The power of Chinese social networks is unquestionable — the social connections, or guanxi, which shape the country’s complex social order are followed by hundreds of millions of people without question.
Likewise, Renren.com, a Chinese social-networking website, won adulation from investors in its $743 million US IPO on Wednesday, despite an accounting scandal and a high-profile resignation from its audit committee.
Indeed, neither the controversy nor the fact that Renren has yet to become profitable were a concern for investors. The stock soared 28.6% in its trading debut on the New York Stock Exchange, even after the company lifted the offering price 27% higher than the upper end of an indicated range amid excessive demand.
Renren sold 53.1 million American Depositary Shares (ADSs) at $14 each, compared with the initial indicated price range of $9 to $11. The stock ended at $18.01 on the first day of trading, after soaring more than 56% to $21.9.
Even so, the vagueness in Renren’s IPO prospectus is hard to ignore. The company said its “monthly unique log-in users increased from approximately 17 million in December 2008 to approximately 24 million in December 2010”, up by 41%. But that growth swelled to 53% 12 days later, when it said the number of monthly unique users was closer to 26 million in a revised IPO prospectus filed to the SEC on April 27.
To complicate matters, Derek Palaschuk, the head of Renren’s audit committee, stepped down just one day before the IPO was scheduled to price, to prevent “unwarranted attention”. He was also an independent director on the company board.
Working on Renren’s books cannot have been much fun — it had net losses of $68.3 million in 2009 and $61.2 million in 2010, brought about by its growing overhead costs.
BoA Merrill Lynch, Credit Suisse, Deutsche Bank, Jefferies and Morgan Stanley are joint bookrunners of the IPO.
Renren is not the only Chinese internet company that has beaten the odds to complete a successful listing in the US. NetQin Mobile, a leading mobile internet security firm, raised $89 million in March, at the high end of the indicated price range — even though China’s most authoritative TV channel, CCTV, broadcast a special report accusing NetQin of industry malpractice and fraudulence just one day after the company filed its IPO application to the US SEC.
The company, which is a domestic rival of Qihoo 360, was accused in the programme of forcing its users to install anti-virus software that came with a hidden Rmb2 ($0.3) charge.
At least two other Chinese internet companies are making the most of the demand and preparing to go to the US primary market. Phoenix New Media, an internet, TV and mobile-news provider, is looking to raise $178.7 million, while Jiayuan.com International, an online-dating agency, is seeking to raise $85.2 million.
China’s army of almost half a billion internet users certainly makes for a promising investment opportunity. Indeed, there could be as many as 750 million Chinese online by 2015, according to McKinsey & Company, a consulting firm. But the quality of the opportunity will only be as good as the due diligence practices at China’s internet firms.
