IPO Watch: Renren IPO Gets A Possible Red Flag (RENN)

Renren Inc. is supposed to come public as soon as next week in an IPO that is expected to fetch more than $500 million.  The company expects to trade under the stock ticker “RENN” on the New York Stock Exchange.  We saw some updated data ahead of this that is above and beyond just price data for what many investors are calling “The Facebook of China.”

The company is seeking to sell some 53.1 million American Depositary Shares that actually represent some 159.3 million ordinary A shares.  The expected price range is now $9 to $11 per share.

After the IPO’s completion, Renren founder Joseph Chen and SB Pan Pacific Corporation will hold 270,258,970 and 135,129,480 Class B ordinary shares, respectively.  Chen will hold 55.9% aggregate voting power and SB Pan Pacific will hold 33.5% aggregate voting power.  The prospectus also notes that the company will issue and sell a total of 33 million Class A ordinary shares to a group of unrelated third-party investors through concurrent private placements.

The book-runners are listed as Morgan Stanley, Deutsche Bank, and Credit Suisse.  Others listed in the underwriting group are BofA/Merrill Lynch, Jefferies, Pacific Crest, and Oppenheimer.

Here is where the problem is…  We saw a highlighted addition today from last night and Renren has updated its financials.  Now comes word from the WSJ that Renren’s user base growth was really 19% rather than 32%, something which is likely to act as a big red flag considering how skeptical American investors have become when it comes to Chinese IPOs and the transparency or accuracy of many companies versus the reality of numbers.  The new belief is that “2+2” might now “equal 6” to many Chinese CFOs.  

Some of the amended data is as follows for the first quarter of 2011:

• revenues for the last quarter in March were up 46.6% to $20.6 million
• cost of revenues were up 14.4% to $4.1 million, which fell to 19.8% of revenues in 2011 versus 25.4% a year earlier
• operating expenses were up 88.6% at $21.2 million
• loss from continuing operations was down to $2.6 million from a loss of $10.7 million a year earlier
• cash and cash equivalents was $334.8 million and its bank borrowing and issued debt was zero

Some consider Renren as “the Facebook of China” but this has been somewhat challenged by some pundits.  Other companies get referred to as “The ____ of China” when they often are not.  As we always like to tell investors looking at more esoteric companies… “Know what you are investing in.”  Renren’s amended filing is here with more details on that financial data. Unfortunately, the explanation is not very clear.

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JON C. OGG