WSJournal. ipo / YY popped.

http://online.wsj.com/article/SB1000142412788...dfinance_6

By TOM ORLIK

With investors raising difficult questions for Chinese listings in the U.S., YY Inc. seems to have all the answers.

The online communication and gaming platform that boasts more than 400 million registered users debuted on Nasdaq Wednesday. That marked the first initial public offering for a Chinese company in New York since March. It was a test of investor sentiment after previous internet offerings have failed to perform and allegations of fraud against other Chinese firms have battered their stocks.

Several factors worked in YY's favor.

First, it's generating not just rapid growth but profits and positive cash flow from operations, too, mostly from advertising and online gaming. Revenue in the first nine months was 553.2 million yuan ($88.8 million), up 168% year-on-year. The company also saw net income of 55.9 million yuan in the same period as well as positive net cash inflow from operations of 235 million yuan.

Next, the IPO was not priced aggressively. The $10.50 IPO price was at the bottom of the range YY's bankers had been looking for. That valued YY at about 5.2 times annualized revenues for 2012, meaning the shares look cheap for a fast growing internet company. Indeed, the share price popped on the first day of trading, rising 7.7%.

There are concerns. The pre-IPO owners are hanging on to 85.3% of the company, but they control 98.3% of the shareholder vote. The rise in popularity of mobile Internet poses a problem—YY's core competence in online text, voice and video communication is a more obvious fit with PC.

There's also the threat of more competition from other, deep-pocketed Chinese internet companies, such as giant Tencent that already has a popular mobile messaging system.

Still, answers to that next set of questions don't have to come immediately. YY's priced cheaply enough investors won't mind for now.