Qunar, LightInTheBox Stumble In Latest Reports

 |  Includes: LITB, QUNR
by: Doug Young

Note: After originally publishing this article, a Qunar spokesman pointed out that the company's report that it had $80 million in cash was as of September 30, which would not have included the $194 million that it raised in its IPO, which occurred at the beginning of November.

Newly listed Internet companies Qunar (Nasdaq: QUNR) and LightInTheBox (NYSE: LITB) are trying hard to kill a recent window of positive sentiment towards Chinese IPOs in New York, with each announcing quarterly results that can only be described as disappointing. Not surprisingly, shares of both companies tumbled after the results came out, with LightInTheBox falling well below its IPO price. More broadly speaking, this outcome reflects the pressure that Chinese Internet companies feel to put on their prettiest faces before their IPOs, which creates disappointment when a clearer picture inevitably emerges in the following months.

Let's start with a look at Qunar, the Baidu-backed (Nasdaq: BIDU) online travel agent whose shares doubled on their trading debut nearly 3 weeks ago but have come down since then. Qunar's maiden earnings report paints a picture of a company that is still in the developing stage, and probably shouldn't have gone public just yet. American Depositary Shares (ADSs) for its IPO priced at $15, and then doubled on their debut. They have come down since then and fell another 6 percent to $25 in after-hours trade after their results came out.

Its results show that Qunar is still spending heavily to build up its business, with product development expenses up by a sharp 75 percent, well outpacing the company's 58 percent jump in revenue (company announcement). Not too surprisingly, the heavy spending caused Qunar's net loss to balloon to 48.8 million yuan ($8 million), nearly 6 times its loss from a year earlier. I had previously said the company might be near the break-even level, since most firms don't like to make IPOs until they are close to becoming profitable. But clearly that's not the case with Qunar, meaning we may not see any profits at all next year.

Perhaps the most alarming news from Qunar was its announcement that its cash pile is quite small. Qunar said it now holds only $80 million in cash and cash equivalents, even though it raised $194 million in its IPO (see clarification note at top of article). With cash so tight, I wouldn't be surprised to see Qunar try to make a secondary offering in the next few months, which could put more downward pressure on its shares.

Meantime, LightInTheBox, an e-commerce company that sells Chinese goods to customers outside China, reported it slipped back into the loss column in the third quarter after notching a small profit in the second (company announcement). This doesn't surprise me at all, as companies often manipulate their numbers to try and post a profit right around their IPOs to appeal to investors. But such tricks can usually only be done once, and then companies have to state their true situation.

In this case, LightInTheBox posted a loss of $2.4 million in the third quarter, more than double the year-ago loss of $1 million and the small $600,000 profit in the second quarter. Equally alarming were signs that the loss could widen further still. That's because LightInTheBox said its revenue growth would slow sharply to 16-19 percent in the fourth quarter, from 33 percent growth in the third quarter.

Shareholders didn't respond favorably to the gloomy news, with LightInTheBox shares tumbling 23 percent after the report came out. At one time, the ADSs had more than doubled from their June IPO price of $9.50; but they have tumbled sharply since a clearer picture emerged and now trade at $7.68, or nearly 20 percent below their IPO price. These latest results could dampen sentiment towards future IPOs in New York by Chinese companies. But what I've previously said is probably still true, namely that investors will still give a warmer reception to Chinese tech firms that are truly profitable.

Bottom line: Weak results from newly listed Qunar and LightInTheBox could dampen sentiment towards loss-making Chinese tech IPOs, but profitable firms should still do reasonably well.