China’s RenRen Looks At E-Commerce To Monetize Large Audience

According to market estimates,China’s internet population reached 477 million users in March of this year, far ahead of the 239.2 million internet users recorded in the U.S. at the end of 2010. Despite the increased numbers, Internet penetration in the country is at just 40%. In comparison, 78% of the U.S. population has at least one home-based email account. But growing Internet use has translated into an increased number of websites registered, to 3.82 million at present from 3.3 million in February in China.

RenRen’s Financials
RenRen is China’s biggest social networking website by page views. The company recently listed on the NYSE in an attempt to raise $734.3 million from the issue. RenRen operates in three key segments in the country and earns revenues through online advertising and through value-added services sold on their online properties. Apart from having a social network offering, they have an online game site and a group-buying site, Nuomi.com. Nuomi.com is a daily deals site that sells offers on local services and cultural events in the country.

In the recently reported quarter, RenRen’s revenues increased 53% over the year to $30.4 million with a breakeven EPS. The market was looking for revenues of $29.5 million on a breakeven EPS. During the quarter, online advertising revenues grew 94% over the year to $16.9 million. RenRen is the equivalent of Facebook in China and had 124.2 million users at the end of the recent quarter, compared with 117 million users reported at the end of March this year. The number of monthly unique log-in users increased from 25.0 million a year ago to approximately 34.4 million in June 2011.

In terms of business segment, Internet Value-Added Services includes revenues from online games and Nuomi.com. Revenues from this segment grew 21.5% over the year to $13.5 million driven by 17% growth in online games revenues. For the quarter, online game revenues stood at $10.2 million and Nuomi’s revenues were $1.1 million.

For the current quarter, the company projects revenues of $33.5 million-$35.5 million compared with the market projections of $35.20 million.

RenRen’s Market Expansion
RenRen’s management is counting on the future of the e-commerce market in the country. They believe that nearly half of their active users will become paying members in the years to come and are investing in R&D in both internet and mobile space to cater to that growth.

Additionally, they are focusing on developing Nuomi.com, where they are seeing good traction. Similar to Groupon, Nuomi earns revenues through the revenue-sharing model on offers run on the site. But in consideration of the local market dynamics, Nuomi charges a 5% fee compared to Groupon’s 50% share.

The Chinese government’s requirements for censoring information available on the Internet have resulted in restricting forums that can be used for social commentary and dissent. Last year, Google had to rework their China policy because of some of these restrictions, and global leaders in social networking, including Facebook and Twitter, are blocked from the Chinese market. RenRen may be heavily monitored by authorities and censors in the country, but it has tapped into a fast-growing market.

RenRen’s Amercian Depository Receipt (ADR) is listed on the NYSE and is trading at $7.57. The stock has fallen significantly since its IPO launch at $14.00.