China tech rout sifts IPO haves from don’t-needs

April 9, 2014

By John Foley 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Falling prices of internet stocks are a headache for companies yet to join the market. The sell off that began in the first week of March and broke on April 8 hit Chinese companies particularly hard. It may leave investors pickier about coming initial public offerings of tech companies from the People’s Republic. The haves will be sorted from the don’t-needs.

The recent drop may just be a short-term correction. Shares in Tencent, which operates mobile messaging app WeChat, more than doubled in value in the year to March. The 20 percent fall in the past month, and the greater drop before April 8 in shares of peers Baidu, Jiayuan and Dangdang probably reflects some profit-taking as well as a recognition that Chinese consumer spending is picking up less quickly than hoped. Even so, falling valuations will lead to tough questions for those still hoping to join the market.

Alibaba is least exposed to the market’s swings. The giant e-commerce group’s likely valuation of more than $100 billion and near dominance of online retail in China makes it less volatile than more speculative internet wannabes. More importantly, it can afford to price its shares attractively. The main reason for its mooted offering isn’t to raise cash but to force shareholder Yahoo to sell half of its stake.

Rival JD.com is in a less enviable position. Unlike Alibaba, it’s not profitable. The far-smaller online retailer needs funds to open new warehouses and expand its workforce. But JD too has the underpinning of China’s booming consumer e-commerce market, which grew by 65 percent in 2013 according to iResearch. It also has rich backers including Tencent and Saudi Prince Alwaleed bin Talal.

Then there’s microblog Weibo, the weakest of the pack. Investors can already gain exposure to China’s version of Twitter via its listed parent Sina, whose shares have fallen by almost a quarter in a month. Weibo barely has revenue, let alone earnings, and no clear plans for spending the proceeds of its proposed IPO. A listing seems to serve little function other than giving insiders a path to eventually sell out. When the market swings, it’s that kind of opportunistic offering that’s most likely to swing out of favour.

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