May 25, 2011, 9:11 am

YNDX - Yandex

2011-05-16
YNDX - Yandex

YNDX - Yandex plans on offering 57.7 million shares at a range of $20-$22. Insiders will be selling 40 million shares in the deal. Morgan Stanley, Deutsche Bank, and Goldman Sachs are leading the deal, Piper Jaffray and Pacific Crest co-managing. Post-ipo YNDX will have 323.3 million shares outstanding for a market cap of $6.79 billion on a pricing of $21. Ipo proceeds will be used for general corporate purposes.

The two founders will own 49% of YNDX combined post-ipo. Each has agreed to a one year lock-up of their shares.

From the prospectus:

'We are the leading internet company in Russia, operating the most popular search engine and the most visited website.'

Russian search engine, largest internet company in the country.

64% of search traffic in Russia, Google is number 2 at 22%.

***YNDX share of the market is growing from 55% in 2008 to 57% in 2009 and to 64% in 2010 to 65% in the first 3 months of 2011.

In 3/11, YNDX website(yandex.ru) attracted 38.3 million unique visitors.

YNDX also operates in Ukraine, Kazajhstan and Belarus.

In addition to broad search, YNDX offers local search results in more than 1,400 cities. Also specialized search resources including news, shopping, blogs, images and videos much like Google.

YNDX also offers an online payment system at yandex.money.

Revenues derived from online advertising. Currently bulk of revenues are from text based advertising, with display advertising making up a smaller amount. YNDX does not utilize any pop-up ads.

Much like Google, YNDX also serves ads on third party websites that make of the YNDX ad network. Third party site ads accounted for 12.5% of 2010 ad revenues.

In the first quarter of 2011, YNDX served ads from 127,000 advertisers.

Just 3% of revenues are from advertisers outside of Russia.

Much like the selling points for BIDU when it came public, YNDX notes that 1)the Russian economy is expected to grow faster than the global economic rate; 2)Russian internet penetration significantly lags developed countries and is expected to grow faster leading to the conclusion the Russian online/mobile advertising market looks poised to 'outgrow' more developed countries.

YNDX does serve ads on Facebook.

Lest we forget, Russia is not yet a free country. This little tidbit hit the newswires not too long after YNDX filed for this ipo:

'Yandex, which last week announced its intention to list on NASDAQ, says it has been forced by Russian authorities to hand over financial information about an anti-corruption blogger to Russia’s domestic security agency, the FSB.

Alexei Navalny, who operates the RosPil whistle-blower Website in Russia, had complained on his blog that some financial contributors were receiving threatening telephone calls over their support for the site. Contributions through Yandex to RosPil are made using "Yandex Money". Yandex has now confirmed that it provided information about both Navalny and his contributors after being approached by the FSB.'

A cozy relationship with the Russian government means that YNDX has(and one can infer will again) given the government personal information about people that have blogged anti-government rhetoric.

Inflation - Always an issue in Russia, the annual inflation rate has been 12% in 2008 and 9% in each of 1009 and 2010.  

Financials

$1.25 per share in cash post-ipo.

4th quarter is seasonally the strongest.

2010 - $440 million, a 43% increase over 2009. 79% gross margins. Strong 40% operating margins. Tax rate appears to be 25% of operating income. Net margins after interest income and taxes of 30%. EPS of $0.42.

2011 - Revenues are on pace to grow strongly yet again. $650 million in revenues, nearly 50% growth from 2010. Easy first quarter 2010 comparable are helping to accelerate the growth rate here. Operating margins look to improve slightly to 41%, net margins of 32%. EPS of $0.64. On a pricing of $21, YNDX would trade 33 X's 2011 estimates.

Way too cheap, 33 X's 2011 estimates with a 50% growth rate and dominant market position in a sector growing swiftly.

Quick look at BIDU and YNDX.

BIDU - $45 billion market cap. currently trading 22 X's 2011 revenues and 48 X's '11 estimates. $5 per share in cash on the books expected to grow revenues 65% in 2012.

YNDX - On a pricing of $21, $6.79 billion market cap. Would trade 10 X's 2011 revenues and 33 X's 2011 estimates. $1.25 per share in cash post-ipo with an anticipated 50% 2011 revenue growth rate.

Conclusion

Now this is what a foreign internet leader looks like. Strong sector leadership in what should continue to be a fast growing sector going forward. Notably taking market share away from competitors(which include Google) annually the past three years is very impressive. Strong margins and growth, easy recommend in range here. Dominant market leader, everything you look for in an ipo coming at a very reasonable multiple.

May 15, 2011, 5:38 pm

NGL - NGL Energy Partners

2011-05-07
NGL - NGL Energy Partners

NGL - NGL Energy Partners plans on offering 4.025 million units at a range of $19-$21. Wells Faego and RBC are leading the deal Suntrust, BMO, Baird, BOSC and Janney co-managing. Post-ipo NGL will have 15 million total units outstanding for a market cap of $300 million on a pricing of $20.

Ipo proceeds will be used to repay debt.

NGL Energy will own all non-floated units, the General Partnership and the incentive distribution rights. NGL Energy is comprised of the assets of three propane companies: NGL Supply, Gifford and Hicks.

From the prospectus:

'We are a Delaware limited partnership formed in September 2010 to own and operate a vertically-integrated propane business with three operating segments: retail propane; wholesale supply and marketing; and midstream.'

Before we get into the details here lets quickly look at anticipated yield, competitors and cash flows.

Distributions - NGL plans on paying quarterly distributions of $0.3375 per unit. At an annualized $1.35 per unit NGL would yield 6 3/4% annually on a pricing of $20.

3 aspects make up a strong energy master limited partnership.

1 - Solid balance sheet to enable cash flow positive acquisitions down the line. NGL does have s nice balance sheet on ipo due to utilizing ipo monies to pay off debt. $25 million of debt on the balance sheet post-ipo.

2 - Strong parent company to facilitate dropdown acquisitions once public. Nope, not much there parent wise here.

****3 - Sufficient annual cash flows to pay not only anticipated distributions, but also to cover debt servicing and capex. NGL falls woefully short here. Pro forma(taking into effect ipo as if it occurred 1/1/10) NGL did not have sufficient cash flows to have covered all three of these. Now NGL did embark on an aggressive expansion capital expenditure plan in 2010, so possibly that was an aberration. However forecasts for the first 12 months public(ending 3/31/12), NGL anticipates having cash flows post capex and debt servicing to pay just 61% of the expected distributions. This is as short on a percentage basis as I've seen in one of the MLP energy ipos. Simply put, NGL should not be structured as a pass through entity as their cash flows are not sufficient to cover expenses and the distributions to holders. The plan is to borrow the monies to pay the full distributions. Looking at it another way, NGL is borrowing money to service debt, pay capex and pay unit holders. Not ideal borrowing money to service your debt, which is what is happening here after all.

Solid yield, however the underlying business is not generating sufficient cash flows to pay that yield to holders and service debt and fund capex. Of course NGL would not be able to garner this pricing/market cap if they were coming public with a 40% smaller distribution so they will borrow to cover everything. Not interested here at all with this lack of cash flow coverage.

Comparables are NRGY(7.4% yield), APU(6.3%), FGP(7.7%) and SPH(6.5%).

Quick look at the actual operation here:

Retail propane - 54,000 customers, the 12th largest retail propane distribution company in the US. Georgia, Illinois, Indiana and Kansas.

Wholesale - 68 million gallons of propane storage space for supply to third party sellers.

Midstream - Propane terminals for transfer to third party trucks. 3 terminals in IL, MO and Ontario with annual throughput capacity of 170 million gallons.

Financials

$25 million in debt post-ipo. Expect this number to increase as NGL plans on borrowing to cover expenses and to pay distributions to holders.

Forecasts for the 12 months ending 3/31/12 - $884 million in revenues. Gross margins here are very thin at 6.5%. Operating margins of 1.8%, net margins of 1.5%. As noted above, cash flows will NOT be sufficient to pay expected distributions as well as capex and debt servicing.

Conclusion - Weakly structured energy MLP. NGL has historically not had sufficient cash flows to cover all expenses and the expected $1.35 per unit distribution. In fact after expenses, capex and debt servicing, NGL anticipates only being able to pay 61% per unit to cover all distributions for the 12 months ending 3/31/11. They plan on borrowing to cover the rest. Not interested in range, cash flows simply not strong enough to cover the expected yield.

May 9, 2011, 6:09 pm

RENN - Renren

2011-04-27
RENN - Renren

RENN - Renren plans on offering 61.1 million ADS (assuming overs) at a range of $9-$11. Insiders will be selling 10.2 million ADS in the deal. Morgan Stanley, Deutsche Bank, Credit Suisse, BofA Merrill Lynch and Jefferies are leading the deal, Pacific Crest and Oppenheimer are co-managing.

Note that concurrent with the ipo RENN will be selling 11 million ADS equivalent shares in a private placement. The placement will be at ipo price. Buyers include Alibaba Group, China Media Capital and CITIC Securities.

Post-ipo RENN will have 403 million ADS equivalent shares outstanding for a market cap of $4.03 billion on a pricing of $10.

Approximately 1/3 of the ipo proceeds will be used to invest in technology, 1/3 in expanding sales & marketing with the remainder for general corporate purposes.

Chairman and CEO Joseph Chen will own 22% of RENN post-ipo. Mr. Chen will retain voting control through a separate share class.

From the prospectus:

'We operate the leading real name social networking internet platform in China.'

Being touted as the 'Facebook of China'. As Facebook's last round of private funding valued the company north of $50 billion, that comparison alone will garner attention and interest for this deal.

Renren means 'everybody' in Chinese.

Note that Facebook and Twitter are banned in China. From web research it appears to me that there is a consensus that RENN does indeed censor topics/keywords/posts that are considered sensitive by the PRC. Common sense would indicate that would be the case, otherwise RENN would not be able to continue to stay in business. The PRC does have recent history (notably with Google) in attempting to censor content on the internet.

Real name social network site. Much like Facebook users connect and communicate with each other, share information and user-generated content, play online games, listen to music, shop for deals etc...

31 million monthly users in 3/31/11. This is an increase from 26 million in 12/10.

Platform includes renren.com, game.renren.com, nuomi.com (social commerce site) and jingwei.com (professional networking site). These sites combine to make RENN the largest real name social networking internet platform in China.

RENN did add approximately 6 million new users in the first quarter of 2011. Unique users spend an average of seven hours a month on their platform, producing a daily average of 40 million pieces of content including 3 million photos and 13 million status updates. Note that Facebook claims users generate a billion pieces of content a day, compared to RENN's 40 million.

Sector - As most are aware, social networking internet services provide users with interactive platforms to share and consume various forms of media content. The key to the rise of sites such as Facebook and RENN is the use of real names, eliminating the early internet mode of aliases and virtual identities. Usage of real names allow facilitation of personal communication and sharing among actual friends and benefits advertisers by facilitating word-of-mouth advertising among friends and offering targeted advertising based on user’s preferences, personal traits and online activities.

Revenues - Big difference between Renren and Facebook is that RENN derives substantial revenues from social networking games, with players purchasing virtual items. Farmville, the popular Facebook game, began on renren.com. Facebook derives most of it's revenues via advertising. RENN also derives revenues from advertising, however RENN currently (revenue-wise) would seem to have as much in common with the China online gaming stocks as with Facebook!

As noted above 42% of revenues are from advertising 45% from online games. The remainder from e-commerce, and other sources. One online multi-player game alone (Tianshu Qitan) accounted for 14% of 2010 revenues.

Seasonality - Advertising revenues tend to be lower in the first quarter annually.

Financials

$1.75 per ADS in cash post-ipo on a $10 pricing.  

***Revenues in 2010 were just $76.5 million. That is a hefty price to sales ratio for a $4+ billion market cap. One would expect massive year over year growth for that market cap. Indeed in 2009 revenues grew 238%. Note however growth slowed substantially in 2010. Revenues did grow strongly 64% to that $76.5 million number, however on a pure dollar number, the $30 million increase was less than 2009's $33 million increase. These are not weak growth numbers at all. Keep in mind though we are talking about a price to sales number of 50+ (assuming a $10 pricing). Taking that into account a 64% increase in revenues and a slower whole dollar growth in those revenues from year prior does not look so strong. This deal will be 'hot' and it will get done at a healthy price. Going forward though these growth numbers need to be watched closely as this is a potential yellow flag. Valuation in range (let alone actual pricing and open) will mean RENN will be priced to perfection on a pure financials/valuation level, slowing growth going forward will not be acceptable. Keep an eye on this as in 2010 growth was not all that impressive considering valuation. Not at all, I would consider it quite unimpressive actually.

Nice job by RENN in keeping expense growth under control in 2010. Expenses actually grew less on a whole dollar amount in 2010 than in 2009.

2010 - $76.5 million in revenues. Gross margins of 78%. Operating expense ratio decreased nicely from 2009's 83% to 2010's 68%. Very good sign for future profitability. Operating margins of 10%. Folding out currency exchanges and plugging in interest income and 15% tax rate, net margins of 8.9%, EPS of $0.02.

2011:

Again growth is an issue here. Including the 3/11 quarter, the last 4 quarters have shown no growth. Revenues in the 6/10 quarter were $19.8 million, $21.7 million in the 9/10 quarter, $20.9 million in the 12/10 quarter and $20.6 million in the 3/11 quarter. The word to describe this is lackluster.

Expenses increased significantly in the first quarter of 2011 as RENN focused on spending to grow advertising dollars. This un-did a lot of the expense constraint of 2010.

Revenue growth should kick in the back half of 2011. Revenues of $115 million, a 50% increase over 2010. Gross margins improving to 80%. Based on Q1, operating margins do not appear to improve much at all. 12% operating margins, 10.5% net margins. EPS of $0.03.

YOKU came public with the 'YouTube of China' tag. Quick look at each.

YOKU - $6.44 billion market cap, bottom line losses in 2011 expected. Top-line is expected to be the same as our 2011 forecasts for RENN. The difference is quarterly growth. While RENN saw none sequentially the back half of 2010, YOKU grew quarterly sequential revenues 48%, 61% and 31% the final three quarters of 2010. Also note that in range RENN's valuation is comparable to YOKU's after YOKU has appreciated substantially from ipo.

Conclusion

Priced to perfection in range. Revenue base just is not there yet to hold that $4 billion valuation. Revenue growth has been nonexistent the past 4 quarters as well, something I found very surprising.

These issues may not matter initially as RENN should price and open strongly. Why? Currently there just is not nearly enough internet social networking stock out there for the worldwide demand. This is the hottest segment of the worldwide market currently and investors want a piece. That 'Facebook of China' tag means RENN will easily work in range short term. Also YOKU's (The YouTube of China) valuation does not make RENN's valuation look nearly as stretched. Of course comparing skyhigh valuations can easily turn into a house of cards, simply ask anyone loaded in US internet stocks a decade ago. That is a discussion for another time I suppose.

Will work in range. I have issues with this deal and valuation however. I just do not like the lack of growth and the reliance on online multi-player games for revenues. To work longer term, growth is going to have to accelerate at more than 2010's $30 million a year. That revenue growth number is (and should be) a concern. Also of concern is the reliance on multi-player online role playing games for a large chunk of revenues. Popularity of games come and go, meaning RENN will need to continue to develop and/or license popular games. I've a lot of longer term concerns here actually on this deal at this market cap.

Keep in mind the past 4 quarters ending 3/31/11 have shown revenues of $19.8 million, $21.8 million $20.9 million and $20.6 million. If RENN does not start growing revenues sequentially, the stock will suffer down the line.

Deal should work off the 'Facebook of China' tagline, I've a lot of reservations here even in range though. QIHU looked stronger in range than RENN, much stronger.

May 5, 2011, 3:34 pm

NQ - NetQin Media

2011-04-28
NQ - NetQin Media

NQ - NetQin Mobile plans on offering 8.2 million ADS(assuming overs) at a range of $9.50-$11.50. Piper Jaffray is leading the deal, Cannacord and Oppenheimer co-managing. Post-ipo NQ will have 46.3 million ADS equivalent shares outstanding for a market cap of $486 million on a pricing of $10.50. Ipo proceeds will be used for sales efforts, R&D and general corporate purposes.

Chairman & CEO will own 27% of NQ post-ipo. Sequoia Capital will own 7%.
No sense burying the lead:
***On 3/15/11 a piece on CCTV(China Central TV) reported complaints of fraudulent practices against NQ. These accusations included uploading malware or viruses to mobile phones to promote NQ's mobile security products. Since major China media outlets have reported that China’s Ministry of Industry and Information Technology, or MIIT, directed the three major telecom operators in China to cease offering NQ's mobile security applications on their respective online application stores, and as a result the three major telecom operators have terminated their business relationships and contracts with NQ. In addition Nokia has removed NQ's products from their mobile online store.
From the prospectus:
'We are a leading software-as-a-service, or SaaS provider of consumer-centric mobile Internet services focusing on security and productivity.'
Chinese mobile security software operation. A play on the growing number of smartphones and internet data transfer over mobile devices. Cloud platform and client side application combination. Provides mobile anti-malware, anti-spam, privacy protection, data backup and restore. Operates much like non-mobile internet security offerings, continuously updating database of malware and spamware evolving over time.
68% market share in the Chinese mobile security sector. 86 million registered users in over 100 countries. Free service with option to choose from premium paid services.
Compatible with Android, Symbian, iOS, Blackberry and Windows Mobile.
67% of registered users are in China. While there are 86 million registered users, there were actually 30 million users in the month of 3/11.
Interesting - 2011 Technology Pioneer Award bestowed by the Davos World Economic Forum.
NQ's solutions:
Mobile Security - Protecting users from malware, data theft and private intrusions. Mobile malware scanning, internet firewall, account and communication safety, anti-theft, performance optimization, hostile software rating and reporting and other services.
Mobile Productivity - Enhance time and relationship management, including screening incoming calls, filtering unwanted spam short messaging services messages, or SMS messages, protecting communication privacy and managing calendar activities. In addition, cloud-side synchronization of personal data, including address books, text messages, calendars and other data.
Cloud Services - Synchronized contacts/calendars. mobile users’ contact information can be used to link calendar activities across related contacts.
***Revenues are derived by selling subscriptions to premium services. While NQ had 30 million users in 3/11, only 3.67 million were paying accounts. Very large market cap here for just 3.67 million monthly paying users at what appears to be a $5 annual average subscription rate.
Key going forward obviously is converting user base into paying users. Thus far migration to pay services seems to be a bit slow as for the first quarter of 2011 saw just 12% of users converted to paying users.
Note that approximately half of revenues are actually collected by the wireless carriers.
***21% of revenues derived through mobile payment service provider Yidatong. Yidatong is owned by a former NQ consultant. NQ had provided Yidatong with interest free advances in order to fund liquidity needs. Yidatong has paid back these advances prior to this ipo.
Competitors include QIHU, Kingsoft and international security operations.
Financials
$1.50 per ADS in cash post-ipo.
Revenues here are minuscule to date. I am perplexed at the attempted market cap here with such a small current revenue stream.
2010 - Revenues tripled, however just $17.7 million in total revenues. Gross margins of 71%. Operating margins of 12 1/2%, net margins of 10%. EPS of $0.04.
First quarter of 2011 looked strong with $7.6 million in revenues, a tripling of first quarter 2010.
2011 - Until we see the fallout in quarter two of China's big 3 mobile operators barring NQ we simply cannot project 2011. One of the 'Big 3' China Unicom did not offer NQ's products, the other two did. I simply at this point do not have enough information to project 2011. If first quarter momentum were to continue I do believe NQ would book $40 million in 2011 revenues, more than double 2010. EPS would be $0.25. Was a very good first quarter, however we've the issues mentioned above casting a shadow on the 2nd quarter.
Conclusion
Attempting a nearly $500 million market cap with just $17 million in 2010 revenues. On top of that just a month ago China's 3 largest mobile operators have ceased doing business with NQ due to accusations of fraud. To be fair, one of the three did not offer NQ's products anyway. Very surprised they are going through with this ipo right now and not waiting another quarter or two. Yes, a great first quarter of 2011 here. However I'd rather wait and see how revenues are effected in the 2nd quarter before considering entry here. Aggressive market cap here on ipo even without the recent malware accusations. With them, this is a 'wait and see' deal to me.

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