Youku.com, China’s largest online video company, is planning to raise fresh capital through a follow-on sale of American depositary receipts (ADRs) it said in a filing with the Securities and Exchange Commission after the US market closed on Thursday. The announcement came less than six months after the company went public in New York.
According to the filing, the sale could be as large as $600 million, although Youku later clarified that part of the offering will be made up of secondary shares sold by its pre-IPO investors, which means not all the proceeds will go to the company. Even so, at $600 million this would be the second-largest offering by a US-listed Chinese company this year, after Renren.com’s $743 million initial public offering last week.
The filing was made after the company announced a narrowing net loss for the first quarter of this year, mainly due to a strong performance by its brand advertising business. The net loss was smaller than that projected by analysts, while revenues grew at a faster-than-expected pace. It also comes as the company’s share price has more than quadrupled since its listing on December 8, which would make another capital-raising very tempting. It is also not difficult to see why the existing shareholders would be keen to monetise part or all of their holdings.
Youku, which is known as the Chinese YouTube, soared 161% in its trading debut on the New York Stock Exchange (NYSE) after it raised $202.9 million in a highly popular IPO last December. The deal was priced above the $9 to $11 range, at $12.80, and quickly increased in size to $233 million as the greenshoe was exercised on the first day of trading. Last Friday it closed at $58.84 — 360% above the IPO price and just 12.5% below the all-time high of $67.27 that it reached in mid-April.
Having risen this much already — the market capitalisation has expanded to $6.2 billion from $1.3 billion at the time of the IPO — one might expect that investors would approach the follow-on with a bit more caution, or at least ask for a decent discount. The filing contained no information about the number of shares to be sold or when the deal is expected to hit the market. However, the company and its pre-IPO shareholders are locked up for six months following the IPO, which means they shouldn’t really be able to sell any shares until June 8. The deal is subject to SEC approval. It will be arranged by Goldman Sachs, which was also the sole bookrunner for the IPO.
The company said it intends to use the net proceeds from this offering to invest in technology, infrastructure and product development efforts; to acquire additional video content; to expand its sales and marketing efforts; and for other general corporate purposes, including working capital needs and potential strategic acquisitions or investments.
Youku’s net loss fell 8% per cent to Rmb46.9 million ($7.2 million) in the first quarter from the same period a year earlier. According to analysts polled by Thomson Reuters, the loss was expected to be about $8.7 million. Revenue improved by 163% to Rmb128 million ($19.5 million), compared with an average forecast of $16.8 million. In a bid to improve earnings, Youku has raised its advertising budget this year, but analysts say the company will need at least two more years to become profitable.
Together with E-Commerce China Dangdang, the country’s largest online book retailer, which listed on the same day, Youku was one of the players that kicked off a wave of investor interest in the Chinese internet sector. There have been several such companies listed in the US since then and, even though many of them are still loss-making, investors are banking on the potential as more and more Chinese people start to use the internet. As of the end of 2010, the number of Chinese internet users was estimated at 457 million, which is more than the entire US population, but still only a third of the Chinese market.
Aside from US buyers, Asian investors have also taken notice and, according to bankers, a growing portion of the IPOs are placed in Asia. Investors have been piling into these deals in the hope of finding the next big winner and many of the stocks have gained significantly in the secondary market, despite the fact that the IPO valuations are already quite rich. A key reason for this, observers say, is that most of these companies are small and, as a result, there simply isn’t enough stock to meet the demand.
DangDang, commonly referred to as China’s Amazon.com, climbed 87% on its first day after raising $272 million. It lifted its initial price range once and then priced $1 above the new range at $16. Less than a week after Youku and Dangdang, IT services provider iSoftStone Holdings gained 27.8% on its opening day on the NYSE after raising $140.8 million; in March, Qihoo 360, a Chinese provider of internet and mobile security products, rose 134% on day one after pricing its IPO 16% above the top of the range to raise $175.6 million; and in late April 21Vianet gained 25% when it started trading on Nasdaq. The provider of Chinese internet data services raised $195 million from an IPO that was expanded by 40% after the number of shares and the price range were both increased from the initial offer.
The real test of the demand for the sector came last week when Renren.com upped the ante with an IPO that was significantly larger than these other deals. However, the Chinese social-networking website, which is a close copy of Facebook, had no trouble filling its order books — even though the company got caught out having published wrong information about its number of users in the prospectus and the head of its audit committee resigned the day before pricing.
And, like many of its internet peers, Renren has yet to make a profit, but it still priced its IPO 27% above the initial price range and then gained 28.6% in the trading debut last Thursday.
Also in the market at the moment are Phoenix New Media, an internet, TV and mobile-news provider, which is looking to raise up to $178.7 million; and Jiayuan.com International, an online-dating agency, which is aiming to raise up to $85.2 million. Kaixin001, another social-network website and a direct domestic competitor to Renren, is also reported to be preparing a share sale in the US.
