What, Another IPO from China?

Justin Hibbard

Another day, another dollar, and another VC-backed Chinese company files to go public. Today it's Beijing-based Hurray Holding Co. Ltd., which provides ringtones, picture downloads, and other entertainment services to mobile-phone users in China. Hong Kong-based Fidelity Greater China Ventures Fund, an affiliate of Boston-based FMR Corp., owns 18% of the outfit. Granite Global Ventures, a Menlo Park, Calif. VC firm, owns 8%. Hurray! aims to raise up to $91.8 million in an offering led by Citigroup.

Some of the best performing IPOs of 2004 came from VC-backed Chinese companies. American depositary shares of Shanda Interactive Entertainment, a Shanghai-based online game company, have risen 238% since the company went public on the Nasdaq last May. ADSs of 51job, a Shanghai-based online job-listing service, are up 222% since its Nasdaq debut in September. (We recently spoke with David Chao, one of 51job's VC investors.)

Companies like 51job have wowed investors with growth stories tied to China's exploding economy, and Hurray! is no exception. The "Market Opportunity" section of its red herring (that's a preliminary prospectus) talks up the "significant growth" in China's wireless market. The company presents financials to back its play. Hurray!, which was spun out of Chinese telecom equipment maker UT Starcom in 1999, turned profitable in 2003, earning $4.5 million on $23 million in revenues that year. In the first nine months of last year, net income nearly quintupled from the same period in 2003 to $12 million, while gross profit margins held steady at 51%.

VCs and investment bankers have been flocking to China to get in on the action, and that kind of excitement should put an extra clench in any investor's stomach. There's genuine opportunity here, but pay attention to the risks. For examples, Hurray! derives all of its revenues from two customers, mobile operators China Unicom and China Mobile. And remember: not every recent IPO from China has delivered soaring returns.

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