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PRESENTSCOMPANY IPO ANALYSIS        May 4, 2011     By Kenny Hong, CFA
TABLE OF CONTENTSForeword                                            3Executive Summary                                   ...
FOREWORD“China Internet IPO”, “Social Network“, and “Facebook” are the hottest buzz words of 2011.Renren includes all 3 of...
EXECUTIVE SUMMARY  ▪ Price per share: $12-14 (increase from previous $9-11)  ▪ 114 million registered users (February 2011...
IPO DETAILS  ▪ RenRen expected IPO date: May 4, 2011.  ▪ RenRen ticker symbol: NYSE:RENN  ▪ Price per share: $12-14 (incre...
▪ Internet Demographics in China      o 58.2% of internet users below the age of 30      o Students comprise 30.6% of the ...
RenRens Potential Growth             900             800             700             600Axis Title             500        ...
Share of Advertising Spending by Medium in China                   2009                                             2012EF...
RenRen Revenue & Net Income 08-10                               $100.0                                $75.0        in mill...
SOURCES OF REVENUE   ▪ IVAS (Internet Value Added Services)        o Primarily through online game revenues of which the s...
PLANS FOR PROCEEDS FROM IPO   ▪ Renren plans on using the proceeds of the IPO in three manners        o $180M for investin...
Ownership and Voting Rights                                            0.0%   10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80...
questionably similar to competitors (e.g. Facebook), while expanding into new markets. Privacyand anti-spam anti-malware w...
CURRENT COMPETITION IN CHINA                     April 14th, 2010, China’s Top 4 in Comparison                            ...
RenRen○ Design and business model are copied from Facebook.○ Users: The majority of users are students, although RenRen st...
KaiXino While RenRen was still concentrated on students, the upstart Kaixin001 was able to  attract white-collar workers (...
QZone○ Qzone draws traffic from QQ Messenger, which boasts 523 million active users and  is also owned by Tencent. Qzone t...
three times Facebook’s estimated revenues. It’s unclear how much of that is   attributable to the Qzone social network tho...
approach of starting with the elite students at China’s top universities, BeiDa and              Tsinghua, and then spread...
RankTraffic (forChina)Alexa          #90           #155          #10          #419          #179    #13RankTraffic(globall...
Top left: At the end of 2010, Renren held 36% market share in real-name China SNS(excludes Qzone), leading its next closes...
COMPARISON TO FACEBOOK  ▪ Revenue multiplier is common method used to determine relative price of a company  ▪ Renren is n...
RECENT CHINA INTERNET IPO ANALYSIS  China Internet Ipo Sample Size                                                        ...
Using IPO Offering Price                   First         Open vs   Day IPO         IPO       Price    1-Week      1-Month ...
Using First Day Adj Close          1-Week    1-Month   TotalTicker    Return    Return    ReturnSOHU         -7.23%   -55....
INVESTMENT STRATEGY FOR RENRENSPECULATIVEHIGH VOLATILITYESTIMATE OPEN $14 TO $20ESTIMATE 1ST DAY CLOSE $16 TO $28ENTRY PRI...
General: Additional information is available upon request. Information has been obtained fromsources believed to be reliab...
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Ren Ren Company Ipo Analysis

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RenRen (RENN) IPO & Company Analysis

Indepth report on the RenRen China Internet Social Network company & its IPO.

TABLE OF CONTENTS


Foreword 3

Executive Summary 4

IPO Details 5

Renren User Base & Internet Demographics in China 5

Financials 8

Sources of Revenue 10

Plans for Proceeds from IPO 11

Early Investors 11

Risk Factors 12

Management 13

Current Competition in China 14

Comparison to Facebook 22

Recent IPO Analysis 23

Investment Strategy for Renren 26

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Ren Ren Company Ipo Analysis

  1. 1. PRESENTSCOMPANY IPO ANALYSIS May 4, 2011 By Kenny Hong, CFA
  2. 2. TABLE OF CONTENTSForeword 3Executive Summary 4IPO Details 5Renren User Base & Internet Demographics in China 5Financials 8Sources of Revenue 10Plans for Proceeds from IPO 11Early Investors 11Risk Factors 12Management 13Current Competition in China 14Comparison to Facebook 22Recent IPO Analysis 23Investment Strategy for Renren 26 2
  3. 3. FOREWORD“China Internet IPO”, “Social Network“, and “Facebook” are the hottest buzz words of 2011.Renren includes all 3 of those elements and will be one of the first social network websitesgoing IPO with Linkedin, Facebook, and Kaixin001 following after. Renren is a China InternetSocial Network company designed to look like the Facebook of China and is going IPO onWednesday, May 3, 2011. China has 457 million Internet users at the end of 2010 and isestimated to grow to over 700 million by 2014. Renren has 114 million registered users. Thewave of hot IPOs has evolved from US Tech. firms in the 1990s to the US Internet IPOs in the2000s to the China Internet IPOs in the 2005-2010 to the Global Social Media + China InternetSocial Media in 2011. As an early adopter and user of various Internet Social Networks, I haveexperience the evolution of sites such as Friendster, Myspace, Facebook, Linkedin, and now theChina Websites and Social Networks such as Renren as I am currently based in Shanghai, China.The recent China Internet IPOs from Dec. 2010 such as Dang Dang (Dang), Yokou (Yoku), andQihoo (QIHU) have been successful for institutional investors, 45% to 366% return from IPOprice to May 3rd while the return for investors after the open IPO price has been mixed from -5% to 121%. More data are provided in the following report. The information from thisresearch report has been taken from the Renren prospectus and various reputable sources inEnglish and Chinese as well. We hope this report will better help you in your investmentdecision, business decision, or academic interests by providing you with an overview of Renrenas a company and the social network in China as well.Kenny Hong, CFAVice President, Investment AdvisoryKenny.hong@ct-business.com 3
  4. 4. EXECUTIVE SUMMARY ▪ Price per share: $12-14 (increase from previous $9-11) ▪ 114 million registered users (February 2011) o Aggregate 2.9 billion photos, 249 million blogs, 20.8 billion comments/reviews ▪ 58.2% of Chinese internet users below the age of 30 ▪ Users in China spent 7.8% of their online time on social networking sites compared to 13.9% globally and 11.6% in the United States (April 2010) ▪ YoY revenue growth was 239% from 2008-2009 ▪ YoY revenue growth declined to 64% in 2009-2010 ▪ Company has no debt and over $136M in cash on balance sheet ▪ Revenue breakdown ▪ Renren potentially has large upside from increasing its product offerings and monetization its services ▪ Risk factors include intellectual property, user base, innovation, technology, reputation, and regulation ▪ Management has strong engineering, tech start-up and consulting backgrounds ▪ Competitors include Kaixin001, Weibo, Pengyou, and Facebook 4
  5. 5. IPO DETAILS ▪ RenRen expected IPO date: May 4, 2011. ▪ RenRen ticker symbol: NYSE:RENN ▪ Price per share: $12-14 (increase from previous $9-11) o Raising up to $743.1 million o 15.93% to 18.59% of the company will be floating ▪ Shares offered o ADSs by Renren: 42,898,711 o ADSs by current shareholders: 10,201,289 o Total ADSs offered: 53,100,000 o ADSs to Class A ratio: 3ADSs to 1 Class A share ▪ Private Placements o Third-party investors affiliated with Alibaba Group, China Media Capital, and CITTIC Securities to purchase an aggregate USD 10 million worth of Class A shares at IPO price with respect to the ADSs to Class A ratioRENREN USER BASE & INTERNET DEMOGRAPHICS IN CHINA ▪ Renren User Base ○ 114 million registered users (February 2011) ○ 31 million active users o Aggregate 2.9 billion photos, 249 million blogs, 20.8 billion comments/reviews Cumulative total activated users (in millions) 117 million as of 140 March 2011 120 110 million 100 83 million Axis Title 80 60 33 million 40 20 0 December 1, 2008 December 1, 2009 December 1, 2010 5
  6. 6. ▪ Internet Demographics in China o 58.2% of internet users below the age of 30 o Students comprise 30.6% of the total user population o Only 38.4% of internet users in China engaged in online social networking compared to 69.8% globally and 81.4% in the United States (April 2010) o Users in China spent 7.8% of their online time on social networking sites compared to 13.9% globally and 11.6% in the United States (April 2010) Growth of Chinese Internet Population US Users China Internet Users 900 800 700 600 Users (millions) 500 400 300 200 100 0 2007 2008 2009 2010 2011 2012 2013 2014 6
  7. 7. RenRens Potential Growth 900 800 700 600Axis Title 500 China Internet 400 Users 300 200 100 0 2007 2008 2009 2010 2011 2012 2013 2014 Number of End Users in China by Media Interface 7
  8. 8. Share of Advertising Spending by Medium in China 2009 2012EFINANCIALS ▪ YoY revenue growth was 239% from 2008-2009 ▪ YoY revenue growth declined to just 64% in 2009-2010 ▪ Revenue forecast for the coming years maintains a growth rate between 50-60% Renren Revenue & Growth ($USD Mln) $200.0 $183.7 $150.0 2008 $122.5 2009 $100.0 $76.5 2010 $46.7 2011(E) $50.0 $13.8 2012(E) $0.0 2008 2009 2010 2011(E) 2012(E) ▪ Loss from operations in 2008 and 2009 but moved to positive numbers in 2010 ▪ Majority of loss recorded in the past 2 years has been caused by change in fair value of warrants issued to investors ▪ Company has no debt and over $136M in cash on balance sheet 8
  9. 9. RenRen Revenue & Net Income 08-10 $100.0 $75.0 in millions of US$ $50.0 $25.0 $0.0 ($25.0) Net Revenue ($50.0) Gain from Opeations ($75.0) Net Income ($100.0) 2008 2009 2010 Net Revenue $13.8 $46.7 $76.5 Gain from Opeations ($8.0) ($2.7) $7.6 Net Income $49.3 ($70.1) ($64.2)▪ Revenue multiplier is common method used to determine relative price of a company▪ Renren is nearly twice as expensive as Facebook Renren Facebook Value $5.1 Bln $70 Bln 2010 Revenue $77 Mln $2.0 Bln 2010 Revenue Multiple 67.1x 35.0▪ Renren average revenue per user of $0.65▪ Facebook averages $4.00 per user▪ Potentially Renren has large upside from increasing its product offerings and monetization its services Renren Facebook Revenue $77 Mln $2.0 Bln Number of Users 117 Mln 500 Mln Revenue per User $0.65 $4.00▪ No plans to pay any cash dividends in the foreseeable future▪ Will retain future earnings to operate and expand our business 9
  10. 10. SOURCES OF REVENUE ▪ IVAS (Internet Value Added Services) o Primarily through online game revenues of which the substantial majority is generated from users’ purchases of in-game virtual items o Other revenues include revenues earned from merchants who offer services and products on nuomi.com, paid applications on the Renren Open Platform program and VIP memberships o ▪ Online Advertising o Variety of different ads offered but over 90% of revenue comes from pay-for- time arrangements o Due to rapidly evolving nature of both online advertising and social networking websites, Renren is unable to provide any meaningful advertisement volume or price information Revenue Sources 2010 Other Online Services 2009 Games Advertising 2008 0.0% 20.0% 40.0% 60.0% 10
  11. 11. PLANS FOR PROCEEDS FROM IPO ▪ Renren plans on using the proceeds of the IPO in three manners o $180M for investing in technology and research and development activities o $180M for expanding sales and marketing activities o Remainder of the proceeds will be used for general corporate purposes including acquisitions and investmentsEARLY INVESTORS ▪ Investors - Series D o Softbank Corporation April 2008 purchased 35% for $430 million Aggregate of 10,071,763 series D preferred shares at USD 9.93 per share Has warrants to purchase 30,215,288 series D preferred shares o Joho Capital and SBI Investment Company April 2008 purchased 3,133,438 series D preferred shares for USD 30 million ▪ Investors - Ordinary Shares o Joseph Chan Economic ownership 22.8% Voting power 55.9% ▪ Underwriters of offering o Morgan Stanley, Deutsche Bank, Credit Suisse, Bank of America Merrill Lynch, Jefferies, Pacific Crest, and Oppenheimer 11
  12. 12. Ownership and Voting Rights 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% CEO Joseph Chan SB Pan Pacific Pre-IPO and Private Placement Investor… Public Investors Holding Class A Shares Pre-IPO and Private Public Investors Placement Investor SB Pan Pacific CEO Joseph Chan Holding Class A Shares Holding Class A Ordinary Shares Ownership 13.4% 29.6% 34.2% 22.8% Voting Power 3.3% 7.3% 33.5% 55.9%RISK FACTORS User Base, Innovation, Technology, and Reputation o Maintain and increase user base o Maintain innovative services and applications o Expand into new services, new demographics, whilst keeping up with technology o New fast-growing company in uncertain industry with heavy reliance on advertising and third-party services o Spammers, malicious content, collection of personal data may affect reputation, removal of content due to PRC regulations Intellectual Property o Conflict with US companies that already have patents such as Facebook o Copying other companies or being copied ▪ Regulation o PRC censorship issues and business license o Conforming to US GAAP Transparent and reliable financial information o Leasehold interests may be faultyRenren’s most imminent risk factors are lawsuits and competition, due to the saturation of theChinese social networking market. Renren will have to maintain a competitive advantage whileminimizing problems arising from intellectual property, regulatory or other issues.After their IPO in the US, Renren may be under closer scrutiny by investors, who require reliableand transparent financial information. Renren must also avoid using content that is 12
  13. 13. questionably similar to competitors (e.g. Facebook), while expanding into new markets. Privacyand anti-spam anti-malware will also become an issue.MANAGEMENT ▪ Strong engineering, tech start-up and consulting backgrounds ▪ Previously worked at Google, Yahoo, Alibaba, and other tech companies ▪ Chairman & CEO: Joseph Chen, 41 o Founder of ChinaRen.com (first-gen SNS), SVP of Sohu.com o MIT Masters in Engineering and Stanford MBA ▪ Director: Katsumasa Niki, 43 o Group manager of Softbank Corp Finance Department, director of several Softbank subsidiaries o Kobe University Bachelor of Economics and Chuo Grad School MBA ▪ Director: Matthew Nimetz, 71 o COO of General Atlantic (venture capital firm), corporate and international attorney for over 30 years o Harvard Law School and Oxford University Rhodes Scholar ▪ COO: James Jian Liu, 38 o Founder and CEO of UUMe.com, BCG China management consultant o Shanghai Jiao Tong BS Computer Science and Stanford MBA ▪ CFO: Hui Huang, 38 o CFO of Cathay Industrial Biotech from 2003-2007, Associate in Goldman Sachs Asia Principal Investments, BCG Associate o Wharton MBA ▪ Chief Marketing Officer: Alvin Chiang, 40 o VP of Alibaba, VP Sales of NetEase, Yahoo ▪ SVP Games: Chuan He, 31 o Ph.D. in Computer Science from Tsinghua ▪ VP of Nuomi.com: Derek Boyang Shen, 37 o Google Head of China Development, Strategic Partner Development, Engineer o UCLA Masters in Computer Science 13
  14. 14. CURRENT COMPETITION IN CHINA April 14th, 2010, China’s Top 4 in Comparison 14
  15. 15. RenRen○ Design and business model are copied from Facebook.○ Users: The majority of users are students, although RenRen strives to retain those users after graduation. In the fall of 2009, it launched a massive advertising campaign—both traditional and digital—urging Chinese to reconnect with old friends and classmates. The emphasis is on connecting with real-life friends online, just as on Facebook. As RenRen grows, it is encroaching on the turf of its rivals: teens (Qzone), white-collars (Kaixin001), and lower-tier cities (51.com).○ User Interface: The user interface is nearly identical to Facebook (though it has not copied Facebook’s latest redesign). It has a few unique features, such as a “footprint” of who last visited your page and recently added game mechanics or ‘funware’ so that users can reach ‘higher levels’ for interacting on the site. It also allows custom skins, though the majority of users stay with the basic theme.○ Platform: The application programming interface is open to 3rd parties, but revenue share is a capped at 56%. It boasts about 250 applications (almost all games) and is China’s most popular open platform. Foreign game developers are just starting to test the approval process, with FooMojo, RockYou, and PopCap leading the way. Access for foreign developers is certain to be a hot topic at the upcoming 2010 China Social Games Summit.○ Games: RenRen has the most and best games, in large part due to its open platform. But RenRen also develops games in-house, leading to concerns that RenRen will favor its own games over those of outside developers. Other networks often copy the most popular games on RenRen.○ Financing: Softbank purchased 35% of RenRen for $430 million, valuing the company at $1.2 billion. The company intends to hold an initial public offering as soon as 2011.○ RenRen’s parent company is Oak Pacific Interactive, which also owns Mop, a smaller Chinese social network, forum, and humor site.○ Revenues: Annual revenue was over 100 million RMB ($15 million) in 2009, according to one source from the company. The primary revenue channel is advertising (brands, games, and e-commerce).○ Analysis: RenRen is the most popular, most open, and best-financed social network in China. Its management team is also the smartest and fastest-moving. It is actively developing advertising, gaming, and e-commerce revenues. Its user growth is impressive, in large part due to its aggressive marketing campaigns. The August 2009 name switch from Xiaonei (inside-campus) to RenRen (people’s web) signaled its ambition to become China’s dominant popular social network. By comparison, China’s other social networks are asleep at the wheel. 15
  16. 16. KaiXino While RenRen was still concentrated on students, the upstart Kaixin001 was able to attract white-collar workers (in large part via spam).o Its social games got entire offices addicted to parking cars, stealing crops, and other top games. Its white-collar workers are the richest and most monetizable demographic of social network users. Kaixin001’s critical battle is ensuring that the next generation of students “graduates” to its site upon entering the workforce, rather than remaining with RenRen.o Users: White-collar workers who can secretly farm crops and check friends’ photos from their office desk. Its users spend twice as much time on site, as compared to users on the other social networks.o User Interface: The interface is clean and very simple—Kaixin001 is a pared-down version of Facebook. It eases first-time users into social network: the most popular applications, like the popular “Buying a House,” even comes pre-installed. Advertising is minimal.o Platform: Kainxin001 is a closed platform, although insiders say that it will eventually open up. It has about 50 applications, the majority of which are games.o Games: Kaixin001 launched the social games craze in China and its users are game- crazy. But its games now lag behind RenRen in quantity and quality, because it’s attempting to develop everything in-house. For instance, it took Kaixin001’s developers 6 months (an eternity in social game years) to copy a popular restaurant game on RenRen. That will damage Kaixin001 as it aims to attract new users and retain and monetize its existing users.o Financing: Kaixin001 has received a total of $23 million through two funding rounds. Investors include Sina, Qiming Ventures, and Northern Light Venture Capital.o Revenues: Kaixin001 has reached monthly revenues of 7 million RMB ($1 million), but is not yet profitable. Advertisers at ad:tech Beijing told BloggerInsight that Kaixin001 is the hottest site.o Analysis: Kaixin001 has seen rapid growth and has captured a desirable demographic of white-collar workers (appealing to advertisers), who spend tons of time on the site. But its management team is far more conservative and slow- moving than RenRen. It’s far behind in terms of its advertising and monetization channels. Its site design has changed little and its application programming interface remains closed. If Kaixin001 fails to innovate or at least keep up with the curve, it will lose out. Students will stick with RenRen rather than “graduate” to Kaixin001. 16
  17. 17. QZone○ Qzone draws traffic from QQ Messenger, which boasts 523 million active users and is also owned by Tencent. Qzone targets teens, rural, and casual users and claims a whopping 388 million active users, a highly suspect number. Tencent’s internet services, QQ Messenger, QQ Show, QQ Games, QQ Pet, and Qzone, do connect a huge number of Chinese people. But the classification of Qzone as a social network is questionable. It has tons of dormant, skeleton profiles that are pulled from QQ Messenger. In that regard, it’s similar to MSN Spaces, which also has a ton of “users,” but low value and retention rates. Qzone users often use nicknames or aliases rather than real-life names. Given Tencent’s awesome advantages and synergies in social networks, Tencent’s forays into “real-identity” social networking should be seen as a squandered opportunity.○ Users: Teens and rural users. Qzone is attempting to funnel its older users towards its other social network, Xiaoyou (classmates), with limited success. It already failed with an earlier attempt called QQ Campus.○ User Interface: Qzone is a lousy website: it’s ugly, unintuitive, and buggy. The site is very basic (for a social network), but not in a user-friendly way (like Kaixin001).○ Platform: Qzone is a closed platform, though it is experimenting with licensing. It has about 50 applications (mainly games). Benjamin Joffe, Tencent expert and CEO of internet market research firm +8*, comments: “Applications are all copies or licenses or bought from social gaming companies, generally with terrible revenue share or poor valuation. Why? Because Tencent is a closed network and because they can. Problem is: operating social games is not the same as instant messaging or massive multi-player online games and there is a learning curve – even for Tencent.”○ Games: Although Qzone should have a natural advantage (Tencent also owns QQ Games), the games, like much else on the site, are of low quality. Qzone develops in- house copies of popular games, but it lags way behind and prohibits users from adding games without paying at certain times. Perhaps Qzone’s comparatively young and rural users are so naïve that they pay Qzone when they can play the same—or better—games for free on the other networks. But it’s doubtful that this is a successful business strategy in the long run.○ Financing: Tencent, Qzone’s parent company, is massively profitable and can employ incredible resources should it so desire.○ Revenues: No public figures are released. There is a lack of advertising and quality games, so virtually all revenues must come from Qzone “Yellow Diamond” memberships. It is difficult to estimate that revenue stream, but it’s hard to imagine that too many Chinese users will stay loyal to Qzone in the long-run if they continue to offer lousy services.○ Analysis: Tencent with Qzone is like Microsoft with Windows Vista: a near- monopolist (in instant messaging) that can thrive despite a terrible product and lack of vision. Tencent is still massively profitable: 2009 revenues were $1.8 billion, about 17
  18. 18. three times Facebook’s estimated revenues. It’s unclear how much of that is attributable to the Qzone social network though. Benjamin Joffe comments, “Tencent is definitely not the best in terms of products or innovation – similar to Zynga in that sense – but their ability to deliver a “good enough” mass market service and integrating it within their ecosystem is impressive.” It holds the teen demographic, but poor site design and management have cost it ground against its competitors. Qzone is shut out of the market for older students and white-collar workers, and RenRen is now encroaching on its core demographic of teens. Qzone could still turn things around though, as its parent company Tencent is an 800- pound gorilla in the Chinese internet.51.Com○ 51.com was an early favorite with significant backing, but is now struggling. Growth has slowed and it has the lowest traffic rankings of the top four. In early January, the site was briefly blocked for “objectionable” content, so management is trying to clean itself of lewd users and content (it’s rumored to be a platform for the world’s oldest profession). Its Chief Strategy Officer recently resigned, citing illness. 51.com is a borderline mass-market contender at best. Urban and educated demographics have all turned to its competitors. It’s now in the precarious position of defending its core user base in lower tier cities.○ Users: Users from lower tier cities.○ User Interface: 51.com is a simple social network. It’s far more functional than elegant. Several popular applications are pre-installed and the skins are customizable.○ Platform: 51.com offers an open platform. It has attracted about 50 applications (mostly games). It is expected to offer more favorable revenue share terms than RenRen.○ Games: The games on 51.com are decent, though not as numerous or high-quality as on RenRen. 51.com also develops its own games in-house: it’s investing $15 million in a gaming portal, in an attempt to reduce its reliance on advertising and value-added services. It will also soon connect into the gaming platform from Giant Interactive, one of its investors.○ Financing: Giant Interactive, a publicly-listed Chinese massive multiplayer online gaming company, invested $51 million for a 25% stake. Earlier backers include venture capital firms Sequoia Capital, SIG, Redpoint Ventures, and Intel Capital. In early 2007 there was premature talk of an IPO in 2010, but nothing has been heard since.○ Revenues: 51.com claims to have turned a profit in 2009, with advertising revenues of about 200 million RMB ($29 million). Its open platform generated roughly 12 million RMB ($1.8 million) in revenues.○ Analysis: 51.com was likely doomed to the mass-market by its rural roots. Its lower tier cities approach initially allowed for quick user growth, but the site now has a low-brow reputation and is scorned by more sophisticated netizens. RenRen’s 18
  19. 19. approach of starting with the elite students at China’s top universities, BeiDa and Tsinghua, and then spreading outward (copied from Facebook), appears to have been far more successful. Second tier social networks worldwide are falling to Facebook. Will China’s more “sophisticated” networks push into 51.com’s territory? BloggerInsight is inclined to think so. 51.com’s stagnation in user growth relative to other networks is not a good sign; spreading outward from elite users has been successful for social networks worldwide and for RenRen in China too. There are certainly differing opinions though. Beijing-based internet guru Kaiser Kuo told BloggerInsight, “I wouldn’t write them off at all: They’ve got a real hold in sub- secondary cities and with their tie-up to a major game company (Giant Interactive), they’ve got plenty of cash, and as far as I know, loads of traffic. It’s also been cleaned up quite a bit within the last year, from what I’ve heard.” 51.com may or may not hold its ground in lower tier cities. But one thing’s for certain: 51.com stands little chance in China’s top-tier cities. Current China’s Top 6 Social Networking Sites in Comparison Renren Kaixin001 QQ Community 51. com Pengyou WeiboURL www.renren.com www.kaixin001.c www.qq.com www.51.com www.pengyou.c www.sina.com.c om om nType Real-name SNS Real-name SNS Nickname SNS Real-name Real-name Microblog SNS SNSRegistered 170 million 95 million 481 million 1/8 million 131 million 120 millionUsers (Tencent claims (Tencent claims these as these as iResearch (iResearch “actives” under “actives” under iUserTracker) iUserTracker) an extremely an extremely broad, broad, undefined undefined definition) definition)Active 95 million 40 million 190 million 40 million 80 million 65 millionUsersUser Students, White-collars Teens Lesser-tier Students, White-collarsDemograp white-collars cities, rural white collarshics usersAlexa #15 #28 #2 #72 #26 #3 19
  20. 20. RankTraffic (forChina)Alexa #90 #155 #10 #419 #179 #13RankTraffic(globally)Alexa 10.03 16.96 9.06 11.79 4.74 10.08RankPageviews/User(average3months)China #10 #19 #2 #127 #27 #3Rank Reports from Renren regarding its user base and market share 20
  21. 21. Top left: At the end of 2010, Renren held 36% market share in real-name China SNS(excludes Qzone), leading its next closest competitor, Tencent Pengyou by 13.5%, and farahead of Kaixin001.Top right: Renren also claims the highest user loyalty, meaning 70% of users are unlikelyto shut down their Renren accounts to join another SNS service.Bottom: Future user usage frequency, 60% of users stated that they will spend same oftime in Renren as they are now, 15.9% vote they will spend more time, 20.2% vote for lesstime, and 3.7% unsure.*Note that these pictures are data from CNNIC: According to CNNIC’s latest Chinese SNSusers’ report, Renren has dominated the whole SNS market with its 39% market share and moststable user foundation (user loyalty as high as 69.6%). However, the report has excluded Qzonewhich may have a bigger market share and higher user loyalty when combined with TencentPengyou. ▪ Kaixin001 and Weibo (Sina) o Sued Renren for unfair competition Renren released Kaixin.com a copy of Kaixin001 o Weibo growing at 10 million users per month while Renren is only growing at 2 million users per month o Kaixin001 planning to issue IPO one month after Renren Pengyou (Tencent) ○ Tencent’s latest entry into the real-name social networking space has many users. However, whether the social graph is strong is still uncertain. 21
  22. 22. COMPARISON TO FACEBOOK ▪ Revenue multiplier is common method used to determine relative price of a company ▪ Renren is nearly twice as expensive as Facebook Renren Facebook Value $5.1 Bln $70 Bln 2010 Revenue $77 Mln $2.0 Bln 2010 Revenue Multiple 67.1x 35.0 ▪ Renren average revenue per user of $0.65 ▪ Facebook averages $4.00 per user ▪ Potentially Renren has large upside from increasing its product offerings and monetization its services Renren Facebook Revenue $77 Mln $2.0 Bln Number of Users 117 Mln 500 Mln 22
  23. 23. RECENT CHINA INTERNET IPO ANALYSIS China Internet Ipo Sample Size Total Raised Stock Exchange Ticker Business IPO Date ($ million) Sohu NASDAQ SOHU Net ads and content 12-Jul- 12-Jul-00 59.8 Baidu NASDAQ BIDU Search Engine Aug- 5-Aug-05 109 Alibaba HK 1688 B2b ecommerce Nov- 6-Nov-07 1500 Changyou.com NASDAQ CYOU Games (Sohu subsid) Apr- 2-Apr-09 165 hiSoft Tech NASDAQ HSFT IT, business process 30-Jun- 30-Jun-10 74 SouFun NYSE SFUN Real estate ad site 17-Sep- 17-Sep-10 125 ChinaCache Intl NASDAQ CCIH Internet app delivery 1-Oct-10 Oct- 84 Dangdang NYSE DANG Ecommerce ex. Amazon Dec- 8-Dec-10 272 Youku NYSE YOKU Like Youtube Dec- 8-Dec-10 203 Qihoo NYSE QIHU Internet Security 30-Mar- 30-Mar-11 176 IPO Adj IPO 1- Adj 1- 1- Adj 1- Share Share Adj IPO Adj IPO Week Month Current Ticker Price Price Open Close Price Price Price SOHU 13 13 13.03 13 12.06 5.75 105.74 BIDU 27 2.7 6.6 12.25 9.5 7.78 148.52 1688 13.5 13.5 30 38.48 28.17 32.48 13.78 CYOU 16 16 22 20.02 25 32.62 45.32 HSFT 10 10 10.25 10.4 11 12 18.66 SFUN 42.5 10.625 16.75 18.38 17.42 18.2 23.05 CCIH 13.9 13.9 27 27.15 23.53 23.71 16.81 DANG 16 16 24.5 29.91 27 29.42 23.16 YOKU 12.8 12.8 27 33.44 33.3 38.9 59.69 QIHU 14.5 14.5 27 34 30.3 28.5 28.72 23
  24. 24. Using IPO Offering Price First Open vs Day IPO IPO Price 1-Week 1-Month TotalTicker Offering Return Return Return ReturnSOHU 0.23% 0.00% -7.23% -55.77% 713.38%BIDU 144.44% 353.70% 251.85% 188.15% 5400.74%1688 122.22% 185.04% 108.67% 140.59% 2.07%CYOU 37.50% 25.13% 56.25% 103.88% 183.25%HSFT 2.50% 4.00% 10.00% 20.00% 86.60%SFUN 57.65% 72.99% 63.95% 71.29% 116.94%CCIH 94.24% 95.32% 69.28% 70.58% 20.94%DANG 53.13% 86.94% 68.75% 83.88% 44.75%YOKU 110.94% 161.25% 160.16% 203.91% 366.33%QIHU 86.21% 134.48% 108.97% 96.55% 98.07% 70.91% 111.88% 89.06% 92.30% 703.31%Using First Day Adj Open First Day 1-Week 1-Month TotalTicker Return Return Return ReturnSOHU -0.23% -7.44% -55.87% 711.51%BIDU 85.61% 43.94% 17.88% 2150.30%1688 28.27% -6.10% 8.27% -54.07%CYOU -9.00% 13.64% 48.27% 106.00%HSFT 1.46% 7.32% 17.07% 82.05%SFUN 9.73% 4.00% 8.66% 37.61%CCIH 0.56% -12.85% -12.19% -37.74%DANG 22.08% 10.20% 20.08% -5.47%YOKU 23.85% 23.33% 44.07% 121.07%QIHU 25.93% 12.22% 5.56% 6.37% 18.83% 8.83% 10.18% 311.76% 24
  25. 25. Using First Day Adj Close 1-Week 1-Month TotalTicker Return Return ReturnSOHU -7.23% -55.77% 713.38%BIDU -22.45% -36.49% 1112.41%1688 -26.79% -15.59% -64.19%CYOU 24.88% 62.94% 126.37%HSFT 5.77% 15.38% 79.42%SFUN -5.22% -0.98% 25.41%CCIH -13.33% -12.67% -38.08%DANG -9.73% -1.64% -22.57%YOKU -0.42% 16.33% 78.50%QIHU -10.88% -16.18% -15.53% Average: -6.54% -4.47% 199.51% China Tech IPO Price Trends 160 140 120 Sohu Baidu 100Price ($/share) Alibaba 80 Changyou.com hiSoft Tech 60 SouFun ChinaCache Intl 40 Dangdang 20 Youku Qihoo 0 Adj IPO Adj IPO Adj IPO Adj 1-Week Adj 1-Month Current Share Price Open Close Price Price Price Day (Graph Not Scaled to Time Period) 25
  26. 26. INVESTMENT STRATEGY FOR RENRENSPECULATIVEHIGH VOLATILITYESTIMATE OPEN $14 TO $20ESTIMATE 1ST DAY CLOSE $16 TO $28ENTRY PRICE: $14 TO $18 STAVOID 1 DAY ENTRY PRICE OF ABOVE $20 (HIGH RISK)1 YEAR PRICE TARGET $30Even though RenRen will be an overvalued stock from the start, the hype and exuberance willdrive investors and traders to speculate and drive up the price on this stock. From our IPOanalysis of China Internet IPOs, the 1st day opening vs. IPO Offering price has ranged from0.23% Sohu to 144% Baidu. Since the Renren’s IPO price will be between $12 to $14 dollars andthe current hype, The IPO price of Renren could estimate to open from $14 to $20. Since theinvestment bankers on the deal already raised the IPO price from $9 to $11. That has alreadyincreased the price by about 30%. If you do plan to invest in Renren, you should enter a limitorder versus a market order to prevent panic buying at a very high price. It’s possible for thestock to hit an intraday high of as high as $28 on the 1st day and drop back to there. It would bea very unlikely event for the stock to drop below the IPO price since the current market liquidityis very strong, and it’s in the investment bankers’ interest to have a very strong IPO for the 1stof a list of social network IPO. Please be aware that the 1st day price volatility could be veryhigh. You should have a plan on what price you are willing to purchase and be disciplined.Research report by:Kenny Hong, CFAVice President, Investment AdvisoryKenny.hong@ct-business.comShanghai mobile: +(86) 151-2111-5396Analyst Research Contribution by (Alphabetize by first name)Gabriel WongJay PatelKelly LaiStephanie Miao 26
  27. 27. General: Additional information is available upon request. Information has been obtained fromsources believed to be reliable but CT Business Solutions Ltd. or its affiliates and/or subsidiariesdo not warrant its completeness or accuracy except with respect to any disclosures relative toand/or its affiliates and the analyst’s involvement with the issuer that is the subject of theresearch. All pricing is as of the close of market for the securities discussed, unless otherwisestated. Opinions and estimates constitute our judgment as of the date of this material and aresubject to change without notice. Past performance is not indicative of future results. Thismaterial is not intended as an offer or solicitation for the purchase or sale of any financialinstrument. The opinions and recommendations herein do not take into account individual clientcircumstances, objectives, or needs and are not intended as recommendations of particularsecurities, financial instruments or strategies to particular clients. The recipient of this reportmust make its own independent decisions regarding any securities or financial instrumentsmentioned herein. CT Business Solutions Ltd. distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided oncompanies/industries based on company specific developments or announcements, marketconditions or any other publicly available information. Clients should contact analysts andexecute transactions through a subsidiary or affiliate in their home jurisdiction unless governinglaw permits otherwise.Copyright 2011 CT Business Solutions Ltd. All rights reserved. This report or any portion hereof may not be reprinted,sold or redistributed without the written consent of CT Business Solutions Ltd.#$J& 27

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