YY, Vipshop Reap Rewards Of Risky IPOs

| About: YY Inc. (YY)

I wanted to take this opportunity to commend Internet companies YY (Nasdaq: YY) and Vipshop (NYSE: VIPS) for taking the risky move of launching New York IPOs at the heart of a deep freeze in investor sentiment towards Chinese companies in 2012. The pair, which have both just announced their latest stellar results, were 2 of the only major offerings by Chinese firms in New York that year. Shares for both received an initial tepid reception due to the chilly investment climate at the time. But all of that has changed more recently with a sudden surge in investor interest, and anyone who was brave enough to buy the companies' shares shortly after their IPOs has been handsomely rewarded.

I should be fair and point out that the strong sentiment towards Vipshop and YY is the result of their profitability and fast growth, 2 elements that investors love and factors that will be critical in determining the success for a new wave of IPO candidates waiting to list. Those 2 elements were on prominent display in the 2 companies' latest earnings, which came out on consecutive days this week, sparking new rallies for their already soaring shares.

Before we look more closely at the results, I need to point out just how much the 2 companies' shares have risen since their shaky debuts in 2012. At the time, western investors were highly skeptical of Chinese Internet companies due to a series of scandals that highlighted aggressive accounting tactics at some firms.

Vipshop was first out of the gate in March 2012, but was forced to lower its IPO price to $6.50 per American Depositary Share (ADS) after failing to get enough interest at its initial range of $8.50-$10.50 (previous post). Anyone who bought shares at the IPO price and was smart enough to hold them has seen his initial investment jump 26-fold, which includes a 32 percent jump in Vipshop shares that reached $169 in the latest trading session. YY has also performed well following its IPO in November 2012, with its shares up more than 8-fold from its offering price of $10.50. That includes a 15 percent rally for YY shares after it announced its latest results (previous post).

All that said, let's look briefly at the actual results, which are relatively straightforward and give a clue about what kind of companies investors will favor in an upcoming round of New York IPOs by Chinese Internet companies. YY, which offers marketing services using a social networking (SNS) approach, saw its profit jump nearly 6-fold to $31.7 million in last year's fourth quarter, while revenue zoomed 130 percent to just over $100 million (earnings announcement). The company added it expects revenues to double in the current quarter.

Vipshop, a discount e-commerce company, said its profit quadrupled to $25.4 million in last year's fourth quarter, as revenue jumped 117 percent to a sizable $651 million (earnings announcement). The company also predicted revenue would continue to grow at about 108 percent in the current quarter. Its rally after the results announcement brought Vipshop's market value to nearly $10 billion, making it China's most valuable listed e-commerce firm. YY's value now stands at $4.8 billion, also making it one of the country's biggest listed Internet firms.

So, what do these stellar results say about the prospects for an upcoming flood of Chinese companies preparing to list in New York? It should be clear from the YY and Vipshop examples that investors are looking for 2 things: triple-digit revenue growth, and profitability. Companies that can show strong numbers for both of those factors should do quite well in their IPOs. Companies that are still losing money but will soon become profitable should also do respectably, while anyone with double-digit revenue growth or lower could get a lukewarm reception.

Bottom line: The meteoric success of Vipshop and YY shares shows investors will favor profitable companies with triple-digit revenue growth in the current wave of new IPOs.

Disclosure: No positions

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