As the Chinese Internet industry continues its impressive growth, many companies are moving to make an initial public offering in the United States. In 2014, there is an expected surge of Chinese IPOs as numerous companies have declared intentions to publicly sell shares in the U.S. The announcements are in spite of numerous controversies surrounding the relationship between Chinese companies and U.S. markets.
Controversies and impressive returns
The SEC recently banned the Big Four Chinese accounting firms from operating in the United States for six months. The ruling came after the accounting agencies failed to comply with an SEC investigation into audit work on China-based companies. There was added controversy when the accounting firms claimed that complying with the SEC's request could cause them to violate Chinese laws regarding secrecy. This issue demonstrates one of the many differences between Chinese and U.S. laws, which has caused numerous headaches for companies operating in both countries. While this may be a reason for companies to hesitate listing in the U.S., several corporations are looking past these issues to the potential for large returns.
In the last two months of 2013, multiple Chinese companies debuted in the U.S. and saw impressive returns. Sungy Mobile, 58.com, and 500.com each have grown more than 100% since their IPOs, and all operate in the highly competitive Chinese Internet industry. This rapidly expanding industry is leading investors to look past the controversies and toward greater returns, prompting more Chinese companies to follow suit with a U.S. IPO.
Weibo vs. Twitter
Weibo is often described as China's version of Twitter (NYSE:TWTR), and the company just announced that it will raise capital through an initial public offering. It is seeking to raise $500 million on the NASDAQ, foregoing a larger offering by parent company Sina Corporation, which aimed to maintain majority control.
Weibo has experienced impressive revenue growth from zero revenue two years ago to $188 million in 2013. With 129.1 million active users per month, the company has plenty of opportunity to boost revenue. This is an impressive number when compared to the 241 million users claimed by Twitter, which already boasts a market cap of $27.3 billion. Twitter and Weibo both report that more than 70% of their users access the social-media tools via a mobile app. In 2013, Twitter capitalized on its 184 million mobile users to generate 63% of its revenue from this market. Weibo did not use this base as effectively, only generating 22% of its revenue from mobile users. It only began selling mobile ads in the second quarter of 2013, but moving forward it can use Twitter as an example of how to drive revenue from mobile users.
Weibo leveraged its growing user base to turn its first profit in the final quarter of 2013, which could be a great sign for the future of the company. Twitter also had a strong fourth quarter of 2013, posting $243 million in revenue and an EPS of $0.02; both companies beat analyst expectations. While Weibo is a much smaller version of Twitter, the comparisons are clear. Whether fair or unfair, after the company's IPO, there will be a large number of analysts and investors tracking its performance against Twitter. This, along with the looming threat of censorship by the Chinese government, means this will be a fascinating new stock to follow.
Alibaba vs. Amazon
Alibaba, China's largest e-commerce business, is certainly the most discussed upcoming Chinese IPO. Analysts have estimated the company's IPO could raise nearly $15 billion in capital, which would be close behind Facebook's IPO total of $16 billion. Not only is the company massive, being valued at more than $130 billion by several analysts, but it has been surrounded in controversy as it decides where to publicly list its shares. Alibaba is currently structured to give the founding partners the power to nominate the majority of the board of directors. This would violate the rule of the Hong Kong Exchange stating that each share can only be worth one vote.
Alibaba has often been compared to Amazon.com (NASDAQ:AMZN) based on their similarities in size and user traffic. However, the companies have different business models. Alibaba operates an online marketplace for outside retailers, while Amazon operates a similar marketplace and also sells merchandise directly to consumers. In 2012, Alibaba's marketplace produced $160 billion in gross merchandise volume -- nearly twice Amazon's GMV. The differences in the companies' business models are clear when you view the revenue data. In 2012, Alibaba drew $4 billion in revenue from that sales volume compared with $60 billion in revenue for Amazon. But despite the huge difference in revenue, Alibaba maintained profitability with a 34.7% net profit margin, compared to Amazon's margin of -0.1%. Numerous analysts are impressed, valuing Alibaba at more than $100 billion ahead of its IPO.
On top of the impressive results, Alibaba has made numerous strategic investments that have added even more value for investors. Alibaba has an 18% stake in Weibo and an outstanding offer to buy the remaining stake in AutoNavi, which is an industry-leading mobile mapping service in China. Amazon often takes a different path with its investments. The company is well-known for making investments based on the future needs of the world. These include research on the potential for a drone delivery system and one-day delivery in large cities. While the two companies are different in many ways, many investors believe Amazon's impressive performance is a clear indicator of Alibaba's potential.
Just the beginning
There has been much controversy surrounding U.S.-listed Chinese companies over the last several years. This may have caused corporations to resist going public in the U.S. However, a growing Internet industry and successful offerings have caused revived interest. If this new batch of Chinese companies can create a positive road map for success, it could lead to a new migration of foreign companies listing in the United States.