Watch This Chinese Internet IPO

The last few years have been great for IPOs, especially Internet technology companies. Moreover, the last year has been particularly special for Chinese Internet companies. Together, this means that you should be particularly excited about the upcoming IPO of 58.com, and the valuation that it might support.

A mimicked space
Chinese Internet companies are known to mirror that of successful American companies. Baidu (NASDAQ: BIDU  ) is essentially GoogleYouku (NYSE: YOKU  ) is like YouTube, and Sina (NASDAQ: SINA  ) is like Yahoo.

Not surprisingly, all of these Chinese versions of popular American companies have grown rapidly and performed well in the stock market. Now, 58.com, equivalent to Craigslist, is preparing to try its luck with an IPO.

The next in line
Details of 58.com's IPO are now becoming clear as Morgan Stanley, Citigroup, Pac Crest, and Credit Suisse will be underwriters. The company is offering 11 million shares, with a price range that translates to a market cap of $1.0 billion-$1.17 billion.

Why should you be excited about this latest Chinese IPO? There are two fundamental reasons: valuation and performance. The company produced $58.1 million in the first half of 2013, which equaled growth of 51% year-over-year. Looking at full-year 2013 revenue guidance, $130 million is the target.

Hence, if 58.com IPOs at $1 billion, it will trade at about 7.7 times this year's sales.

How does it compare?
To explain why 58.com might be a good buying opportunity, take a look at the chart below. The chart shows three popular Chinese Internet companies alongside each company's growth during its last quarter. Also, you'll find how each company is valued compared to trailing 12 months sales.

Company

Price/Sales

Revenue Growth

Baidu

13x sales

38%

Youku

12x sales

30%

Sina

10x sales

23%

As you can see, companies in this class of all growth levels trade at a range of about 10-13 times sales. Moreover, each company has seen large stock appreciations over the last year, suggesting that momentum for such companies is at an excellent level for those considering an IPO.

Baidu's 65% gains in 2013 are largely attributed to speculation surrounding mobile monetization. Currently, mobile is all but a tiny piece of Baidu's annual sales, but Citi recently projected that mobile could account for 21% and 28% of total revenue in years 2014 and 2015, respectively. In addition, Citi believes that mobile monetization could boost its already-high 43% operating margin, as Chinese companies typically pay much lower traffic acquisition costs. This theory plays into the optimism surrounding Baidu.

Aside from the immense excitement surrounding the likes of YouTube and Netflix, Youku is also striking large content deals by the month. In the U.S., we've seen large content deals move shares of Netflix, as investors believe solidifying these programs are the key to longevity. For Youku, the same theory applies, and investors have been encouraged by the fact that content costs continue to outpace revenue growth, as it means Youku is building to become a Chinese video power. Thus, Youku has rallied 65% this year.

Sina has seen stock gains of 80% in 2013, but clearly not because of its current growth. Instead, investors are focused on the future, as Sina makes investments for long-term relevance. For example, Sina launched a new social media platform that challenges the popular Tencent (growing more than 20% quarter-to-quarter). Then, Sina entered the mobile payment business in the same month, a market that's there for the taking. Hence, investors are excited about the company's level of aggression.

One more thing to consider
Clearly, optimism is high, growth is impressive, and valuations are sky-high. For 58.com, this is a winning combination. However, there is also a class of Chinese Internet-based companies that trade with valuations that are even more robust than those seen with these three noted stocks, such as Qihoo 360 (NYSE: QIHU  ) .

Qihoo sells anti-virus software and is growing at an impressive rate. During Qihoo's last quarter, it grew sales 108% and maintained an operating margin of 15% while posting explosive growth. As a reward, Qihoo has been valued at 23 times sales market cap. This suggests that 58.com might support a valuation higher than 10-13 times sales, but lower than 23 times sales based on its growth rate.

Final thoughts
Just to be conservative, if 58.com carries a price-to-sales ratio of 15, the company could see a market cap closer to $2 billion this year. Given the massive IPO gains over the last few years, 58.com might see a $2 billion valuation the day it becomes public. If not, 58.com might still make a good investment, as investors reward it for being both a Chinese Internet company and for its impressive growth. If 58.com continues to grow rapidly for the next several years, it could maintain this valuation, making it a good long-term investment.

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  • Report this Comment On October 22, 2013, at 10:05 AM, RichesToWealth wrote:

    Brian, thanks for this article. I've been searching the net to get more information about 58.com so the information here is very useful. Any idea where one could purchase the IPO before it lists?

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