IPO Preview: Xunlei

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 |  About: Xunlei Limited (XNET)
by: IPOdesktop

Summary

XNET is one of the top 10 largest Chinese internet companies, as measured by user base.

Comparing Q1 '14 with Q1 '13, the income statement metrics declined.

But the price-to-book of 1.7 is low for a China-based Internet company with a large market share.

Based in Shenzhen, China, Xunlei Limited (NASDAQ:XNET) scheduled a $73 million IPO on the Nasdaq with a market capitalization of $694 million at a price range midpoint of $10 for Tuesday, June 24, 2014.

The full IPO calendar is available at IPOpremium

SEC Documents

Manager, Co-Managers: J.P. Morgan, Citigroup

Joint Managers: Oppenheimer

End of lockup (180 days): Monday, December 22, 2014

End of 25-day quiet period: Monday, July 21, 2014

Summary

XNET is one of the top 10 largest Chinese internet companies, as measured by user base.

According to iResearch, XNET had an average of approximately 300 million monthly unique visitors for the three months ended on March 31, 2014

Valuation

Glossary

Valuation Ratios

Mrkt Cap (MM)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

annualizing Q1 '14

Xunlei Limited

$694

4.3

974.7

1.7

1.9

11%

Click to enlarge

Conclusion

Comparing Q1 '14 with Q1 '13, the following income statement metrics declined.

  • Revenue
  • Gross Profit
  • Operating profit (went negative)
  • Profit, was barely above breakeven.

The price-to-book of 1.7 is low for a China-based Internet company with a large market share.

But investors pay for growth and XNET appears to have some heavy headwinds in Q1 '14.

The rating on XNET is buy.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

XNET is one of the top 10 largest Chinese internet companies, as measured by user base.

According to iResearch, XNET had an average of approximately 300 million monthly unique visitors for the three months ended on March 31, 2014.

Revenue sources

Subscription services
XNET provides cloud acceleration subscription services for subscribers to enable faster and more reliable access to digital media content. Revenues from subscription services contributed to 48.1% of revenues in 2013 and 60.3% for the three months ended March 31, 2014. Subscription fees are time-based and are primarily collected up-front from subscribers on a monthly or yearly basis.

Online advertising services

XNET offers advertising services by providing marketing opportunities on XNETA's online video streaming websites and platform to advertisers. Online advertising revenues contributed to 26.7% of revenues in 2013 and 18.3% for the three months ended March 31, 2014 and the revenues are derived principally from various forms of advertisements that XNET places on Xunlei Kankan.

Other internet value-added services
XNET offers multiple other value-added services to users, including online games and pay per view services. Revenues from other internet value-added services contributed to 25.2% of revenues in 2013 and 21.4% for the three months ended March 31, 2014.

Digital media

Digital media content, such as video, music and games, is one of the most popular usages for internet users in China.

XNET operates a powerful internet platform in China based on cloud computing to enable users to quickly access, manage, and consume digital media content.

Mobile

XNET is increasingly extending to mobile devices in part through potentially pre-installed acceleration products in mobile phones and to living rooms through TV coverage (set-top boxes and IPTV) to further expand its user base and offer its users a wider range of access points.

XNET aspires to deliver superior user experience in ease of access, management and consumption of digital media content anywhere, anytime, and on any device.

XNET is the No. 1 acceleration product provider in China as measured by market share in March 2014, according to iResearch.

Two core products & services

To address deficiencies of digital media transmission over the internet in China, such as low speed and high delivery failure rates, XNET provides users with quick and easy access to online digital media content through two core products and services:

-- Xunlei Accelerator, which enables users to accelerate digital transmission over the internet, is XNET's most popular and free product, with 142 million monthly active users and approximately 204 million monthly unique visitors in March 2014, according to the iResearch Report.

Xunlei Accelerator enjoys a market share of 84.1% based on the number of launches among all transmission and acceleration products in China in March 2014, according to iResearch; and

-- XNET's cloud acceleration subscription services, delivered through products such as Green Channel, Offline Accelerator and Yunbo, offer users premium services for speed and reliability, with approximately 5.2 million subscribers as of March 31, 2014, up from approximately 1.1 million as of January 31, 2011.

Dividend Policy

No dividends are planned.

Intellectual Property

As of March 31, 2014, XNET had 44 patents granted in the PRC and 3 granted in the United States, while another 5 patent applications are being examined by the State Intellectual Property Office of the PRC and 1 additional United States patent application is being reviewed by the United States Patent and Trademark Office.

XNET also seeks to vigorously protect its Xunlei brand and the brands of its other services.

As of March 31, 2014, XNET has applied to register 157 trademarks, of which it has received 133 registered trademarks in different applicable trademark categories including 1 trademark registered with the United States Patent and Trademark Office and 1 trademark registered with World Intellectual Property Organization.

Competition

Due to its multiple service offerings, XNET faces competition in several aspects of the internet services market in China.

XNET believes that the key competitive factors in the overall internet services market in China include brand recognition, user traffic, technology platform and monetization abilities.

XNET's Xunlei Accelerator would primarily compete with Tencent (QQ Cyclone) and Baidu.

XNET's Xunlei Kankan website primarily competes with other major online video websites in China such as Youku.com, Tudou.com and iQiyi.com.

In addition, XNET also faces competition for the advertisement budgets of its advertisers from other internet companies and other forms of media.

5% stockholders

Xiaomi Ventures Limited 27.2%

Morningside Technology Investments Limited 14.5%

Vantage Point Global Limited 12.6%

King Venture Holdings Limited 12.2%

IDG Funds 9.7%

Ceyuan Funds 5.4%

Skyline Global Company Holdings Limited 5.7%

Aiden & Jasmine Limited 5.0%

Use of proceeds

XNET expects to net $65 million from its IPO. Proceeds are allocated as follows:

US$10 million to invest in technology, infrastructure and product development efforts;

US$10 million to acquire digital media content and exclusive online game licenses; and

the balance for other general corporate purposes, including working capital.

Disclaimer: This XNET IPO report is based on a reading and analysis of XNET's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.