IPO Preview: Phoenix New Media

| About: Phoenix New (FENG)
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Based in Beijing, China, Phoenix New Media (proposed FENG) is scheduling an $166 million IPO with a market capitalization of $983 million at a price-range mid-point of $13 for Thursday May 12, 2011. Our full IPO calendar includes nine others for the week of May 9.

SUMMARY -- Chinese new media company with a poor December quarter leading into the IPO. For fiscal 2010 versus 2009 sales were up 100%to $80 million from $40 million, and net income was up to $11 million from $50,000.

However, sales were relatively flat for quarter ended December 31, 2010 compared to the September 2010 quarter: $24 million compared to $23 million.

Net income as a percent of sales declined to 7% from 17% in the September 2010 quarter, to $1.7 million from $3.8 million in the September quarter. December quarter expenses included $867,000 expense for share related compensation for general and adminis.

Gross margin percent of income declined to 40% from 44% for the December quarter compared with the September quarter.

VALUATION -- FENG is priced at 89 times annualized earnings for the six months ended December 2010., at the price range mid-point of $13.

FENG seems priced on a little the high side, especially given the lack of sales growth and declining income in the December quarter versus the September 2011 quarter. There is heavy competition from other highly trafficked Chinese consumer sites.

IPO after-market buyers should be aware that all recent Chinese Internet IPOs, except for Youku, have traded down from their first day of trading.

FENG Valuation Metrics

Each ADS represents eight ordinary shares.

BUSINESS -- FENG believes it is the leading new media company providing premium content on an integrated platform across Internet, mobile and TV channels in China.

Having originated from a leading global Chinese language TV network based in Hong Kong, Phoenix TV, FENG enables consumers to access professional news and other quality information and share user-generated content, or UGC, on the Internet and through their mobile devices. FENG also transmits UGC and in-house produced content to TV viewers primarily through Phoenix TV.

PAGE VIEWS -- FENG's ifeng.com website ranked number one in terms of page views, or PV, among the world's leading TV companies' websites, including CNN.com, BBC.co.uk, and CNTV.cn, in March 2011 according to Alexa.com, a third-party web information company, and ranked 8th among all Chinese websites in terms of PV in December 2010, according to Google Ad Planner.

FEND had 222 million online monthly unique visitors in March 2011, and according to the iResearch Report, FENG's online users' average monthly income was over four times that of the average Internet user in China in November 2010.

REVENUE SOURCES -- Net advertising revenues collectively accounted for 18.1%, 31.1% and 38.7% of total revenues in 2008, 2009 and 2010, respectively. The number of advertisers reached 197, 319 and 502 as of December 31, 2008, 2009 and 2010.

Paid service revenues comprised 81.9%, 68.9% and 61.3% of total revenues in 2008, 2009 and 2010, respectively. FENG offers a variety of paid services through all of its channels, including

  • Mobile Internet and value-added services, or MIVAS, which includes digital reading services, mobile game services and wireless value-added services, or WVAS, such as messaging-based services (SMS and MMS);
  • Video value-added services, or video VAS, which consist of online subscription and pay-per-view video services, mobile subscription and pay-per-view video services and video content sales; and
  • Internet value-added services, or Internet VAS. FENG derived 87.3%, 8.1% and 4.6% of paid service revenues, respectively, from MIVAS, video VAS and Internet VAS in 2010.

FENG generates the majority of its paid service revenues from its WVAS (Mobile Internet and value-added services), digital reading services and mobile subscription and pay-per-view video services by providing content to mobile device users and collecting revenue shares from the relevant mobile operator.

FENG also earns a significant portion of paid service revenues in the form of fixed fees from China Mobile for digital reading services.

COMPETITION -- Other content and service provider competitors includes NetEase.com, Inc. (NASDAQ:NTES), Sina Corporation (NASDAQ:SINA), Sohu.com Inc. (NASDAQ:SOHU) and Tencent Technology Limited (OTCPK:TCTZF).

In video, FENG competes with a number of "pure play" online video companies, including Ku6.com, Qiyi.com, Tudou Holdings Limited and Youku.com Inc. In addition, CCTV, China's largest and state-owned television network launched its online video website, China Network Television, or CNTV, in December 2009.

FENG also faces competition in video with the online video websites of large Chinese Internet companies, such as NetEase.com, Sina Corporation, Sohu.com Inc., and Tencent Technology Limited.

In mobile Internet, FENG competes against 3G Menhu, A8.com, and Kong Zhong Corporation, as well as the mobile businesses of the large Chinese Internet companies Sina Corporation and Tencent Technology Limited (3G.QQ.com).

EMPLOYEES -- 836 as of December 31, 2010.

USE OF PROCEEDS -- Shareholders expect to sell 1.3 million ADSs. FENG expects to sell 11.5 million ADSs to net $135 million.

  • $60.0 million for content acquisition and production;
  • $40.0 million for product development and technology infrastructure;
  • $30.0 million for marketing and sales; and
  • Balance for general corporate purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.