Chinese social media platform Weibo has raised $285.6 million after pricing its Nasdaq flotation at the bottom end of its $17-$19 indicative price range.
The initial public offering of 16.8 million American Depositary Shares was priced at $17 per unit just after New York’s close on Wednesday by joint leads Credit Suisse and Goldman Sachs. Initially there were 20 million ADS units on offer, but recent market volatility led to a reduction in the offer size.
One ADS unit equals one ordinary share, with an additional 15% overallotment option.
The institutional book for China's version of Twitter is said to have been very concentrated. The top 10 investors – mainly long-only institutional investors focused on technology – accounted for 70% of the book. Although firm numbers weren't available, there were reportedly around 50 investors in the deal.
Most of the interest came from the US, with rocky markets and a general nervousness of internet stocks weighing down on Asian appetite, bankers said. Since Weibo filed its prospectus with the US Securities and Exchange Commission on March 14, the Nasdaq Composite Index has dropped 4%. This is likely the reason why the number of shares on offer were downsized.
Pre-greenshoe, public investors will hold 8.25% of the 203.5 million shares outstanding, with parent Sina Corp on 58.15% and Chinese e-commerce giant Alibaba on 32% after exercising an option to increase its stake in the group.
This means Weibo has been valued at about $3.5 billion ($3.7 post-greenshoe), a far cry from analysts’ initial estimates of closer to $5 billion. The prospectus reveals that Alibaba’s option was structured at the lower end of a price equivalent to an equity valuation of $5.5 billion, underscoring the company's hopes for a much higher valuation.
But the IPO valuation does represent a premium to the level Alibaba paid one year ago when it acquired its initial 18% stake. This cost $585.8 million, valuing the group then at $3.25 billion.
At $17 per share and 2013 revenues of $188.3 million, Weibo has been valued on a price-to-sales ratio of 18.6 times.
Blended syndicate research forecasts Weibo’s 2015 sales total $472 million.
Comparables
The closest comparable is Weibo’s own parent Sina Corp, which closed Tuesday at $52.90. One of the rationales for bringing the IPO was to supposedly unlock value in Sina Corp, which also derives a significant portion of its revenues from web portal advertising.
Instead, Sina has seen its share price come down significantly. Year-to-date it is down 37% and an even steeper 43% since its 52-week peak last October at $92.83.
At $52.9 per share and 2013 revenues of $665 million, Sina is trading on a very low price-to-sales ratio of just 5.2 times.
At the other end of the scale is US internet bellwether Twitter, which reported the same 2013 revenues as Sina, but is currently trading on an extremely rich price-to-sales ratio of 36 times.
This could mean the market thinks Twitter will do a far better job at monetizing its user base than Sina or Weibo. Or as a number of analysts are suggesting, it could be plain overvalued.
Twitter’s trading performance also highlights how much market sentiment towards technology stocks has changed since it listed last November. The first day trading on the New York stock exchange provoked a feeding frenzy after investors, who had been unable to purchase the group at its IPO price of $26 per share, pushed the stock up by 73% to $44.9.
It continued to climb from that level to peak at $74.73 in December before sliding 31.4% subsequently.
Timing
In contrast, Weibo has hit what could either turn out to be a small rough patch for the technology sector or the beginnings of a more sustained slide.
The Nasdaq Composite Index closed Tuesday up 1.29% to 4,086.23. The re-bound followed a torrid week in which the index suffered its worst day in two-and-a-half years, dropping 3% last Thursday. However, many market commentators have greeted the recent sell-off with some relief after worrying about large supply coming into the market and bubble valuations, particularly at the loss-making end of the sector.
This week the National Venture Capital Association reported that VC firms raised a total of $8.9 billion in the first quarter, more than double the amount raised in the same three-month period of 2013 and the best quarter overall since 2007.
Recent Chinese IPOs have also been caught in the downturn. Children’s online game operator Baioo Family Interactive raised $196 million on April 3 but the Hong Kong-listed shares have dropped 24% from their IPO price.
Weibo’s operations, revenues
Weibo is also still loss-making, reporting a net loss of $38 million for FY2013 after a loss of $102.4 million in 2012.
The improvement was due in large measure to its strategic partnership with Alibaba, which contributed revenues of $49 million in 2013. Other reasons for the year-one-year improvement in revenue include a jump in the number of key accounts from 260 to 350 and an increase in the average spent by each account to $231,000 from $195,000.
But it is Weibo’s relationship with Alibaba that likely excited investors most, particularly since it formally linked up with the latter’s payment arm Alipay in January. This now gives Weibo’s 400,000 business accounts a payments solution.
In its prospectus, the company estimates that its relationship with Alibaba will generate $380 million of advertising and marketing revenue through to 2015.
Overall in 2013, Weibo generated 78.8% of its revenues from advertising and marketing services, with a further 12.2% from game-related services and 5.9% from VIP membership services.
Selling points
The opportunities for internet and smart phone usage in China are enormous.
The number of internet users in China increased from 298 million in 2008 to 618 million at the end of 2013, according to Weibo’s prospectus. Mobile internet users surged to 500 million from 117 million over the same period.
Weibo points out that internet penetration rates on the Chinese mainland still remain considerably lower than in developed countries -- at 45.8% compared with 81.9% in the US and 80.4% in Japan, according to the China Internet Network Development Statistics Report.
Likewise, growth rates are fast, with World Cellular Forecasts predicting a 19.4% compound annual growth rate in smart phone connections through to 2015.
However, Weibo faces one very strong head wind, which attracted a lot of comment during the Hong Kong leg of its roadshow.
Competition is intensifying. Tencent’s WeChat already has 272 million active monthly users compared to Weibo’s 144 million as of end March 2014. Twitter, by contrast, has 241 million.
One mainland Chinese user told FinanceAsia, “I’ve switched from Weibo to WeChat for two reasons. Firstly, postings from favourite commentators like Xue Manzi and Li Kaifu have become a bit meek and boring following a government crackdown."
“I also like WeChat because I’m only connected to people I know so I can voice my opinion on certain sensitive issues. Weibo is a bit too public for me,” she said.
In its prospectus, Weibo said that its user-base fell by 9% to 280.8 million in 2013 from 308.6 million the year before, citing the China Internet Network Information Center data.
Regulation and censorship affects all Chinese internet companies and, in March 2012, it was revealed that Weibo has a team of censors working to clean up content deemed unsuitable by the Chinese government.
But supporters say Weibo still has advantages and differentiating factors to both WeChat and Twitter. One is the ability for users to post up to 140 characters. Given the large amount of information that can be conveyed by a single Chinese character, this means Weibo functions far more like a blogging service than either WeChat or Twitter.
Proceeds from the IPO will be used to re-pay loans to Sina Corp.
