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Summary

  • XNET, a Chinese provider of a cloud-based internet platform, designed to allow customers to access digital content at higher speeds, plans to raise $73.2 million in its upcoming IPO.
  • While the environment for Chinese tech company IPOs has been positive lately, we have some concerns about XNET's core business could be at risk when China increases its internet speed.
  • We like this IPO.

Xunlei Ltd (NASDAQ:XNET), provider of a cloud-based internet platform in China, designed to allow customers to access digital content at higher speeds, plans to raise $73.2 million in its upcoming IPO.

The Shenzhen, China-based firm will offer 7.3 million shares at an expected price range of $9-$11 per share. If the IPO can find the midpoint of that range at $10 per share, XNET will command a market value of $725 million.

Underwriting

XNET filed on May 23, 2014

Lead Underwriters: Citigroup Global Markets Inc; J.P. Morgan Securities LLC

Underwriters: Oppenheimer and Co., Inc

Summary: XNET Offers Platform For High Speed Access To Video, Music, Online Games

XNET operates a Chinese internet platform based on cloud computing designed to allow users to access digital media content including video, music and games at high speeds.

The firm is among the top ten Chinese internet firms in terms of user base, having averaged some 300 million unique visitors per month for the first three months of 2014, and was the top acceleration product provider in China as measured by market share as of March 2014.

XNET hopes to take advantage of the generally poor internet speeds in China through a pair of core services and products. Xunlei Accelerator, a free product designed to allow users to accelerate online digital transmissions, is the firm's most popular product with some 142 million monthly active users in March 2014. The firm's cloud acceleration subscription services, which are available through various products including Green Channel and Yunbo, provide users with what the firm describes as "premium services for speed and reliability." The cloud acceleration services had approximately 5.2 million subscribers as of March 31, 2014. XNET also offers online video streaming services, pay per view services, and online game services.

Valuation

XNET offers the following figures in its F-1 balance sheet for the three months ended March 31, 2014:

Revenue: $41,190,000.00

Net Income: $178,000.00

Total Assets: $439,785,000.00

Total Liabilities: $155,255,000.00

Stockholders' Equity: $127,222,000.00

Business Faces Minimal Competition

XNET currently faces minimal competition in the acceleration market-though this may be due to the limited potential lifespan for acceleration technology, as discussed in our conclusion below.

Large Chinese internet firms could potentially choose to enter the acceleration sector; likely potential competitors include Tencent and Baidu (NASDAQ:BIDU). XNET's video services face competition from similar services, including those offered by Tudou.com, Youku.com, and iQiyi.com.

Chairman and CEO An Expert In Distributed Computing

Co-founder Sean Shenglong Zou has served as XNET's Chairman and CEO since its 2005 inception, and is recognized as an expert in distributed computing.

Mr. Zou holds a bachelor's degree in computer science from University of Wisconsin-Madison and a master's degree in computer science from Duke University.

Mr. Zhou is joined by fellow co-founder Hao Cheng has served as a director since inception and is currently CEO of Xunlei Games Development (Shenzhen) Co. Ltd.

Mr. Cheng previously managed the products, services, marketing and sales of the corporate search team at Baidu, Inc.

Mr. Cheng holds a bachelor's degree in mathematics from Nankai University and a master's degree in computer science from Duke University.

Conclusion

We are fairly positive on this IPO.

We are hearing the deal is oversubscribed; it has been accelerated to Monday night (June 23rd). In addition, several Chinese tech IPOs have done quite well recently, including JD.com (NASDAQ:JD).

However, we have some concern that the nature of XNET's core products may mean that it will have a limited shelf life; Chinese internet will not remain slow forever, and as internet speeds improve the demand for XNET's products will evaporate.

Unless XNET is able to significantly expand its product offering in the next few years, we don't foresee continued success for this firm.

Although XNET has seen steady increase in net revenues since 2011, it has shown a slight decline in the start of 2014.

We plan to participate in this IPO and suggest investors do the same.

Source: We Plan To Take A Hard Look At The IPO For Xunlei Ltd