IPO Froth Builds With Meteoric Qunar Debut

by: Doug Young

Two highly successful IPOs by Chinese tech firms, late last week, may officially mark the arrival of spring for such offerings after a long winter. But now that spring has finally come on so strong, the new question becomes: Is an overheated summer on the way? My answer to that question is "quite possibly", following the very strong debut last Friday for Qunar (Nasdaq: QUNR) the fast-rising online travel site that hopes to someday take on industry leader Ctrip (Nasdaq: CTRP). Qunar's meteoric debut follows the strong opening a day earlier for online classified advertising site 58.com (NYSE: WUBA), which rose 41 percent on its first trading day.

Two things could be happening here, following a 90 percent jump for Qunar's American Depositary Shares (ADSs) on their first day of trading. The first, and less likely scenario, is that the banks that underwrote these offerings are quite stupid, and grossly underpriced the shares, costing these 2 companies tens of millions of dollars in money that instead went to buyers of their IPO shares.

But each of the offerings was underwritten by one or more very experienced investment banks, with Morgan Stanley, Credit Suisse and Citigroup sponsoring the 58.com deal, and Goldman Sachs among the sponsors for Qunar's offering. What's more, the underwriters for each offering raised their initial price ranges after they began marketing the deals, realizing that demand was quite strong.

All that brings me to my second theory, namely that opportunistic speculators-- sensing positive sentiment has returned to Chinese tech firms after a 2 year freeze-- are playing games with these newly listed companies in a bid to make some quick money. If that's the case, then we could soon see a big correction for shares of both Qunar and 58.com after this initial speculative frenzy wears off, perhaps in the next 2-3 months.

All that said, let's step back and look more closely at the 2 deals, starting with Qunar, which is 55 percent owned by leading search engine Baidu (Nasdaq: BIDU). Qunar initially set a price range for its offering of $9.50 to $11.50 per ADS, and then raised that to $12-$14 after seeing strong demand. It ultimately raised the price even more, finally selling ADSs for $15 each, raising $167 million.

But even that increase wasn't enough, as the company's shares more than doubled to a high of $34.99 on their first trading day before finally closing at $28.40 (English article; Chinese article). That strong performance came despite the fact that Qunar is still losing money, posting a $2.76 million loss in the first half of this year. The company's strong performance overshadowed an impressive debut the day before for 58.com, whose shares added another 3.7 percent on their second trading day on Friday, to put them 47 percent ahead of their IPO price of $17 per ADS.

As I've said above, I do suspect that most of these gains are being fueled by short-term buyers looking to make some quick money. Anyone wanting to glimpse the future might take a look at e-commerce company LightInTheBox (NYSE: LITB), the only other major Chinese tech firm to go public in New York this year. After initially more than doubling in the first 3 months after their June debut, LightInTheBox shares have come crashing back to earth as the initial euphoria over its strong IPO wore off.

LightInTheBox's ADSs now trade at about $8.50, or some 10 percent below their IPO price of $9.50. Of these 2 newly listed companies, I would venture that Qunar is the more likely to see a bigger correction, as it operates in a highly competitive space. 58.com could fare a little better, since it's a leader in its space and is already profitable. Still, I would be surprised if either of these companies' shares is trading at or above their current levels by the end of January.

Bottom line: Strong debuts for Qunar and 58.com are likely being fueled by short-term speculators, raising the risk of downside potential for their shares over the next year.