500.com, Sungy Surge On Small Offerings

500.com surges on trading debut

Media are hailing the big first-day gains of 500.com (NYSE: WBAI) and Sungy Mobile (Nasdaq: GOMO) in their New York trading debuts, saying the strong performance reflects a return of investor confidence to Chinese Internet stocks after a 2 year pause. I agree with that assessment somewhat, but would also offer the contrarian viewpoint that this pair of offerings was quite small, and thus the gains for both companies could have been easily influenced by the big banks underwriting the deals.

The hype from a strong trading debut is beneficial to not only the newly listed companies, but also for the banks as it helps them to find new business from other Chinese IPO candidates. The real test of investor sentiment probably won’t come for another few months, as we wait to see where these companies’ American Depositary Shares (ADSs) will be trading after the initial hype of their new listings fades.

Before I continue with my thoughts on the bigger picture, let’s take a closer look at these 2 offerings that have become the latest in a year-end surge of IPOs for Chinese tech firms in New York. We’ll begin with 500.com, an online seller of lottery tickets. The company got a shaky start when it had to halve the size of its IPO due to weak demand. But then sentiment seemed to pick up, and it raised its price range from an original $9-$11 per ADS to $11-$13, and ended up setting its final price at $13.

In the end, 500.com sold 5.8 million shares to raise $75 million, or half the $150 million it had originally targeted. (English article) Its shares surged as much as 70 percent on their debut trading day, and ultimately closed up 54 percent at $20.01. Volume was strong at 6.9 million ADSs, meaning that most people who bought IPO shares probably sold them on the first day — not an uncommon occurrence but also hardly a vote of confidence in the firm.

Meantime, Sungy Mobile sold 7 million ADSs at $11.22 each, near the upper end of their range of $9.50 to $11.50, to raise $79 million, also near the company’s original target. Shares of the mobile apps developer surged as much as 44 percent on their first trading day on heavy volume of 9 million ADSs, and ultimately settled down to end up 19 percent at $13.35. Like 500.com, Sungy’s volume on its first trading day was bigger than the number of shares it sold, meaning most investors who purchased IPO shares probably sold them on the first trading day.

Both companies benefited from having major investment banks underwrite their offerings, with Deutsche Bank leading the 500.com offering and Credit Suisse and JPMorgan teaming up on the Sungy Mobile deal. Some analysts pointed out that having such big banks on the deals was a positive signal for investors, since the big banks are all being extra careful to avoid controversy after a string of accounting scandals that triggered the initial confidence crisis 2 years ago.

I would agree with that assessment, and have written that before. But at the same time, these 2 offerings combined have raised a relatively modest $150 million — hardly a big sum compared with many of the big-name Chinese Internet IPOs in the days before the confidence crisis. When the numbers are that small, it becomes much easier for investment banks to influence the IPO performance, especially for big names like JPMorgan, Deutsche Bank and Credit Suisse, whose clients own billions of dollars in assets and would consider $150 million pocket change.

I’m not accusing the banks of any wrongdoing, since they are only trying to do their job by bringing together their IPO customers with their investor clients. But I’m not fully convinced that newly listed shares of 500.com and Sungy Mobile will continue to post strong gains, and would be more inclined to bet they will slowly move downward in the next few weeks to approach their IPO levels.

Bottom line: Shares of 500.com and Sungy Mobile are likely to stagnate in the next few weeks following their strong debuts, and could even settle back to their IPO levels.

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