Chinese social media firms stay strong post-IPO

Positioned in large market with growing Internet population, social media companies in China may outdo global peers but need to work on fundamentals for long-term survival.

Chinese social media companies face better prospects than their counterparts worldwide due to the Asian giant's population size and market potential, according to industry observers. At the same time, they also face stiffer competition and may suffer from overvaluation of IPOs (initial public offerings) as they generate strong hype but low profits.

Chinese companies are able to make returns on investments (ROI) with greater pragmatism, hence their valuation is less likely to drop after going public, Jake Saunders, forecasting vice president at ABI Research told ZDNet Asia in an e-mail interview. Nearly all Chinese stocks are stamped with the moniker "growth stocks", he pointed out.

Saunders explained this is because China had entered the Internet later than its Western counterparts, particularly North America and online businesses grew in a "more tried and tested Internet marketplace environment". They have also been more focused on market dynamics over cutting-edge technology dynamics, with extreme competition to "separate the wheat from the chaff" early on--prior to the IPO stage.

Saunders also said that in countries such as China, there is "no safety net" since there is less emphasis on social welfare, unlike in the United States or Europe. He added: "Furthermore, in a country where the middle class is 300 million strong and growing, if you don't take advantage of the opportunity, someone else will."

And while the U.S. is a large addressable market, it is considered a mature market in terms of consumer purchasing, noted Saunders. "China, on the other hand, has a population base that is three times bigger and its consumer purchasing capacity will continue to grow."

Nimble with opportunities
The best of Chinese social media companies are fast at seizing opportunities and not afraid to try something new, Amanda Chen, business analyst at China Market Research (CMR) Group added.

In an e-mail, Chen noted that Sina's Weibo, the Twitter-like Chinese microblogging site, is interesting as users have greater flexibility to load and share additional contents such as videos.

In addition, video sharing Web site Youku went from focusing on user-generated content to developing its own or licensing content. "This changes the model from what we see in the U.S., and if [Youku] can keep costs under control, [it] has the potential [to grow further] because younger consumers in China don't really watch TV and are hungry for fresh content," she pointed out.

Hover Xiao, senior research analyst of vertical industry research and consulting at IDC China, also agreed that China's Internet population is key to the success of Chinese social media.

That said, social media companies in China provide more entertainment compared to their global counterparts--social networking services in the country are driven mainly by games, he said in an e-mail.

Xiao added social games have brought many active users and revenue to Renren and Kaixin001, in particular. Renren's revenue from games has surpassed its online advertising revenue, while Kaixin001 has relied greatly on social games as advertisers have shown a preference for bundling online ads with social games.

According to Xiao, the most important thing for social media companies after obtaining IPO is to have an eye-catching business model and "tell a good story". They, he suggested, should keep users active, make money from virtual goods and embedded ads in games, and utilize social-commerce as a new profit platform.

In addition, these companies need to demonstrate they have in place strong management, and the ability to generate revenues and profits. They should also possess the ability to innovate or adapt technology as well as form a strong and active user base.

With the money raised from IPOs, Chinese social media outfits can further invest in new emerging markets, said Xiao.

More hype than profits
Despite the buzz and potential for growth, CMR's Chen noted Chinese social media companies are not yet profitable. Youku and Renren, she pointed out, have both attained IPO status recently but made a loss in the first quarter of 2011.

"We see most of the social networking IPOs coming out of China as somewhat overvalued," she said. "There is a lot of excitement because they are Chinese companies; China has such a large number of Internet users and because the market is growing so quickly but often the underlying fundamentals are not so good."

Citing Renren as an example, Chen said it claims to have 160 million users but only 31 million are active users. She added the Youku, Tudou and Renren had received much media attention in the U.S. due to their IPOs but are still in the red.

These companies, she noted, are capitalizing on the interest surrounding their technology and China as a potential market to sell into, to seek high valuations and raise money. Yet, they did not have solid business plans and were spending a lot of money to grow.

Nonetheless, Chen said more IPOs will be floated by Chinese social media companies in the coming years but steeper competition can also be expected. "As more options from China and other countries become available, investors are going to start asking more questions about the sustainability of these companies."

If Facebook does go public, there will be greater comparison on performance and profitability with, for example, Ren Ren, she added.