Qihoo 360 more than doubles in US debut

Equity markets may remain volatile, but the interest in Qihoo 360 Technology’s initial public offering shows that investors are not shy about committing money to market newcomers when they sense a growth opportunity ahead. The Chinese company, which provides internet and mobile security products as well as China’s second most popular web browser after Microsoft’s Internet Explorer, raised $175.6 million yesterday morning after pricing its US IPO 16% above the top of the range at $14.50.

And when the stock started trading on the New York Stock Exchange last night, it more than doubled. At the strike of the closing bell, Qihoo had risen 134% above its IPO price to $34, bringing back memories of two other Chinese internet-focused companies, Dang Dang and Youku, referred to as a Chinese version of Amazon and Youtube respectively, which jumped 87% and 161% in their December debuts last year.

Demand was strong throughout the two-week marketing period and, according to sources, the deal attracted close to 500 orders and was 40 times covered. This meant that almost a third of the investors received no allocation at all, and only 10 or so accounts received more than $2 million worth of shares. Hence it wasn’t too surprising that investors kept chasing the stock in the secondary market.

The strong demand also allowed the bookrunners to fix the price well above this initial filing range of $10.50 to $12.50. US IPOs have the possibility of pricing up to 20% above the indicated range without a new filing, which in the case of Qihoo, meant a top price of $15. However, ahead of the final day of marketing, the bookrunners told investors that the final price would be between $13.50 and $14.50, suggesting the company was prepared to give up a few cents at the top to help ensure a good trading debut. However, as noted, it did price at the top of that guidance at $14.50 after most investors reconfirmed their orders at strike.

US investors are clearly positive on Chinese internet stocks and the sector has continued to perform well in recent weeks while the broader market has been suffering due to concerns about the fallout from the earthquake in Japan and the continuing violence in Libya and the Middle East. One source also noted that Qihoo has grown very rapidly since it was founded in 2005, and is now the third largest internet company in China with 339 million monthly active users. And while this is only some 20 million users less than those that log in to Tencent’s popular site, the IPO price put Qihoo’s market capitalisation at only $1.7 billion, compared with about $50 billion for Hong Kong-listed Tencent.

“This is a penny option on a company that could achieve a market cap of $50 billion to $75 billion over time,” said one banker. And while he agreed that there will be execution challenges, he argued that even if the company messes up spectacularly, it should have no problem reaching a market value of $5 billion.

Indeed, the first day performance suggests he may be right about that. The stock didn’t come cheap, however. The final IPO price valued Qihoo at 35.2 times its estimated earnings for 2012, which compares with 21.5 times for Tencent and a median 25.2 times for Chinese internet stocks as a group. Qihoo’s IPO valuation was in line with Baidu, a provider of a Chinese search engine, whose share price has multiplied 49 times since its listing in 2005. Tuesday’s closing price of $136 valued Baidu at a 2010 price-to-earnings multiple of 36.1 times, according to Bloomberg data.

Following yesterday’s rally, Qihoo is now valued at 82.5 times its 2012 earnings estimate and its market cap has increased to almost $4 billion.

The company offered 12.11 million American depositary shares (ADS), accounting for 10.4% of the outstanding share capital. Each ADS is equal to 1.5 class-A ordinary shares in the company. Qihoo also has class-B shares, which each having five voting rights compared with the one voting right carried by the class-A shares. The deal also comes with a 15% overallotment option, which is likely to be exercised given the strong debut.

The order book contained all the top-level investors, including a few sovereign wealth funds. While the bulk of the demand came from the US – as is usually the case for US listings – demand from Asia was also strong and one source estimated as much as 30% of the order amount came from “pure” Asian accounts.

Aside from the perceived growth prospects, the interest would also have been underpinned by the fact that four of Qihoo’s private equity investors – Sequoia Capital, Highland Capital, Trustbridge Partners and CDH Investments -- had agreed to buy a combined $50 million worth of shares in a private placement alongside the IPO. The four of them will pay the same price as the IPO investors and have agreed to a 180-day lockup after the listing.

This means that Qihoo will raise a combined $225.6 million from the listing exercise, or $251.9 million including the overallotment option.

The company will use the proceeds to develop new internet and mobile security products and services; to enhance its R&D capabilities; for investments in and acquisitions of new technologies, products or businesses; and for other general corporate purposes.

The IPO, which was led by Citi and UBS, is by far the largest listing by a Chinese company in the US this year. According to Dealogic, five Chinese companies have come to market year-to-date and the largest of them was the $70 million IPO by BCD Semiconductor Manufacturing in January. Global Market Group, an online trading platform that matches Chinese suppliers with international wholesale buyers was in the market earlier this month with an IPO of up to $143 million, but the deal was called off before pricing amid the volatile market.