Despite a dismal climate for US-listed Chinese stocks, online entertainment specialist Shanda appears to be moving ahead with a long-delayed IPO for its Cloudary online literature unit by attempting to wow investors with something they haven’t seen in a while: a profit. If Cloudary does indeed make it to market, it would become only the second Chinese firm to make a public listing in New York this year, as US investors have largely shunned Chinese stocks following a series of accounting scandals last year. The only company to make an offering so far this year has been a money-losing online discount retailer named Vipshop (NYSE: VIPS), whose March IPO was a resounding flop. (previous post) Another money-losing firm, auto rental specialist China Auto was all set to make a New York IPO to raise around $100 million last month, when it abruptly halted the deal due to anemic demand just before its shares were set to price. (previous post) Shanda had indicated earlier this year it was planning to refile for the Cloudary IPO, which it had to abort last summer after sentiment turned sharply negative due to all the accounting scandals and a constant stream of short seller attacks. Now it has submitted a new filing to the US securities regulator, surprising everyone by announcing that Cloudary posted its first-ever profit of about $3 million in the first quarter of 2012. (Chinese article) If that’s true, the company would indeed have a rare asset in its profitable bottom line, contrasting sharply with most of the Chinese companies that have gone public over the last year and a half, starting in late 2010 when such firms were an investor favorite. Names like online video site Youku (NYSE: YOKU) and social networking site Renren (NYSE: RENN) all have yet to report a profit despite making public offerings during that period, and online retailer Dangdang (NYSE: DANG), one of the few profitable companies at the time of its offering, has fallen deeply into the loss column since then due to stiff competition. So against that backdrop, Shanda’s Cloudary offering actually could look quite attractive and may potentially even draw some moderate investor interest if it moves ahead. When news of this offering first surfaced last year, I said it actually looked relatively attractive, as online literature was a growing area, driven by a boom in demand from users of e-readers, smartphones and tablet PCs looking for material to read on these mobile devices. Furthermore, Shanda appears to be a relative leader in the area, and could earn a premium for being the first to make an IPO in this category. Of course the big risk could be that Shanda, aware that investors aren’t interested in money-losing companies, has used accounting tricks to make Cloudary profitable for this latest reporting quarter, and that the company could slip back into the loss column in the current quarter. I suspect the truth is somewhere in between, that Cloudary is probably still losing money but is perhaps is quite close to becoming profitable on a sustained basis perhaps by the end of this year. All that said, look for investors to show some moderate interest in this offering when it moves forward, providing a welcome relief for the beleaguered IPO market.
Bottom line: Shanda Cloudary’s latest regulatory filing including a first-quarter profit shows it is moving ahead with its New York IPO plan, which could attract moderate interest from investors.
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