NASDAQ IPO raises hopes in China

The second successful Chinese company IPO in the US this year, social media company YY, bodes well for 2013, according to sources.

The $82 million listing of the private equity-backed Chinese social media company YY on the NASDAQ yesterday may have been tiny compared to Facebook’s $16 billion May listing, but it could send a reassuring message to other Chinese companies hoping to list in the US, according to industry sources.

Alex Hartigan, managing director at Steamboat Ventures, a private equity firm invested in YY, claims that the exit was a “grand slam” for his firm, meaning a return of around 25x on an undisclosed initial investment in 2008.

“There’s a lot more potential for the company, but the entry valuations are up,” added Hartigan, who sits on YY’s board.

Hartigan added that the company’s road show in particular helped sell the company in the US – the management team had to work very hard to show they were “buttoned down” yet transparent in terms of their disclosure.

US investors wary of Chinese companies due to some accounting scandals, combined with poor public market performance in both the US and China, have caused IPO plans to be delayed. 

Given these conditions, in October, YY went ahead and applied to list anyway. Many in the industry have been waiting to see how the public debut would fare, particularly since it will be the last Chinese listing in the US this year, according to David Roberts, partner at O’Melveny & Myers.

The company lowered initial valuation expectations. It had expected to raise $100 million from its IPO, but soon lowered the target to $82 million, according to statements from the company and Steamboat. 

“The YY listing just shows that if these companies are willing to do a reality check on valuations, they can still list successfully,” Roberts said. He added that the investors of YY probably made a judgment call on what valuation they could expect in the current environment, with all the negative impressions surrounding Chinese companies, and it paid off.

He also points to the IPO of VIP Shop earlier this year as another example lowered valuations that paid off.

Although only two private equity-backed IPOs of Chinese companies in the US happened in 2012, both are nonetheless trading above their offering price.

Roberts said that as many as 40 Chinese companies hope to list in the US and they will take YY’s relative success as a good sign. He believes that in 2013, ten to 15 Chinese IPOs in the US is a realistic prediction.