ChinaCache International Holdings (CCIH) was one of the top IPOs of 2010. The company priced above the initial range at $13.9 and eventually ended up over 90% on the opening day closing at $27.15 and hitting as high as $30.70. The stock eventually peaked out at $35 over a month later on Nov 12th. So what makes the stock so appealing now?
Well, after that massive IPO jump and follow through, the stock has plunged roughly 50%. Investors are fleeing this once high flyer just 3 months after its peak. The combination of a weak China equities market in January and the resignation of the COO on February 10th has been too much for investors to risk. Ironically though the Shanghai Index has had a good February and shows good technical signs this week. Seems like the better question is why have investors fled CCIH with it now trading at its 52 week lows other then the COO resignation, crash lows and below to the IPO open price?
Stone Fox Capital likes to look for opportunities while others are fleeing. While IPOs are typically reviewed and CCIH was originally targeted, the better values tend to occur 3-6 months after the IPO. A lot of companies inevitably can't live up to the hype and the 'hot money' traders leave while growth investors aren't comfortable enough in a new name to fill the void. CCIH appears to be a prime example.
First, the weak equity market due to the government attempting to slow the economy scared off investors in most emerging markets. China still targets 8-9% growth, which might be a reason to not chase the stock in the mid $30s, but it doesn't justify such a significant sell-off. Second, the COO did resign for personal reasons, but he is expected to remain a consultant to the company. Anybody following China internet companies should be well aware of the similar situation where Baidu (BIDU) lost both the COO and CMO in October 2009, when the stock was around $40. Roughly 15 months later BIDU traded above $130 or a greater then 200% gain after the resignations. A clear example of how US investors over analyze an executive departure in China as compared to the US.
Another bullish point is that the Q3 earnings report and the first as a public company reported strong growth and it guided to better then expected numbers in Q4. Revenue is expected to grow roughly 70% and it appears to finally be turning the corner on margins. Sure the COO resigning so shortly after an IPO appears concerning, but with him remaining as a special advisor and only being the 3rd in charge the sell-off appears grossly overdone. Not to mention that the experience at BIDU wasn't the death nail that all expected.
Mobile internet is booming with revenue having grown 40% QoQ and the recent spate of China internet IPOs such as Dangdang (DANG) and Yoku.com (YOKU) should help provide the cash to fuel the content and application delivery market in China. CCIH appears to be in the sweet spot being the market leader just as the market demand takes off.
Revenue growth at CCIH has taken off after slow growth in 2009. It also signed a couple of deals with subsidiaries of market leaders BIDU and China Mobile. Sequential growth has exceeded 10% for the last two quarters and should continue in Q4 when reported on March 7th.
Now is likely the best time to invest in a hot market in China long after the IPO magic has passed and the market is no longer paying attention. Investors tend to focus too much at the IPO time when the market is hot instead of letting the opportunities come to them. We wrote back at the IPO time that the small investors were being left out of some prize IPOs when the stock opened up way over the IPO price even though plenty of investors like myself would gladly have paid over the $13.90 price [ChinaCache International IPO Pops 100%: Small Investors Left Out Again].
Not only could it be the Akamai (AKAM) of China, but for now it won't face international competition providing the potential of dominating the China market similar to BIDU. Market share for 2010 is expected around 55% meaning that the nearly $100M IPO cash should provide ample liquidity to crush any competition and make it the provider of choice going forward.
Could the COO departure signal problems under the surface? Possibly, but the market seems irrational. The CEO and CFO aren't leaving plus the numbers since the IPO were strong and CCIH had no mention of a disappointment in relation to his departure. The CDN market appears in high growth considering the recent deal announcements and this significant drop smacks of a great buying opportunity. Naturally earnings on March 7th will be key but the risk sure seemed a lot higher when the stock traded above $30 than it appears now.
Disclosure: I am long CCIH.