Monday, May 2, 2011

RenRen (RENN) IPO Appetite Seen Huge, but Red Flags Abound

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As mentioned previously, the Chinese "Facebook" (notwithstanding the fact there are multiple companies in the space) RenRen (RENN) is set to IPO this week.  [RenRen Set to IPO May 4th]  I've been following this company (and space) closely since a reader alerted me to this area late last fall.  As we get closer to the IPO, some of the details coming out on the growth metrics of RenRen are looking less than impressive, but in the midst of a herd mentality with anything that has to do with "social media" or "local online buying groups" - it won't matter to this market.  I expect the stock to soar on IPO day, and those who rely on facts or information to be left in the dust.   That said, eventually the wheat will be separated from the chaffe - it's all fun and games until people begin to care about underlying metrics.

Reuters has a good story on some of the red flags a few other sources have highlighted over the past week on RenRen.  Again, none of it will matter at this moment as we are in a easy money mania, but if you are going to play this field, it's still important to be informed because eventually facts matter.

  • When Chinese social networking site Renren goes public this week, investors will likely ignore big risks the company faces, and be lured instead by a combination of the words "China" and "social networking."
  • The demand for Renren shares was clear on Friday when the company raised the expected price range of its IPO 30 percent to $12 to $14 per share. 
  • "Appetite to invest in China right now is so strong that some investors are willing to ignore factors that they wouldn't in other markets," said Mark Natkin, managing director of Marbridge Consulting, a Beijing-based company that advises investors on China's Internet and telecommunications sectors.
  • Renren's IPO filings do raise a handful of very serious questions. 
  • For one thing, Renren does not really seem sure how many users it has. According to its April 27 revised IPO filing, the Chinese Facebook clone's monthly unique log-in user base grew by only 5 million, or 19 percent, in the first quarter of 2011 -- not the 7 million, or 29 percent, it reported in its first filing only 12 days earlier.  (that is a huge red flag, in that (a) growth is not that spectacular and (b) they are revising this sort of data within a 2 week period)
  • "If you can't validate the numbers or the company proves it doesn't have a good handle on the numbers, then you've got to be concerned," said Gary Rieschel, founder of Qiming Venture Partners, which is an investor in Renren rival Kaixin001. 
  • Another possible risk for investors is the broad government oversight that Renren, and other companies operating in China, face.  (I am not as concerned on this one, as it's not a "new" factor) Chinese authorities keep extremely close tabs on Internet companies, arguing that this is necessary to maintain social harmony. Renren says in the risk factors section of its IPO prospectus that this means a prohibition against posting content that, among other things, "impairs the national dignity of China" or is "superstitious."
  • Whether a social network page posting is objectionable is determined by the Chinese authorities. Renren is also required to monitor advertisements on its websites, some of which are subject to special government review before they are posted.  Renren must even guard against providing services that may lead to its users finding themselves in "emotionally charged situations.
  • The company also said in its filings that while it has not conducted a comprehensive review, it found a "material weakness" and a "significant deficiency" in its internal financial controls: Renren does not have enough people with knowledge of U.S. generally accepted accounting principles. It also lacks a formal policy for investing surplus cash and managing its treasury functions. 
  • Renren may also face some heat over intellectual property questions. When social networking website Kaixin001.com started taking off, Renren founder and CEO Joseph Chen launched a matching site with a similar color scheme and layout under the name Kaixin.com. Kaixin001.com won a lawsuit that ultimately resulted in Chen changing the name of another of his social networking sites to Renren, and merging Kaixin.com into Renren.  Sources have told Reuters that Kaixin001 is also planning a U.S. IPO.
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