Tarena Sputters As Year’s First China IPO In NY

Tarena in lackluster NY debut

Educational services provider Tarena (Nasdaq: TEDU) has become the first Chinese company to list in New York this year, posting a disappointing debut hinting that US investor enthusiasm towards China stocks may be starting to cool. But truth be told, Tarena hardly looks like the vast majority of Chinese companies rushing to list in New York, most of which are in the Internet space. By comparison, Tarena is a relatively niche provider of education services for software engineers that is growing quickly enough but is still quite small.

Word that Tarena was planning an IPO first emerged late last year, just when the IPO market was rapidly picking up steam after a 2 year deep freeze. (previous post) The booming sentiment saw names like online classified web site 58.com (NYSE: WUBA), online car information site Autohome (NYSE: ATHM) and online travel agent Qunar (Nasdaq: QUNR) all notch meteoric gains after relatively modest IPOs that raised between $80 million and $150 million.

By comparison, many of the newest companies to apply for listings have set their sights much higher, with Sina’s (Nasdaq: SINA) Weibo microblogging unit aiming to raise $500 million and e-commerce firm JD.com targeting $1.5 billion. Tarena clearly realized it wasn’t quite in the same league as those companies, and raised a more modest $138 million after pricing its American Depositary Shares (ADSs) at $9 each, right in the middle of their range. (English article; Chinese article)

Investors looking to make some quick money on the recent China hype initially embraced Tarena’s shares, which rose as much as 20 percent after trading began. But early buyers quickly dumped their stock, which ultimately closed up just marginally at $9.06. A year ago that kind of performance would have been positive, since any gains at that time were a relief as many US-listed Chinese stocks were struggling.

But in the current climate of overheated enthusiasm, this performance by Tarena as the first Chinese stock to list in the US this year certainly looks unimpressive. The company itself looks solid enough financially. Its revenue grew 63 percent last year to $93 million, while profits grew at a slower 47 percent to $14 million. Perhaps investors have become used to triple-digit growth, meaning Tarena’s numbers aren’t so impressive anymore. The company’s relatively small size and niche position in a non-tech sector also inevitably worked against it.

From a broader perspective, market watchers are inevitably trying to guess what this lackluster performance means for the Chinese IPO market in the months ahead. At the moment at least 8 Chinese companies are in various stages of the IPO process in New York, with the latest news coming just yesterday that security software maker Cheetah Mobile was planning a $300 million offering. (previous post) Sina Weibo and JD.com are the 2 biggest companies to make public filings so far, and e-commerce leader Alibaba is also expected to make a multibillion-dollar IPO later this year in New York.

I’ve previously forecast the market will remain strong for Chinese IPOs through the first half of the year, but that sentiment is likely to weaken considerably in the second half as investors tire of hype surrounding the China Internet story. I do think Tarena’s disappointing performance is mostly an aberration, and the company probably accelerated its IPO plan to try and steal some of the hype surrounding the Internet listings.

I would look for the company’s shares to post some modest gains in the next few months, but nothing like the gains we’ve seen for some of the web firms that listed late last year. In the meantime, other tech listings should continue to post strong debuts for at least the next 4 to 6 weeks, after which we could start to see enthusiasm start to fade.

Bottom line: Tarena’s lackluster debut is an aberration for Chinese IPOs in New York, and new offerings should continue to debut strongly for the next 4-6 weeks.

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