Lessons from listing of Renren Inc ( NYSE: RENN ) and other China based internet and tech firms !

What are the lessons to be learned from Chinese tech companies ? Investors should not go blind behind the words like China, Social Media , e commerce etc. According to Francis Gaskins, president of IPO Desktop, investors need to be cautious when it comes to investing in Chinese internet companies listing in the U.S.

As we have seen an example of Chinese Social Networking Site Renren Inc ( NYSE: RENN ), that after initial aggressive response from investors, now company stock has been slipped to below its issue price of $ 14. Investors realized that company is overvalued in terms of pricing of the stock, as it was valued 78 times of its 2010 sales. Lesson from Renren Inc is investors might look at Chinese tech companies as trading point of view and rather than subscribing for IPO. Investors might consider to trade the stock after tracking its movement for couple of days after listing.

In fact, out of the eleven China-based stocks to list recently on the Nasdaq or New York Stock Exchange, Gaskins says 10 are trading below their IPO price.

“The average opening premium is 18 percent for the first day, but from the first day’s high on average they are down 24 percent - that is a total disaster.”

Gaskins believes many Chinese IPOs fail in the U.S. because they are overpriced based on financials or priced for uninformed retail investors who do not question the value of what they are paying for.

“Most of the retail investors buy on emotion and a cursory look at the industry and recent yearly financials.”

He recommends investors look closely at a company’s sequential growth (quarter over quarter) rather than the growth over the previous year before making an investment decision. Gaskins says this is important, particularly when it comes to Chinese internet and technology ventures, which operate in a “fiercely” competitive space and often fail to produce sustainable growth.

“Quarterly sequential growth is very important because it's like an airplane taking off. Often in the growth of tech companies, recent top-line revenue and bottom-line profit growth momentum means there's a good chance of future earnings increases, which is what it's all about,” he explained.

NetQin Mobile, a latecomer to the mobile security space, which listed on NYSE on May 5th, is one such example. The firm, which had “erratic” quarterly financials and posted yearly growth of just 21 percent in 2010, saw its stock price sink 15 percent on its first day of trading.

“If the upward momentum (in earnings) is there going into the IPO, then investors are more likely to believe future projections of growth. If the momentum starts to flat-line, then investors normally want out of the deal,” Gaskins added.

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