick-up in IPO activity by Chinese Internet firms in the fourth quarter.