IPO Candy's  Instablog

We’ve observed the online dating space from the periphery over the past few years. The success ofMeetic in Europe (at least, according to its founder and CEO) suggests that the investment returns are quite good. Public market investors have been frustrated to some degree by the fact that there are no “pure plays” to own. Match.com is a well known business in the US, but it is part of the IAC conglomerate, which always seems to have some other part of its business dragging Match.com results down.

eHarmony is another leading site in the US, and has grown to be a pretty large (circa $250M revenues) and profitable company. eHarmony is still private, and is currently going through a CEO transition, so is unlikely to be available for public market investors in the near term.

A Chinese company, Jiayuan.com (Jiayuan), just completed marketing and priced its IPO at $11. It is the largest online dating platform in China, and even its company story is a bit romantic. It smacks of the classic American tale of a university student implementing a social networking idea and then seeing it grow into a large base of active users.

Jiayuan was founded in 2003 by Ms. Haiyan Gong, who basically built the first version of the site to find her own love. She graduated from Bei Jing University (a top university in China) with a major in Chinese and went on to get her Masters degree from Fu Dan University. She founded the website during graduate school and received her first investment of nearly $7M from New Oriental Education. This allowed her to focus on building the site and the company full time and seize the opportunity.

Positives:

• Leading market share in a rapidly growing market. According to iResearch, jiayuan.com ranked first and commanded a 43.7% share of the total amount of money spent in China’s online dating market in 2010. Jiayuan.com also ranked first in terms of number of visits from different internet protocol addresses (unique visitors), average time spent per user and average page views per user among all online dating websites in China in 2010. The online dating market is expected to grow to 3–4× its size today in the next four to five years.
• Strong consumer branding and market positioning. Jiayuan.com has aligned itself with big dating shows in China. For example, the top Chinese dating show, “Fei Cheng Wu Rao”, has been working with jiayuan.com, and a lot of its candidates are chosen from jiayuan.com. Jiayuan also targets a more highly educated, more urban user type, which is an attractive demographic segment.
• Effective business model. Many enjoy the company’s results-based pricing model. Net revenue increased by from $9.54 million to $25.4 million in 2010. Unlike the other dating websites, which require an up-front subscription fee, jiayuan.com allows users to join for free and pay per message (roughly $0.30), which most find irresistible. If you got a message from someone who could potentially be your next lover, would you pay 30c to read it? More frequent users can join via a subscription fee rather than paying per message.
• This has lead to a very attractive financial model. Gross margins have trended up consistently from 60% a year ago to nearly 68% in Q1 of 2011. Operating margins improved sharply during the first half of 2010, and have been consistent at 20–21% for the last few quarters.

Concerns:

• Privacy and confidentiality. Jiayuan.com is facing a lawsuit that claims that the company aided fraudulent activities on its service by approving a user with a fake ID. The personal identification system in China is not reliable, and requires substantial improvements. Jiayuan.com does have technology and methods to guard against this more effectively, but the company must be very careful in order to protect the trust and reputation it has established in the market.
• Online dating is still very new in China. Many social networking tools are adding dating-type features. Will Chinese people just prefer to use Weibo/Renren to find their lover? It’s too soon to know.
• New competitors are coming into the market. Jiayuan.com has enjoyed only a mildly contested space to date, but this is changing. More direct competitors will spring up, including western sites like eHarmony. Some new competitors might do a better job of leveraging new technology such as location-based services and social networking platforms. In addition, social networking and “meet up” services will no doubt launch and be a substitute for some over-specific online dating sites.

So what about valuation?

We haven’t done a full IV analysis yet on this company, but at $11 the market capitalization is $352M, which represents something on the order of 7× current sales levels. Other dating or coupling oriented stocks like Spark Networks (AMEX: LOV – $3.27), The Knot (NASDAQ: KNOT – $10.20) and the recentFriendFinder Networks (NASDAQ: FFN – $7.66) have not been very good stocks in the past.

How the shares will trade in the aftermarket will determine how interested we are in adding the name to our IPO Candy Folio. The recent action in Renren (NASDAQ: RENN – $13.16) may make investors skittish if the shares move up sharply. We’ll see how DATE trades, and if we could add it at or near the IPO price,we will probably include at least a 1% position in the IPO Folio.

[Disclosure: None]