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Chinese Internet Bubble Burst?

The question whether there is a bubble in the China internet sector comes up frequently in conversations. In my views, definitely, yes. There is a bubble in the sector. And during the recent market correction, some of the most over-priced saw their share price plunged a lot. But my guess is: it is not over yet, the bubble will swell again, once the market recover from recent Greek debt crisis. Five or six years ago when I just started following the sector, the Chinese internet companies had to be making profit before they got listed. Actually, all of them, Baidu, Tencent, Netease, Shanda and so on, made healthy profit and had fast growth. And that was what supporting their share price.

Today, that is still true for some of them, such as Baidu and Tencent. But not so much for the others, especially, some of the recently listed. Last October, ChinaCache, which provides Internet content and application delivery services to businesses and government agencies in China got listed when it was still in red. Its share went up 95% on the first day of trading. Then came Youku. It too was making a loss when it got listed last December. Its share went up over 150% on its first day. Recently, it made another public offer, selling its share at US$48.18, or 3.76 times of its IPO price. Still, the company is making a loss and will be doing so in the next couple years. Investors’ thirst for the next hot thing from China Internet do not stop with the IPOs. Old boys with a pretty story to tell also see their share prices shoot up the roof, even there is no new revenue or profit to speak of. Although Sina Weibo has only tiny revenue and no profit, it is worth more than Sina’s original business, which consists of its online portal, its wireless operation and a couple other business. Sina traded as high as US$147 a share. An analyst friend of mine value all its other business together at around US$50 a share only. As the “exit” can be very lucrative, the “madness” is rippled along the whole food chain. Valuation for Chinese startups is also inflated a lot recently. China is not cheap anymore for venture capitalists looking for a new star. “I met with a US startup recently. The management team are from large companies and with years of experience. They are asking for an investment of $1 million only,” said a China based VC, “Startups with similar background would ask for $5 million in China.”