YY, the provider of a communication social platform that engages users in real-time online group activities through voice, text and video, kicked off the roadshow yesterday for a US initial public offering. It is aiming to raise between $81.9 million and $97.5 million.
If successful, YY will be the first Chinese company to list in the US since Vipshop Holdings’ $72 million IPO in March, according to Dealogic. The online discount retailer listed on the New York Stock Exchange and is the only Chinese issuer to complete an IPO in the US so far this year. It currently trades about 69% above its IPO price of $6.50, after dropping more than 15% in its trading debut and falling to as low as $4.26 in the first eight days.
YY is expected to price its IPO after the close of US trading on November 20 and is scheduled to start trading on Nasdaq the following day, sources said.
As Chinese companies seeking to list overseas have come under strict scrutiny after last year’s accounting scandals, the question everyone is asking is which Chinese company will be able to break through the negative sentiment and have a successful listing in the US.
In April, China Auto Rental ended up cancelling its Nasdaq IPO before pricing after failing to attract sufficient demand from investors. The company was seeking to raise up to $137.5 million. And many more issuers have chosen to delay their planned offerings because of the challenging market environment.
YY chose to list in the US because of the liquidity and the availability of capital in the market there, the sources said. There is a better investor base for internet companies in the US, one source noted.
Although, the fact that it doesn’t meet the profit requirements in Hong Kong and Shanghai probably also played a part.
Guangzhou-based YY, which has 400 million registered users and nearly 70 million monthly active users, is offering 7.8 million American depository shares (ADS) at a price between $10.50 and $12.50 each, according to its listing prospectus.
The offering size represents 13.5% of the company. There is a 15% greenshoe option of an additional 1.17 million ADSs, which could increase the total deal size to as much as $112.1 million. One ADS represents 20 class-A common shares, which each come with one vote. YY also has class B common shares that entitle the holders to 10 votes per share. The B-shares are all held by the senior management and other existing shareholders and will account for 98.3% of the total voting power after the IPO.
The price range values the company at a 2013 price-to-earnings ratio of between 12.6 times and 15 times, according to one source.
For comparison, investors are likely to look at other high-growth Chinese internet companies such as Tencent, Sohu.com and Baidu. Hong Kong-listed Tencent is currently trading at a 2013 P/E of around 23.8 times, while Sohu.com is quoted at around 12.3 times, and Baidu at around 17.2 times, according to Bloomberg data.
YY said it plans to use the IPO proceeds to invest in its voice and video technology and infrastructure, to expand its product development and services offerings and to expand its sales and marketing activities.
The company’s communication social platform allows users to create and organise groups of varying sizes to discover and participate in a wide range of online activities, including online games, karaoke, music concerts, education, live shows and conference calls.
The attraction of the company to investors is that it is one of the only platforms that deliver high-quality voice and video, one of the sources said. While it is primarily used for karaoke, gaming and so on, there are many different directions that the company can leverage into such as education and business, the person added.
In 2011, YY had an 84.2% market share in the real-time online group voice communications market in China in terms of user time spent, according to an iResearch Report quoted in the prospectus. While the basic use of its platform is currently free, YY said it monetises its user base through internet value-added services, such as sales of virtual items and game tokens, and through online advertising.
The company, which began operations in 2005, booked total net revenues of Rmb319.7 million ($50.8 million) in 2011, up from Rmb32.7 million in 2009.
But it posted a net loss of Rmb83.2 million in 2011, following net losses of Rmb47.1 million in 2009 and Rmb238.9 million in 2010. During the six months to June this year, it reported a net profit of Rmb20.8 million.
Among the risk factors, the company highlighted its earlier losses and said investors should consider its prospects in light of the risks and uncertainties that early-stage companies in evolving industries in China may be exposed to, including possible volatility in the share price.
The Nasdaq Composite Index dropped 2.5% on Wednesday as investors turned their attention to the US budget situation and Europe after the re-election of the US president. But the index is up nearly 13% so far this year.
Citi, Deutsche Bank and Morgan Stanley are joint bookrunners for the deal.
