The IPO market has reached a new level of activity with 20 companies now in active marketing. Every investment bankers and companies are eager to squeeze in their offerings before the holiday break in a few weeks.
Deals that we are more focused on include:
- There’s sure to be lots of enthusiasm for a IP video pay in China, Youku (YOKU). Youku is both a destination and content provider with their own CDN. So US investors may see them as both a YouTube and an Akamai. It’s hard to imagine Youku not receiving a warm reception in the market, although investors are being asked to really pay. Growth is indeed high at over 100% on the top line to exceed $50M for 2010. The company should start generating positive *gross* profit margins but continue to lose money on an operating basis for another year. The proposed capitalization of just over $1B is just over 20x current year revenues. That would make it the most expensive stock in our IPO Candy Ecosystem. (OpenTable (OPEN) is at 19x and ChinaCache (CCIH) is at 13x.) This feels like one that may appeal to “first day pop lovers” but as a long term investor we’d rather wait on this one.
- SemiLEDS (LEDS) is a promising offering in the LED lighting space which, in general, is doing very well based on the success of companies like CREE (CREE) – although China Intelligent Lighting (CIL) has proven that you can still be a dud in this space. SemiLEDS does have a “special sauce” that they believe will allow them to deliver much lower cost LED products into the market and drive the uptake of the LED into conventional lighting applications. If they are correct, the company will do very well. The company is having a break-out year in 2010 with likely revenues over $32M and very high margins which will generate over $8M in operating profit. Even though the proposed valuation is over 10x current revenues and 20x operating profits, we’d be fairly interested in this one if it doesn’t run away in terms of pricing and the first day open.
- Dangdang (DANG) is another Chinese IPO that will be in the spotlight posing as the “Amazon.com (AMZN) of China.” The company should post close to $325M in revenues for 2010 and be slightly profitable. The proposed market capitalization is just under $1B. It’s not clear just how “Amazon-like” the company really is over there, but the price appears fairly reasonable. We do expect some hyper-competive behavior in this area from everyone, including Amazon.com and every major retailer in China. The rivalry in online today is much different than when Amazon.com grew up. (Remember most large retailers had no credible online offerings for years.)
- Sky-Mobi (MOBI) is attempting to exploit the demand for mobile applications in China where the market is much more fragmented than it is in the US. The company has developed some middleware that can be used across different providers and device types, including feature phones. Revenues should be over $100M for 2010. The company is profitable but expenses are growing prodigiously. This model may be consistent with what amounts to a “land grab” as companies like Sky-Mobi try to capture a large portion of this rapidly growing and increasingly profitable market. There are some sour notes in the story that include a recent decline in revenue growth as the rules around confirming purchases were tightened. However, the proposed market capitalization of $300M looks fairly attractive.
A bit outside our sweet spot but still interesting:
- RigNet (RNET) is a niche networking services company that serves the remote communication needs of the energy industry. This includes off-shore rigs, tankers and remote land-based locations. There are specialized needs in this market and the competition is more limited (although far from absent.) RigNet should do just over $90M in revenues for 2010 and the proposed market capitalization is $215M.
- FleetCor (FLT) technologies is another services company (payments) that is focused on a niche, which in this case is vehicle fleets and energy companies. These are commercial rather than retail offerings and are aimed at streamlining and managing corporate purchasing. In many cases, large companies issue special “fleet cards” which are used to cover all vehicle related expenses. Very high margins at FleetCor make it clear that this is indeed a payments company. They should produce about $120M in *net* margin for 2010 on about $435M in revenues. The proposed $1.9B market capitalization is just over 16x those 2010 net earnings.
- Bona Film Group (BONA) – Film distributor in China. China box office revenues are growing fast and are forecasted to go from just under $1B last year to over $3B in 2012. That’s serious growth. Revenues at Bona are growing with the market and should approach $50M in 2010 versus $38M last year. Operating profit should exceed $8M versus $5.5M in 2009. Although attractive on a broad fundamental level (growth in Chinese consumer), the proposed valuation at 10x current year sales and 60x operating earnings is fairly steep. It may be justified based on the high growth expected. We’ll know once we have an IV on Bona.
- Gain Capital (GCAP) is another offering in the specialized financial services space. Just last week we had FX trading platform FXCM go public in a pretty solid deal. Gain is also focused on FX trading, which is said to be a $4T/day market now and could reach $10T/day by 2020. Gain seems to be as much of a brokerage firm as a platform so it’s not clear how well this will fit into our FinTech theme.
- iSoftStone (ISS) is a providers of IT services in China; based on the recent success of HiSoft there should be good interest in this deal. iSoftStone should record $180M in revenues for 2010 and is basically break-even (backing out the government subsidy). At a proposed market capitalization of $630M, this one seems expensive.
- BG Medicine (BGMD) is in the medical diagnostics space, which we like generally. BG works to develop new diagnostics and get them approved and in use as a manual method first and then have them worked into automated solutions from diagnostic instrument makers. Their process appears to be more solid than other players. The company is still fairly early stage with limited revenues and a history of losses. The proposed market capitalization is $250M. A more established company in this space, Clarient, recently agreed to be acquired by GE Healthcare for approximately $450M.
There are few deals that may fine but just don’t belong in the dessert case:
- It doesn’t get much less sweet than Ventrus Biosciences, which is a play on hemorrhoids and anal fissures. Of course there are often high profits in the jobs that nobody else wants to do. And these maladies are real problems for millions with limited treatment options. The company is still pre-revenue but has a few key products in late stages of development. Proposed market capitalization at the mid-point is $41M and the deal is small at $18.2M. We’ll be watching it as an indicator of the market appetite for small deals in less developed companies. Despite the unappetizing nature of what they do, the deal could be of interest to those who can qualify the science behind the products.
- Lentuo International (LAS) is an automobile retailer in China. Of course that sounds like a growth business but it’s just hard to get excited about it. One tip we can offer to investment banks doing China deals here (are you listening Cowen and HSBC?!) is that if you are going to translate, hire a translator that is the same gender as the presenter!! Watching the burley CEO of Lentuo present while listening to a tiny feminine voice in English is pretty discordant.
- First Republic Bank (FRC) is probably a good deal to pay attention to…but it’s a bank. So we’ll leave it for the bank specialists. Seems like a sector in which there will be lots of opportunity post-recovery.
- Targa Resources (TRGP) provides natural gas and natural gas liquid services. We’re not into gas.
- Walker & Dunlop (WD) does commercial real estate financing. So there.
- China Shengda (CPGI) makes cardboard boxes, but at least they do it in China. Still, that’s not quite enough to put it on our radar. It will be on our “Lucky Candy” ecosystem at least. It is interesting that this deal is not listed on many services; so for those into box companies, this might create an opportunity.
- Swift Transportation (SWFT) has some very nice trucks – over 12,500 of them, in fact – plus lots of other trucking and related assets. The CEO founded the company in 1966. Obviously a solid if mundane company and a play on a recovering US economy.
- CTP Partners (CTP) is an executive search player with stable revenues of around $110M a year for the last three years. In the last year, their operating margins have improved to about 10%. It’s always been hard to identify a sustainable advantage and asset in this business for equity investors. There are some claims to be able to use some patent process technology to improve results, but it still feels too much like conventional people placement.
- Richmond Honan Medical Properties (MOB) – This is an established provider of real estate services to hospitals, clinics and physician groups. It makes sense that a company could build a strong business model by focusing on the locations and specific needs of an large industry group like healthcare providers.
- UCI International is a supplier of aftermarket auto and truck parts. The company may be interesting but it’s probably better to be in the online segment of the business, and our research is aimed more at companies like US Auto Parts Network (PRTS.)
In short, what a year-end finish the IPO market is working on! There is certainly something for everyone.