* Renren to raise about $690 mln in IPO next Tuesday
* IPO would value company at $5 bln vs Facebook's $70 bln
* Censorship, patents, accounting among Renren concerns
By Melanie Lee and Clare Baldwin
SHANGHAI/NEW YORK, April 29 When Chinese social
networking site Renren goes public next week, investors will
likely ignore big risks the company faces, and be lured instead
by a combination of the words "China" and "social networking."
Hot Chinese tech companies like Internet search engine
Baidu Inc (BIDU.O) and online video site Youku.com YOKU.N
have risen triple-digit percentages since their IPOs, whetting
investors' appetites for such offerings.
And this is in a sector that is hot in the U.S. Facebook,
the biggest social network company in the world, has a market
value of somewhere around $70 billion, based on a share sale
currently being contemplated, making it worth more than
companies such as Boeing Co.[ID:nN27185713]
The demand for Renren shares was clear on Friday when the
company raised the expected price range of its IPO by 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 revised filing shows slower growth [ID:nN28228501]
Insider on Renren valuation link.reuters.com/zyk39r
Breakingviews column on Renren [ID:nLDE73H0EF]
Renren's IPO filings do raise a handful of very serious
For one thing, Renren doesn't 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.[ID:nN28228501]
Some investors and analysts brush off such red flags --
after all China is the biggest Internet market in the world and
it is growing rapidly. They justify their cavalier attitude by
saying that figures reported by Chinese companies should be
used for directional information and not as perfect
Others say the opaque information is a big problem.
"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,
Chinese authorities keep extremely close tabs on Internet
companies, arguing that this is necessary to maintain social
harmony. This led to a big bust up between Google Inc. (GOOG.O)
and the Chinese government last year that ended with Google
curtailing its operations in the country.
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."
The prospectus doesn't mention the recent Middle Eastern
uprisings, which led to a crackdown on the use of certain words
on the Internet in China, but it does say Renren may not post
content that is "socially destabilizing."
If Renren fails to comply, the company says that its
websites could be shut down. Clearly that could put it out of
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
The company also said in its filings that while it hasn't
conducted a comprehensive review, it found a "material
weakness" and a "significant deficiency" in its internal
financial controls: Renren doesn't 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.
That's not unusual for Chinese IPO companies. Neither is
the fact that 87 percent of Renren's leased floor area did not
have the proper title documents. But it all paints a picture of
a company that is far from risk free.
Still, it isn't difficult to find people who will give it
the benefit of the doubt.
"Given the investors it has who have board seats and who
work closely with it, you would expect any major issues to have
turned up by now," said Nick Einhorn, an analyst at
Connecticut-based IPO research and investment house Renaissance
Renren's investors include private equity firm General
Atlantic and venture capital firm DCM.
Renren may also face some heat over intellectual property
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
Sources have told Reuters that Kaixin001 is also planning a
Renren in its IPO filings also said that its social
networking platform may be subject to patent infringement
claims, and mentions Facebook as one of the potential
Still, while Renren has posted losses in each of the past
two years, it could still be a dream growth stock. Its net
revenue grew more than fivefold to $76.54 million in 2010 from
$13.78 million in 2008.
But there will be some who, after reading the prospectus,
may wonder whether the risks outweigh the rewards.
(Reporting by Clare Baldwin in New York and Melanie Lee in
Shanghai, additional reporting by Alina Selyukh and Richard Lee
in New York. Editing by Dan Wilchins, Martin Howell)