Article / 15 November 2012 at 5:26 GMT

China Finance: Will YY Inc's IPO on NASDAQ be a Pop or Drop?

Fredrik Oqvist Fredrik Oqvist
Founder / ChinaRAI
China

Executive summary

  • YY Inc's IPO on NASDAQ looks likely to go through, making it only the second Chinese company to IPO on one of the big US exchanges this year
  • Both tech and Chinese IPOs have had trouble this year it's hard to know if the IPO can buck two bad trends
  • Relatively modest valuation and a large and growing revenue base in China means the company should do well, but recent IPOs suggests we're unlikely to see major pop in this market

 

After a very long wait, we’re finally seeing a new Chinese company IPO in the US. YY Inc, a social media company, has filed and recently priced its IPO on the NASDAQ exchange. Early signs seem positive and investor interest is reportedly quite high, so it seems probable the deal will go through. But is it a good opportunity?

The team of experts involved in the deal have good experience with Chinese companies, and the big underwriters combined with a PWC audit should mean we can trust the numbers we’re seeing.

The team of professionals assembled by YY

Source: IPO filings

The deal has been priced in the range of $10.50 - $12.50, which means the company will look to raise just under $100 million. The deal values the company at $600 million, a valuation that might come as something of a disappointment for the early stage investors, but current market sentiment likely means a higher valuation will be hard to attain on the IPO date.

YY's previous rounds of financing

Source: IPO filings (note: per share prices are for each rounds preferred shares)

One of the more important factors to consider in the IPO of any Chinese Internet company is the makeup of the VIE. YY discloses what appears to be a fairly standard VIE structure. While the company holds more assets than many other Internet companies in its VIE, the percentage isn’t alarming.

VIE stats for YY

What is worrying, however, is the lack of disclosure regarding the revenue and profits of the VIE. These numbers are crucial for getting a good overview of how the VIE is used, and factors like transfer pricing risk become all but impossible to gauge. I hope we get a restatement before the actual IPO with more detailed info on the VIE arrangements.

As these stumbling blocks have largely been cleared, we can move on to some of the fundamentals of the business itself. The company operates a number of different services online, including games, video calling, music etc. Of these the real moneymaker so far has been games, with the other areas offering more in terms of diversification. That said, the YY voice client is estimated to have racked up 400 million users and a market share of around 84% in the, admittedly narrow, field of "online group voice communications".

Games are likely to stay on as the driving force of the company (currently accounting for 46.4% of revenue), and it looks to be doing a good job. The company has grown its revenue by 167.6% in the first three quarters this year, as compared to the same time period last year (to $88 million). They have also turned a small loss into a small profit, which is encouraging, as it shows a focus on actually making money.

Overall this IPO shows some promise. The company itself is solid and has a good reputation in China. The real question is if it can actually buck not one, but two trends of failing IPOs, those associated with tech and China. I’m quietly optimistic the company will do well, and there appears to be good investor interest on the roadshow. However, given the recent history of these IPOs a large pop on day one is probably a bit too much to hope for. I would expect some modest increases on the IPO date, given the valuation, and expect some decent support early on from some of the big players involved.

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Fredrik Oqvist writes regularly about Chinese equities, mainly those listed on foreign exchanges. If you'd like to comment on this story or be notified by email whenever a new China Finance story is published, become a member - it's free, and you can use your Twitter, Facebook, Google or LinkedIn login - and "follow" the China Finance blog during the signup process. You can also bookmark the China Finance blog page.

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