Earlier this week Macquarie initiated coverage on China’s leading real-name SNS, Renren (RENN), with an “Underperform” and a $5.25 price target. The stock fell approximately 20% over the two days after the report came out, and is now trading close to its 52-week low of $5.48.
At this price, the company could be attractive due to its market leading position in China’s social networking space, strong network effect similar to that of Facebook, robust advertising sales, and attractive growth into online gaming and group-buying. The company currently has a market cap of approximately $2.5 billion, and is trading at approximately 141x FY2012.
RENN is one of China’s leading SNS with over 124 million activated users, compared to 33 million in 2008. Over the same period, monthly unique log-in users climbed to 34 million from 17 million. Approximately 2 million users are added to RENN per month.
Within the SNS market, RENN is the leader in real-name SNS with approximately 52% market share, which is significantly higher than Tencent Pengyou (33%), and Kaixin001 (10%). According to the China Internet Network Information Center (CNNIC), RENN ranks first among user satisfaction, followed by Sohu Bai She Hui (SOHU), and Kaixin001. RENN also ranks first in traffic among real-name Chinese SNS sites and 15th among all Chinese sites, well ahead of second place Tencent Pengyou and Kaixin001, which rank 23rd and 33rd in traffic among all Chinese sites, respectively, according to Alexa.
The underlying building block behind RENN’s strong network effect is its strong user stickiness. Every RENN user has at least 120 friends. User-generated-contents (UGC) such as photos and status updates, number around 51 million pieces per day and the large number of UGC creates strong bonding among users. As a result, daily time spent and number of page view by RENN users is twice that of Tencent Pengyou's user. To enhance its user stickiness, RENN leverages its large user base by offering additional products such as open platform applications, currently numbering over 1,200 ranging from news to games. The applications solidify user loyalty and allow RENN to retain existing users and attract additional users through word of mouth.
The company also enjoys strong advertising sales (56% of total revenue), which quadrupled to $32m from 2008 to 2010. To leverage its brand equity and large user base, RENN commands pricing power as indicated by its periodical price increase of approximately 25% every six months since 2009. RENN’s white-collar user base could also attract additional ad spending as companies rely on its real-name and profile database to target their consumers. Currently, RENN generates a large amount of ad sales from branded companies such as Nike (NKE), HP (HPQ), L’Oreal (LRLCY.PK), and LG. Going forward, RENN is likely to attract additional advertisers as large domestic brand name companies, such as Anta Sports, China Mobile, and Master Kong Noodles, begin to accept social media advertising as a means of communicating messages to their consumers.
RENN has experienced tremendous success after venturing into social network gaming and group-buying. The company has the potential to become a leading social internet game operator, similar to Tencent, whose QQ-based games are ubiquitous among Chinese internet users. Currently there are over 900 titles that attract over 11 million users per month. The games are free-to-play, but users need to pay for in-game virtual items to enjoy the full gaming experience. For example, Renren Party operates in similar fashion to the iTunes App “Club Story.” Social network games not only generate gaming revenue but also advertising revenue. For example, Budweiser looks to embed “Bud Bar” into the Renren Party application to improve its brand awareness.
Another growth driver behind RENN is its group-buying site, Nuomi, which is modeled after Groupon. A year after its start, Nuomi has generated over 15m monthly visitors to become the 9th widely-used group-buying site in China. Currently Nuomi provides local deals for 45 cities and has over 2 million paying users with over 8 million cumulative transactions. In addition, the unit has over 500 sales staff to promote Nuomi in key cities.
During 2Q11, RENN’s sales surged 53% y/y to $30m, driven by strong ad sales, which accelerated 94% y/y and now account for 56% of total sales. Online game sales grew 18% y/y and the company has enjoyed some success with some of its titles, such as Plants vs Zombies, that generated over 300,000 download on iTunes App Store within 9 days of launch. Nuomi generated $1.1m in sales compare to only $29,000 a year ago. RENN’s EPS is technically $0 per share due to large amounts of shares, but the company did make $0.8m in net income, compared to a net loss of $25.5m a year ago.
The company also saw improving gross margin-- 81% from 76% a year ago. However, operating margin increased 86% during the quarter due to heavy investment in Nuomi. Excluding the Nuomi unit, operating expense only increased 44%.
The total user base grew 28% to 124m.
Financially, RENN is the third most cash-rich U.S.-listed Chinese internet company with $1.2B in cash, behind NetEase (NTES) ($1.6B) and Baidu (BIDU) ($1.57B).
Going forward, RENN is expected to maintain its market leading position in China’s SNS market. The key is to expand user volume and produce new services to capture and maintain users, and so far CEO Joseph Chen has indicated that he is capable of transforming an overhyped and unprofitable website into a successful brand in China’s SNS market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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