The shares of two companies considered to be China's YouTube and Amazon.com soared in their U.S. debuts Wednesday, as investors bet they could become dominant in a still-nascent market.
Online video company Youku.com Inc.'s stock rose to $33.44, or 161 percent, above its IPO price in its first day of trading. The shares of online retailer E-Commerce China Dangdang Inc. rose to $29.91, or 87 percent, above their IPO price — the latest sign that investors are hungry for growth and eager to gain a foothold in China.
"Investors like to get in early in companies that could end up dominating their markets," said Paul Bard, an analyst at Connecticut-based IPO research and investment house Renaissance Capital.
"You have two potential leaders in two potentially massive markets in China. I think that's being reflected in their trading today."
Youku's triple-digit first day pop is the biggest since 2005, when Baidu.com rose 354 percent, according to data from the New York Stock Exchange.
Bankers typically target a first day pop of 10 percent to 20 percent. Those levels of gains insure that most of the money raised in the IPO goes to the company and selling shareholders, but investors are still rewarded for taking a risk on a new issue.
"They left some money on the table but the benefit in this case might exceed the cost," said Josef Schuster, founder of Chicago-based IPO research house IPOX Schuster LLC and principal portfolio manager of the Direxion Global Long/Short IPO fund.
"They are on the radar screen of every investor now," Schuster said, adding that the extra pop got the companies significantly more media coverage and could bode well for future share sales.
Investors are looking for "high quality, high growth" companies in China that can scale their businesses as more Chinese consumers come online, Dangdang Chief Financial Officer Conor Chia-hung Yang told Reuters.
"They look at the success of Amazon and they look for that in China," said Yang, citing a market of 100 million online shoppers. "We are in the early stages of the growth."
Youku founder and Chief Executive Victor Koo said Youku also focuses on growth. He said that the online video service — akin to Hulu, YouTube and Netflix Inc. — intends to use proceeds from the IPO to expand its share in the Chinese market, and that the prestige of a U.S. listing would help.
"The primary reason is that we feel listing on the (New York Stock Exchange) helps elevate the local brand and solidify our leadership position in the video market," said Koo.
So far this year, Chinese companies making their debuts in the United States are posting returns of about 30 percent, according to Thomson Reuters data.
That contrasts with an average return of 23 percent for all U.S. IPOs this year, including companies based in China, according to data from Renaissance Capital.
There have been some Chinese flops, however. The shares of Chinese online retailer Mecox Lane Ltd., which launched in late October, are currently trading more than 38 percent below their $11 IPO price, for example.
Soon after its IPO, Mecox reported a year-on-year drop in gross margin, causing its shares to swoon and triggering several class action lawsuits.
Youku and Dangdang's greatest challenges may lie in making money.
Both are in competitive businesses and both are fighting for profitability.
Youku's revenue increased by an average of 1,000 percent a year over the past two years and was up 135 percent in the first nine months of 2010 compared with the year-earlier period — but it has yet to turn a profit.
Its net loss widened by 22.5 percent to 167 million yuan ($25 million) in the same period.
Youku relies mostly on advertising revenue but is attempting to diversify its model by testing a subscription plan for people who want to watch movies and other entertainment programming in a high-definition format.
Youku's Koo declined to say when the company is expected to turn a profit.
Dangdang has fared slightly better. It swung to a roughly 16 million yuan profit in the first nine months of 2010 from a 5.2 million yuan loss in the year-earlier period. Revenue grew 55.6 percent to 1.6 billion yuan in the same period.
The company holds 50 percent market share for books and media and is currently expanding to general merchandise categories such as beauty, home and lifestyle, and baby goods.
"We want to leverage our client base and execution in the media sector and then go into general merchandise," Yang said, adding that in the first nine months of 2010, some 6.8 million "active" customers had placed orders. That is up from 1.9 million in 2007 and 6 million in 2009.
Dangdang currently generates half of its business from customers in first-tier cities in China, but the company can deliver goods to 750 cities around the country and collect cash — the payment method of choice — on the spot.
Youku sold 15.8 million American depositary shares for $12.80 each Tuesday, raising about $203 million. It had planned to sell 15.4 million shares at $9 to $11.
Dangdang's IPO priced at 14.3 percent above the expected range Tuesday, raising $272 million by selling 17 million American depositary shares for $16 each.
The company had previously raised the expected price range for its IPO.
Credit Suisse Group AG and Morgan Stanley led the underwriters for the Dangdang IPO, while Goldman Sachs Group Inc led Youku's underwriters.
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