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Still a no-go

7 April 2014 By Robyn Mak

Weibo has trimmed down its initial public offering (IPO) but the result is no more attractive for would-be investors. China’s Twitter has cut its planned equity raising from $500 million to $380 million amid a wider drop in Chinese technology stocks. Investors may be right to question sky-high valuations. But even the lower price doesn’t make the spinoff financially compelling.

The new share sale will value the Chinese microblog at up to $3.9 billion. Just two months ago, the original $500 million listing attracted estimated valuations for Weibo north of $5 billion. Indeed, e-commerce group Alibaba, which will increase its 18 percent stake in the microblog to 30 percent after the listing, set a value ceiling of $5.5 billion in the agreement to buy more shares.

This adjustment – 29 percent less than Alibaba’s guide price – reflects the recent fall in value of Weibo’s listed peers, and then some. Rival Tencent, whose mobile messaging platform WeChat is seen as Weibo’s most potent threat, has seen its Hong Kong-listed shares fall 18 percent since the end of February.  Shares of search engine operator Baidu, which is listed on Nasdaq, are down 12 percent in the same time period. The bigger notional fall in Weibo’s valuation may reflect uncertainty over its status as a new stock.

Investors may be right to question sky-high valuations for China’s internet companies. But even after the correction, there’s no new reason to buy Weibo’s shares. The valuation of Sina, which operates and owns 78 percent of Weibo, has fallen by more than 25 percent since the original IPO filing on February 24. It is still not clear why investors, who can already buy shares in Sina, would bother to own Weibo if the parent company’s value accurately reflects changes in its subsidiary’s fortunes.

Even more troubling is the fact that Weibo now says it expects a net loss in the first quarter of 2014. That underlines the fact that investors don’t really have much visibility over the company’s relatively new and untested business model. Even after its downsizing, Weibo hardly looks a steal.

 

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