Investors are feeling a little more comfortable about Chinese
listings in the U.S. than they were a couple of years ago, when
accounting scandals at some firms rocked the whole stock boat
Take Beijing-based58.com (
) . Its U.S.-listed shares, which popped in Friday trading, are
up 84% from the Oct. 31 offering price of $17.
Founded in 2005 and known as the Craigslist of China, 58.com
is the top online classified advertising player in China,
providing a market for consumers and small and medium-sized
Products and services offered on its site include housing,
jobs, used goods, autos, home care, travel and business services,
But it hasn't been entirely smooth sailing for Chinese
stocks.NQ Mobile (
), a Chinese security software developer, lost about half of its
value on Oct. 24 when research firm Muddy Waters alleged "massive
fraud," and several other Chinese stocks traded in the U.S. saw
their shares stumble as well. Many of the others dragged down by
NQ have since recovered.
China's New Issues
The average total stock appreciation of the eight Chinese
companies that have listed in the U.S. this year was 61% as of
Thursday's close, says Stephanie Chang, research analyst at
Investors "remain selective," she says. For example, she says,
online retailerLightInTheBox (
) is off its June offering price due to "company specific" issues
-- shares were down about 15% from the IPO in Friday trading. The
company's Q2 revenue as well as sales guidance for Q3 were well
below Street expectations.
"We think (58.com) has tremendous growth potential given the
nascent nature of China's online classifieds market, which is
expected to grow at a 53% compounded average growth rate through
2017," Chang said by email.
China's online classifieds market currently accounts for 15%
of total classified advertising, according to iResearch.
58.com has seen "massive growth" over the past two years, she
said, "and unlike many high-growth tech companies, it is
It became profitable in the second quarter of this year. Net
income in the third quarter -- its first as a publicly traded
company in the U.S. -- totaled $9.3 million, compared with a net
loss of $5.9 million a year earlier. In terms of per-share
American depositary receipts, it earned 10 cents vs. a 40-cent
As much a jump as that was, earnings came in 2 cents below
analysts' consensus, which caused the stock to fall 10% the day
results were released on Nov. 27. Shares had risen to as high as
38.70 on Nov. 22. Shares have moved up recently, but the stock is
still 21% off that high.
Pacific Crest Securities analyst Cheng Cheng blames the slight
earnings miss for the stock's rocky performance since then. But
he thinks the company still has lots of room to grow.
He figures it's only tapped about 10% of its potential
membership opportunity, for one thing. And he says it'll likely
grow into new verticals and field new ad products.
The company's total revenue in Q3 increased 77.6% from the
earlier year to $41.6 million. Management expects Q4 revenue of
$41 million-$43 million, for a year-over-year gain of 65.9% to
Money From Members
Nearly 60% of Q3 revenue came from membership fees from a
portion of merchants selling on its platform. These merchants pay
monthly, quarterly or yearly fees to have their listings placed
above free listings, Cheng says. "It's kind of a pseudo
advertising revenue stream," he said in a phone interview.
Membership revenue jumped almost 80% from the year ago period,
driven by a gain in the number of paying merchant members, which
increased 73% to 353,000.
The other 40% of revenue was from online advertising. That
included search-engine revenue sharing from partners such asBaidu
), real-time bidding and other marketing services such as
priority listings and service agreements with third-party
Internet companies. All depend on traffic and page views.
Revenue from online marketing jumped 112.4% from the year-ago
period, due largely to the launch of the real-time bidding
service in Q1.
China's local services market "is at the dawn of online budget
migration," wrote Credit Suisse analysts Dick Wei and Evan Zhou
in a recent initiation report on 58.com. They said 58.com is
"riding at the top" of the online local services market. Further
growth could come from new product categories and geographic
expansion, they said.
One of the biggest positives for 58.com, Cheng of Pacific
Crest says, is that 58.com's online business model is "very
mobile ready," so users' transition to mobile devices won't be a
problem. Another positive is that its location-specific products
and services will become even more valuable in China's growing
online classifieds' market.
"58 has been taking share from competitors," he said.
Of the top five online providers of classified ads in China
last year, 58.com had the largest share at 38%, up from 23% in
2010, according to iResearch. Real estate and home-services
portalSouFun Holdings (
) was next with 27% share.
But the "space is competitive," Cheng said. One big concern is
that some of the largest Internet companies in China, such as
Tencent Holdings, Baidu and Alibaba, will offer more "overlapping
services," especially on mobile devices. "People are watching how
it will play out," he said.
Chang of Renaissance Capital agreed that the online
classifieds market in China is "highly competitive and constantly
"(58.com) carries high execution risks as a relatively young
company," she said.
But the Credit Suisse analysts wrote that 58.com has a big
advantage as the leader in the Internet's fast-growing local
services market in China. Plus it has a "strong brand name" and
"good execution track record."
"We believe the local services market is a winner-take-all
market -- with the leader gathering most of the market
information," they said.