China’s return to work following the weeklong National Day holiday has seen a sudden acceleration in the IPO plans by leading online classified advertising site 58.com, which has just made its first public filing for a New York listing. Interestingly but certainly not surprisingly, the company has suddenly turned profitable just in time for the listing. At least some Chinese media are questioning the sudden move into the profit column, and indeed such swings are often the result of creative accounting done to boost investor demand. Still, the offering looks like a potentially interesting one, following the successful debut of online game developer Forgame (HKEx: 484) in Hong Kong last week.
Media had reported during the holiday that 58.com was planning to file its IPO prospectus with US securities regulators at the end of September. (previous post) Presumably that happened, and now the company has just made its first public filing, saying it wants to raise up to $150 million through an offering of American Depositary Shares (ADSs) on the New York Stock Exchange. (English article; Chinese article) The amount is a bit higher than the $100 million previously reported, indicating investor feedback towards the offering has been initially positive.
In the filing, 58.com, sometimes likened to US online classified site Craigslist, reveals it posted its first-ever profit of about $5 million in the second quarter of this year. It reached that point as revenue has surged, doubling to $87 million last year from $42 million in 2011. The company’s investors include a number of major venture capital firms, such as SAIF Partners and DCM. The offering’s underwriter lineup also looks impressive for such a small listing, including Morgan Stanley, Credit Suisse and Citigroup, reflecting how starved these investment banks are for new Chinese IPO business amid a 2-year drought.
The influential China Business News points out that 58.com’s losses were shrinking gradually from quarter to quarter, but also that the move to the profit column came suddenly due to a surge in membership fees and drop in advertising costs. This kind of sudden move to profitability isn’t all that uncommon, as profitability has become a mandatory requirement these days for any Chinese company making an off-shore IPO. I do suspect 58.com used some temporary measures to accelerate its move into the profit column, and it could even slip back into the loss column for a quarter or two after the actual offering.
So what’s ahead for this offering, which could be the first of 5-6 relatively large New York IPOs by Chinese firms before year end? We can look for clues in the Hong Kong trading debut last week of leading online game developer Forgame. Forgame’s shares initially surged in their first 2 trading days, rising as much as 40 percent. They took a slight break at the beginning of this week, but were still 34 percent of their IPO price of HK$51 at Tuesday’s close.
That strong performance shows that foreign investors are once again positive on Chinese tech firms with strong growth potential, though it’s also worth noting that Forgame has been profitable for at least 3 years as required by Hong Kong listing rules. The only major New York listing by a Chinese company this year, for e-commerce company LightInTheBox (NYSE: LITB), has also done relatively well, with its shares still up 20 percent from their June IPO despite a recent pullback.
All that said, the signs look relatively positive for 58.com, which should benefit from its status as China’s first online classified advertising company to list. Accordingly, I would expect to see the offering price in the middle to higher end of its range, and for shares to perform relatively well in their debut, perhaps gaining as much as 10-20 percent in their first week of trade.
Bottom line: 58.com shares will price in the middle to upper end of their range, and should post modest gains on their New York debut.