Scandals Shake Up Momo, SouFun, Xunlei

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Includes: MOMO, SFUN, XNET
by: Doug Young

Bottom line: Momo's (NYSEARCA:MOM) IPO will go ahead but could debut weakly due to wrongdoing allegations against its CEO, while SouFun and Xunlei shares will be weak through 2015 due to a bad real estate market and stiff competition.

The China Internet world is being rocked with scandals as we head into the end of the year, led by new allegations of wrongdoing against the founder and CEO of mobile social networking service Momo on the eve of its New York IPO. Meantime, recently listed online video site Xunlei (NASDAQ:XNET) is being rocked by accusations of putting pornography in some of its pop-up ads. Finally there's leading real estate website SouFun (NYSE:SFUN), which is taking a hit after a highly-trumpeted agreement with a major real estate agency has fallen apart as China's property market deteriorates.

Shares of Xunlei and SouFun both took hits after their respective news came out, reflecting the volatility that lies ahead for many Chinese Internet stocks in 2015. SouFun's shares initially tumbled nearly 7 percent after it announced the termination of its agreement with Century 21 China, though they later bounced back and ended down a more modest 2.7 percent. Still, they are now at half their levels from a peak back in March. Xunlei fell 4 percent on its bad news, and its shares are now 40 percent below their IPO price back in June.

But the biggest questions are now swirling around Momo, which was set to price its IPO and make its trading debut on Thursday in New York (Chinese article). Against that backdrop, the timing of these wrongdoing allegations against its founder and CEO Tang Yan certainly look suspicious. But that said, the allegations certainly have a bit of credibility because they come from his former employer NetEase (NASDAQ:NTES), which also is one of China's oldest and most respected Internet firms (Chinese article).

The allegations came in a statement from NetEase that's all over the Chinese Internet, though the news was surprisingly absent from NetEase's own tech website. NetEase's main claim is that Tang took advantage of his position at the company when he worked there from 2003 to 2009 to gain information and other resources that he used to start Momo. The statement adds that Tang was actually detained by police for 10 days in 2007 when NetEase found out what he was doing, though there's no mention of any criminal charges.

Frankly speaking, this kind of activity is quite common in China, which sees people use information and other resources from their former employers to start new companies. That doesn't mean I condone this kind of activity, but the fact that Tang was never criminally charged means that NetEase is probably releasing its statement now to simply try and spoil Momo's IPO. Accordingly, I expect the IPO will go forward, though it could be delayed until next week and the stock might not open very strongly.

Next let's look at SouFun's disclosure that it has ended a relationship with Century 21 China that was in the headlines earlier this year. The story first broke in August when Century 21 agents reportedly boycotted SouFun due to a disagreement over fees Century 21 agents were required to pay to list their properties on SouFun's site (previous post).

SouFun later reached an agreement with the company in October, but now is announcing the deal has been terminated (company announcement). The bigger picture is that China's broader real estate market is in bad shape, and property agents like Century 21 are unhappy about the fees they have to pay for listing their properties on services like SouFun. That said, look for more of this kind of conflict throughout 2015, which won't help SouFun's top or bottom lines.

Finally there's Xunlei, which has been a troubled company for years. In its early days it was accused of rampant piracy on its site, though it cleaned that up and made a New York IPO in June. Now it appears Xunlei has simply substituted pornography for piracy, and been ordered to halt the inclusion of porn in some of its pop-up ads by China's Internet regulator (Chinese article). Xunlei was always in a difficult position due to its status as one of China's last independent video sites in a highly competitive market, and things look unlikely to get any better as we head in 2015.

Disclosure: None.