May 9, 2011, 6:09 pm

2011-04-27
RENN - Renren

RENN - Renren plans on offering 61.1 million ADS (assuming overs) at a range of $9-$11. Insiders will be selling 10.2 million ADS in the deal. Morgan Stanley, Deutsche Bank, Credit Suisse, BofA Merrill Lynch and Jefferies are leading the deal, Pacific Crest and Oppenheimer are co-managing.

Note that concurrent with the ipo RENN will be selling 11 million ADS equivalent shares in a private placement. The placement will be at ipo price. Buyers include Alibaba Group, China Media Capital and CITIC Securities.

Post-ipo RENN will have 403 million ADS equivalent shares outstanding for a market cap of $4.03 billion on a pricing of $10.

Approximately 1/3 of the ipo proceeds will be used to invest in technology, 1/3 in expanding sales & marketing with the remainder for general corporate purposes.

Chairman and CEO Joseph Chen will own 22% of RENN post-ipo. Mr. Chen will retain voting control through a separate share class.

From the prospectus:

'We operate the leading real name social networking internet platform in China.'

Being touted as the 'Facebook of China'. As Facebook's last round of private funding valued the company north of $50 billion, that comparison alone will garner attention and interest for this deal.

Renren means 'everybody' in Chinese.

Note that Facebook and Twitter are banned in China. From web research it appears to me that there is a consensus that RENN does indeed censor topics/keywords/posts that are considered sensitive by the PRC. Common sense would indicate that would be the case, otherwise RENN would not be able to continue to stay in business. The PRC does have recent history (notably with Google) in attempting to censor content on the internet.

Real name social network site. Much like Facebook users connect and communicate with each other, share information and user-generated content, play online games, listen to music, shop for deals etc...

31 million monthly users in 3/31/11. This is an increase from 26 million in 12/10.

Platform includes renren.com, game.renren.com, nuomi.com (social commerce site) and jingwei.com (professional networking site). These sites combine to make RENN the largest real name social networking internet platform in China.

RENN did add approximately 6 million new users in the first quarter of 2011. Unique users spend an average of seven hours a month on their platform, producing a daily average of 40 million pieces of content including 3 million photos and 13 million status updates. Note that Facebook claims users generate a billion pieces of content a day, compared to RENN's 40 million.

Sector - As most are aware, social networking internet services provide users with interactive platforms to share and consume various forms of media content. The key to the rise of sites such as Facebook and RENN is the use of real names, eliminating the early internet mode of aliases and virtual identities. Usage of real names allow facilitation of personal communication and sharing among actual friends and benefits advertisers by facilitating word-of-mouth advertising among friends and offering targeted advertising based on user’s preferences, personal traits and online activities.

Revenues - Big difference between Renren and Facebook is that RENN derives substantial revenues from social networking games, with players purchasing virtual items. Farmville, the popular Facebook game, began on renren.com. Facebook derives most of it's revenues via advertising. RENN also derives revenues from advertising, however RENN currently (revenue-wise) would seem to have as much in common with the China online gaming stocks as with Facebook!

As noted above 42% of revenues are from advertising 45% from online games. The remainder from e-commerce, and other sources. One online multi-player game alone (Tianshu Qitan) accounted for 14% of 2010 revenues.

Seasonality - Advertising revenues tend to be lower in the first quarter annually.

Financials

$1.75 per ADS in cash post-ipo on a $10 pricing. 　

***Revenues in 2010 were just $76.5 million. That is a hefty price to sales ratio for a $4+ billion market cap. One would expect massive year over year growth for that market cap. Indeed in 2009 revenues grew 238%. Note however growth slowed substantially in 2010. Revenues did grow strongly 64% to that $76.5 million number, however on a pure dollar number, the $30 million increase was less than 2009's $33 million increase. These are not weak growth numbers at all. Keep in mind though we are talking about a price to sales number of 50+ (assuming a $10 pricing). Taking that into account a 64% increase in revenues and a slower whole dollar growth in those revenues from year prior does not look so strong. This deal will be 'hot' and it will get done at a healthy price. Going forward though these growth numbers need to be watched closely as this is a potential yellow flag. Valuation in range (let alone actual pricing and open) will mean RENN will be priced to perfection on a pure financials/valuation level, slowing growth going forward will not be acceptable. Keep an eye on this as in 2010 growth was not all that impressive considering valuation. Not at all, I would consider it quite unimpressive actually.

Nice job by RENN in keeping expense growth under control in 2010. Expenses actually grew less on a whole dollar amount in 2010 than in 2009.

2010 - $76.5 million in revenues. Gross margins of 78%. Operating expense ratio decreased nicely from 2009's 83% to 2010's 68%. Very good sign for future profitability. Operating margins of 10%. Folding out currency exchanges and plugging in interest income and 15% tax rate, net margins of 8.9%, EPS of $0.02.

2011:

Again growth is an issue here. Including the 3/11 quarter, the last 4 quarters have shown no growth. Revenues in the 6/10 quarter were $19.8 million, $21.7 million in the 9/10 quarter, $20.9 million in the 12/10 quarter and $20.6 million in the 3/11 quarter. The word to describe this is lackluster.

Expenses increased significantly in the first quarter of 2011 as RENN focused on spending to grow advertising dollars. This un-did a lot of the expense constraint of 2010.

Revenue growth should kick in the back half of 2011. Revenues of $115 million, a 50% increase over 2010. Gross margins improving to 80%. Based on Q1, operating margins do not appear to improve much at all. 12% operating margins, 10.5% net margins. EPS of $0.03.

YOKU came public with the 'YouTube of China' tag. Quick look at each.

YOKU - $6.44 billion market cap, bottom line losses in 2011 expected. Top-line is expected to be the same as our 2011 forecasts for RENN. The difference is quarterly growth. While RENN saw none sequentially the back half of 2010, YOKU grew quarterly sequential revenues 48%, 61% and 31% the final three quarters of 2010. Also note that in range RENN's valuation is comparable to YOKU's after YOKU has appreciated substantially from ipo.

Conclusion

Priced to perfection in range. Revenue base just is not there yet to hold that $4 billion valuation. Revenue growth has been nonexistent the past 4 quarters as well, something I found very surprising.

These issues may not matter initially as RENN should price and open strongly. Why? Currently there just is not nearly enough internet social networking stock out there for the worldwide demand. This is the hottest segment of the worldwide market currently and investors want a piece. That 'Facebook of China' tag means RENN will easily work in range short term. Also YOKU's (The YouTube of China) valuation does not make RENN's valuation look nearly as stretched. Of course comparing skyhigh valuations can easily turn into a house of cards, simply ask anyone loaded in US internet stocks a decade ago. That is a discussion for another time I suppose.

Will work in range. I have issues with this deal and valuation however. I just do not like the lack of growth and the reliance on online multi-player games for revenues. To work longer term, growth is going to have to accelerate at more than 2010's $30 million a year. That revenue growth number is (and should be) a concern. Also of concern is the reliance on multi-player online role playing games for a large chunk of revenues. Popularity of games come and go, meaning RENN will need to continue to develop and/or license popular games. I've a lot of longer term concerns here actually on this deal at this market cap.

Keep in mind the past 4 quarters ending 3/31/11 have shown revenues of $19.8 million, $21.8 million $20.9 million and $20.6 million. If RENN does not start growing revenues sequentially, the stock will suffer down the line.

Deal should work off the 'Facebook of China' tagline, I've a lot of reservations here even in range though. QIHU looked stronger in range than RENN, much stronger.