Renren Facebook Boost to Be Shortlived on Ads, Maxim Says
Chinese social-network operators Renren Inc. (RENN) and Sina Corp. (SINA) can’t rely on Facebook Inc. (FB)’s initial public offering to boost their shares as both face challenges attracting advertisers, according to Maxim Group LLC.
Renren, which completed an $855 million IPO last year, and Sina, owner of the Twitter-like Weibo site in China, jumped in New York trading on Feb. 2, the day after the world’s most popular social network announced plans to raise $5 billion in an IPO this year. American depositary receipts of Beijing-based Renren have climbed 49 percent in 2012 while Sina (SINA), based in Shanghai, has erased 2011’s 24 percent slump to gain 35 percent.
“There could be a short-term bounce from the Facebook IPO but it’s not sustainable,” Echo He, a New York-based analyst who covers Chinese Internet stocks for Maxim Group, said in an interview. “Renren has a lot of promise but online advertising dollars are hard to make in China. Advertising in China is still TV dominant.”
More than $68 billion was spent on TV advertising in China last year, accounting for more than 75 percent of ad spending in traditional media, excluding online, according to CTR Marketresearch Co. Renren, which got 42 percent of 2010 revenue from ads, said this month the market has got off to a “slow start” in 2012 because of China’s economic slowdown. Sina earned 76 percent of revenue from ads last year and said in February that ad sales this quarter will be “disappointing” as customers cut spending.
Maxim’s He has had a sell rating on Renren (RENN) since Feb. 3 and on Sina (SINA) since October last year, data compiled by Bloomberg show. Renren, which fell 0.4 percent to $5.30 in New York today, will slip to $4.50 over the next 12 months, while Sina will tumble to $51, from $70.75, He said.
China’s economy grew 8.9 percent in the last three months of 2011, the slowest pace since the second quarter of 2009, as Europe’s debt crisis and a lackluster recovery in the U.S. subdued demand for exports. Premier Wen Jiabao cut China’s economic growth goal to 7.5 percent for 2012 on March 5, down from 8 percent over the past seven years.
Renren reported an unaudited operating loss of $19.7 million for the fourth quarter, compared with operating income of $2.3 million in the same period of 2010, as the company boosted name-recognition advertising and increased the sales force for its Nuomi e-commerce venture, according to a March 8 statement.
The site, whose name means “everyone” in Chinese and which is targeted at the student market, is not expected to be profitable this year, according to the average forecast of 10 analysts surveyed by Bloomberg.
Facebook’s success -- it has 845 million members worldwide and founder Mark Zuckerberg said in 2010 that it’s “almost a guarantee” that it will achieve 1 billion users -- has yet to be replicated by China’s social networking sites, said Qi Guo, an analyst at ThinkEquity LLC in San Francisco.
“Renren and Sina’s Weibo are still in the early stages of development, so it’s not an apples-to-apples comparison with Facebook,” said Guo, who has rated Sina a buy since October and doesn’t cover Renren.
Sam Lawn, Renren’s investor relations director, didn’t answer calls to his office in Beijing after hours. Sina’s spokeswoman Cathy Peng also didn’t pick up calls in the capital.
Sina said on Feb. 28 that Weibo, which means “microblog” in Chinese, had more than 300 million registered users. Renren’s user base will grow to about 200 million in 2012, Chief Executive Officer Joseph Chen said in a Feb. 14. interview.
Renren will post “healthy growth” this year from its Nuomi e-commerce site, Chen said, adding that the company “will not hesitate” to make acquisitions to gain new technology. Renren bought online video website 56.com for $80 million last year, and has cash holdings of about $1.2 billion.
“If the Facebook IPO is successful, the social networking space in China will get a bounce,” Andy Yeung, a New York-based analyst for Oppenheimer & Co. said in a phone interview. “Regardless of the Facebook IPO, Renren’s advertising revenue will remain strong in 2012 and their online gaming business will probably see some re-acceleration this year as well.”
Renren’s revenue from online games was $12 million in the fourth quarter, up 39 percent from the same period of 2010, as the company started and promoted new games, Chief Financial Officer Huang Hui said on a March 8 earnings conference call.
Yeung rates Renren outperform, meaning he expects it to gain more than the market, with a 12-month price target of $8.
Renren and Sina also compete with the Pengyou social networking service operated by Tencent Holdings Ltd. (700), China’s biggest Internet company by sales. Tencent stock traded in Hong Kong added 3 percent to HK$223.40 today and is up 43 percent in 2012.
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