Oxstones Investment Club™By Kenneth Rapoza, Forbes Blog,
Shares of China’s social network Renren (RENN) are now worth half their May 4 IPO price. The stock’s effectively become a money losing operation for anyone who thought buying it once it fell back to the $14 price tag it launched on meant it was time to buy. It clearly wasn’t. In fact, Renren has underperformed every single major China internet stock since its debut. It’s worse than Baidu (BIDU), underperforming Tencent Holdings (HK: 0700) and even doing worse than China’s Amazon, E-Commerce Dangdang (DANG), which is down 43.25% year-to-date ending June 21.
Renren has fallen and it can’t get up. It’s down 57.25%, dropping another 5.13% on Tuesday. When will it end? Is Renren really that bad?
This is still a $5.5 billion company with net cash and cash equivalents of $334 million, (not counting equity positions) total current assets of $426.4 million and liabilities of…ut oh…$31.7 million. Renren looks very good on paper, if Deloitte Touche Tohmatsu did their job right.
Renren’s registered users hit 122 million in May, rising from 91 million at the end of May 2010. The company reported a very good first quarter, with net revenues up 46.6% to $20.6 million and online ad sales up 100.5% to $8.1 million in the first quarter. Gross profit rose 57.6% to $16.5 million when compared to the first quarter last year, and although the company didn’t register any profit in the first, it did cut its losses by 78.5% to post a net loss of $2.6 million.
“We had a very robust first quarter, doubling our advertising revenues compared to the same period last year. The Renren brand is getting stronger,” said Joseph Chen, Chairman and Chief Executive Officer, during a conference call with analysts on Monday.
Renren, which means “everyone” in Chinese, has been called China’s Facebook. It is, though not as rich. It raised $779 million in its IPO and the concurrent private placement will likely add to Renren’s financial strength, giving it muscle to compete in China’s rapidly changing social networking services and online ad market.
Renren is the top social networking platform in China. It’s platform includes the social networking website renren.com,
the online games center game.renren.com, the social commerce website nuomi.com, and the newly launched professional and business social networking service website jingwei.com.
Renren was created in 2002 by Qianxiang Tiancheng Technology Development Co. in Beijing. Renren is essentially Qianxing’s brand. In 2005, that brand started targeting Chinese college students at elite universities. It now has the most registered users among Chinese college students, and became known in the US as Facebook before it became Facebook and became a movie.
This isn’t just for 19 year olds, however. Renren also has a strong following among white-collar workers in their late 20s and early 30s. In 2010, Renren Inc. was incorporate in the Cayman Islands, preparing to go public in the US.
Strategically, Renren wants to be one of the leading names in China’s e-commerce space. It’s cash rich, and can be one of the first pack of players in China, putting it on par with the online stars — Baidu, Tencent, Sohu and Sina.
Guidance for second quarter revenue is $29 to $30 million, according to Hui Huang, the company’s CFO. She said the company is still in the early stages of monetizing online gaming.
Game revenue for the first quarter grew 11% because of older games coming to the end of their life cycle. New titles are revving up, which could add more revenue to Renren.
The user base isn’t going viral. Instead, it’s growing steadily and sustainably, which is what the company’s top execs all want. This is no fly-by-night operation.
“During the IPO, we told investors that we anticipate to grow our active user base by 40% a year, and so far our growth has been very strong, exceeing our expectations of 34 million actives per month,” said Chen, speaking with a slight British accent. Chen said that the growth of smart phones will also increase the user base going forward. “We intend to maintain a philosophy of user experience, where people feel comfortable enough with Renren to use their real names, instead of virtual names, and we will continue to invest heavily in China’s smart phone revolution.”
Management has good credentials, and is conservative about spending and growth. It’s got deals in the works with some of China’s biggest travel companies, so people can book travel arrangements on Renren.
Chen knows a thing or two about tech. He has his masters in engineering from the Massachusetts Institute of Technology in Cambridge, Mass. He has an MBA from Stanford University. He served as the chairman of our board of directors and chief executive officer of Renren since inception. He is a pioneer of China’s internet industry. Before founding Renren, Chen was the co-founder, chairman and chief executive officer of ChinaRen.com, a first-generation social networking site in China and one of China’s most visited websites in 1999. He was as senior vice president of Sohu.com after ChinaRen.com was acquired by Sohu in 2000.
CFO Huang got her MBA from Wharton Business School. She’s been at Renren for a little over a year, having come to the company from Cathay Industrial Biotech Ltd, where she served as CFO there as well. From 2000 to 2003, she was an associate of Goldman Sachs and from 1994 to 1998, she was an associate with the Boston Consulting Group.
Huang said that online advertising will contribute to more than half of the company’s revenue in the next quarter. “We expect more momentum from online advertising sales, as well as more users spending more at Renren,” she said during the call.
Renren might not look as bad as its stock does. As investors get their hands dirty with this company, more will come out about its ownership structure in China to get a sense of the relative risks involved with the holding company structure. It’s senior management is no stranger to the US, and that means, one would hope, no stranger to corporate transparency and shareholders’ rights norms in the good ole US of A. As far as the social networking and e-commerce market looks in China, Renren’s a winner. Somebody, someday soon, is going to rate this company a buy.
Tags: Asia, Baidu (BIDU), busted IPOs, China, China internet stocks, china's facebook, China’s Amazon, chinese e-commerce, chinese ipos, chinese social networks, E-Commerce Dangdang (DANG), online gaming, Renren (RENN), Tencent Holdings (HK: 0700)