After a roaring start for the IPO market in 2011, in which 23 new deals priced, the pace of activity has slowed down over the past couple of weeks. What has been especially noticeable is that the number of IPOs from emerging markets -- China in particular -- has dramatically slowed. For instance, in 2010, there were a staggering 40 deals to come out of China, accounting for roughly a quarter of all IPOs. Thus far in 2011, there have only been four, putting us on pace for about 32.
Looking back to the summer and fall of 2010, growth-minded investors couldn’t get enough of these IPOs, as China (and India) represented the most intriguing opportunities. However, a mix of rising inflation in China, improving prospects here at home, and increased skepticism over Chinese IPOs has cooled investors towards these deals. With that in mind, we thought it may be an opportune time to revisit a few emerging market IPOs that have compelling growth catalysts, but have fallen on hard times due to this shift in investor sentiment.
Funny Name, Serious Growth Opportunity
E-Commerce China Dangdang (NYSE:DANG) has an unforgettable name, but, holders of the stock may want to forget the last month or so as the stock is down 28% since reaching post-IPO highs on January 14. When DANG went public back on December 8, the hype and enthusiasm surrounding its IPO was palpable. In fact, it priced at $16 versus the original expected range of $11-13, and then shot up to the $34.50 level in just three sessions.
There was good reason why this online book retailer (now expanding its product line) created a considerable amount of buzz. (Hint: It reminds investors of a certain U.S.-based company that sells Kindles.) Outside of that parallel, DANG’s sales growth rates have been impressive, up 91% in FY09 to RMB 1.46 billion. The company is also the most frequently visited business-to-consumer website in China, adding a staggering 3.4 million new customers over the first nine months of 2010. Furthermore, as it is still in its infancy, the company is only in the early innings of adding new product categories to its website.
The downside to DANG is its paltry margins. Specifically, for the first three quarters of 2010, it had an operating margin of around 1%, which had been pressured by soaring marketing expenses. There have also been some questions and doubts regarding its younger management team. However, with DANG getting set to report its first quarterly report as a public company (no date set), and with shares recently bouncing off a near-term support level, traders may want to give DANG a look.
As always, we strongly recommend that traders first review our trading report before entering a position.
Youku.com (NYSE:YOKU) Worth Watching
Despite operating in completely different industries, DANG and YOKU seem to trade in tandem. The main reason why they tend to be lumped together is that they went public on the same day, December 8, and both companies are replicas of high-growth companies here on the homefront. (Hint: It reminds people of the U.S’s largest online video-sharing website.)
YOKU is China’s most popular and most visited Internet television company, with approximately 203 million unique visitors as of Sept. 30, 2010. The company is young, launching in December 2006. Since then, its growth has been phenomenal – at least, its revenue growth has been. Over the first three quarters of 2010, revenue soared 135%. Unfortunately, it has never been profitable, and isn’t expected to be this year either. The challenge, of course, is effectively monetizing its site, which generates revenue through advertising. Online marketing is a fairly new and un-proven concept in China, which is notorious for its regulations and oversight of the Internet. With that said, its growth prospects are intriguing, and shares of YOKU have been lifting off of support in recent sessions. It could be ready for another leg higher.
Make Gains With MakeMyTrip (NASDAQ:MMYT)
MMYT is the largest online travel company in India. Travelers can research, plan, and book a variety of travel services in India and select overseas locations through its website. Not surprisingly, the underlying demographics and business climate are very favorable for MMYT. For example, some research reports suggest that Indian income levels are expected to triple by 2025, which is expected to foster 8% growth for the travel industry there over the next 10 years. Additionally, the Internet penetration in India is miniscule compared to most other developed countries, at just 7% versus 74% in the U.S. This combination of a financially improving consumer and vast room for e-commerce expansion could be a recipe for robust growth for MMYT.
On November 15, MMYT reported its second quarter results, which were a disappointment as it missed on the top-line. The company attributed the miss to seasonality factors, but traders ran for the exits as the stock plummeted 27% the following day. However, MMYT redeemed itself on Feb. 10 by reporting upside Q3 EPS and revenue, in addition to upside FY11 revenue guidance. The vastly improved report provided a much-needed spark for the stock, but it appears to be running into resistance.
Soda Stream (NASDAQ:SODA) Shares Haven’t Fallen Flat
Admittedly, SODA isn’t an “emerging market” IPO, as it is headquartered in Israel. But we thought we would include it in this article because it has some similar characteristics as an emerging market IPO – particularly its high risk/reward profile. SODA derives almost all of its revenue from sales of its home beverage carbonation systems and soda refills. Its business model is akin to the “razor-razorblade” model, in which it generates a majority of its sales from higher margin beverage refills.
When SODA went public back on November 3, 2010, I was quite skeptical of the business and whether the company could have success penetrating the U.S. market. And quite frankly, I still am after tasting the soda that comes from its beverage carbonation system. But, so far, SODA has proved the naysayers wrong.
Like the other IPOs we’re highlighting, SODA stormed out of the gate, pricing at $20 versus its $18-20 range, and then rocketing 108% through the end of the month of November. Given the magnitude of the move, SODA was set up for failure when it reported its first quarterly report on Nov. 29. By most accounts, its Q3 quarterly results validated its business as its EPS and revenue jumped 48% and 87%, respectively. Perhaps more importantly, SODA commented that it is finding traction for its products in the U.S. market, as its soda machines are now available at 4,000 retailers throughout the country.
With SODA shares once again rolling -- currently trading just 4% below post-IPO highs -- its upcoming Q4 report and guidance on March 1 will be crucial. The fourth quarter, of course, encompasses the all-important holiday season. Considering the run it has been on, and the fact that it trades with a lofty forward P/E of nearly 40x, SODA will need to comfortably surpass the $0.13 EPS estimate. Should it not, traders will want to be aware of its primary support levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.