China IPOs Gallop Out of the Gate: Time to Buy?

 |  Includes: CCIH, DANG, QIHU, YOKU
by: Stone Fox Capital

Over the last 6 months, China has had four internet related IPOs that soared nearly 100% on the first trading day. The latest came last week in the form of Qihoo 360 Technology (NYSE:QIHU). The stock was up an amazing 134% in its market debut, but only ranks second trailing the 161% gain of (NYSE:YOKU). Should you buy now?

Any prudent investor should take a pause after such a meteoric rise. Sure the company has a lot of potential but most companies don't live up too such grand hype. After all, there was a reason that the investment bankers priced it so much below the closing price. Do you really think they turned down extra fees intentionally?

The good news with QIHU is that we have three recent China IPOs that had similar opening day results. What they have done since their respective IPO days could be a great indication of the next 6 months for QIHU.

The three stocks are ChinaCache International (NASDAQ:CCIH), E-Commerce China Dangdang (NYSE:DANG), and (YOKU). All three stocks had roughly 100% gains on their respective opening days and they are all China internet stocks. QIHU matched the gain with the 134% increase, but will the first day pop last?

  1. ChinaCache (CCIH) - leading provider of internet content and application delivery services to businesses, government agencies, and other enterprises in the People's Republic of China. Will benefit from all the cash flowing to internet companies in China that will need more CDN services to grow. Revenue is forecast to grow 40%+ in next 5 years. Trades at a forward PE of 27. IPO'd on 10/1/10. Hit a 52 week high of $35 and since dropped as low as $14.58 on concerns of the COO leaving the company.
  2. E-Commerce China Dangdang (DANG) - is a leading B2C e-commerce company in China. Forecasts revenue growth of 50%+ for Q1. IPO'd on 12/8/10. Hit a 52 week high of $36.4 and has since crashed to below $20.
  3. (YOKU) - operates as a Chinese Internet video website. It offers user-generated and professional video content in China and internationally. Analysts forecast growth approaching 80% for at least the next 2 years. IPO'd on 12/8/10. Hit a 52 week high of 52.80 and currently trades close to the highs.
China Internet IPO Summary
Stock IPO Price Closing Price 4/4/11 Close First Day Gain Gain Since 1st Close
CCIH $13.9 $27.15 $18.45 95% (32..0)%
DANG 16.0 29.91 19.85 87 (33.6)
YOKU 12.8 33.44 48.84 161 47.4
QIHU 14.5 34.00 30.30 134 (10.8)
Click to enlarge

It's clear from the stats that the only winners in these IPOs were the big investors that got IPO shares. As I wrote back when CCIH went public, the small investors were being left out. Based on the opening day closing price, only YOKU has gained. Oddly, YOKU also had the biggest first day spot.

Both CCIH and DANG have had huge losses and are significantly down from the 52 week highs in the $35-36 range. Clearly most after market investors have lost money on these stocks. On a valuation method CCIH is actually attractive based on its earnings and growth rate. All of the other stocks still maintain highly speculative valuations based on sky high price to sales multiples and little to no earnings.

Based on stats, investors should be wary of buying QIHU after the IPO. My firm bought CCIH on the dip after the stock dropped 50% from its highs and investors will likely do well to wait for dips on YOKU or QIHU before buying.

Disclosure: I am long CCIH.