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YY: A Successful Chinese Internet IPO

Posted on Tuesday, Dec 4th 2012

China has the world’s largest Internet-using population, with more than 513 million users. Analysts believe that nearly half of this population accesses at least some social networking and media platforms. Use of social media platforms is driven by increased Internet penetration in the country. Researchers estimate that by 2013, nearly 53% of China’s population, close to 718 million people, will have access to the Internet. In 2010, Internet penetration stood at nearly 35% of the population. Besides internet penetration, social media platforms are also gaining ground through increased adoption of online gaming. According to iResearch, China’s online games market is projected to growth from $6.9 billion in 2011 to $13.3 billion in 2016.

YY Inc.’s Business Model
Riding high on the trend, Chinese social network platform provider, YY Inc. (Nasdaq:YY) recently went public on the Nasdaq. YY was founded by current CEO Li Xueling in 2005. YY’s products include YY Client, web portals and, and Mobile YY. YY Client is the company’s PC-based software that provides real-time access to online activities groups. Initially YY Client offered basic communication and messenger services to their users. Today, however, its platform has become a popular site for group activities including gaming, entertainment, and educational services. Its services are accessed by more than 400 million Internet subscribers, and its high-quality voice and video communication service has made it among the popular communication channels in the country. For the first nine months of this year, YY reported more than 393 billion voice minutes spent by users on YY Client voice calls.

In addition, YY’s social site is also used by gamers and artists. Similar to other social networking platforms, YY allows gamers to connect with each other and purchase in game virtual products. But the unique feature for YY are its offering for performers. YY not only lets artists connect with each other, but it also lets them connect with their audience through multiple platforms. Audience can view or listen to the artist’s performance and can applaud the performance through virtual flowers. Performers can then exchange these online flowers for cash. Analysts believe that a few performers have managed to earn tens of thousands of dollars each month through YY’s virtual flower toss option.

YY earns revenues through Internet value-added services, which includes the sale of virtual goods and advertising. Similar to many other Internet stocks, YY still has to turn profitable despite strong revenue growth. Revenues grew from $2 million in 2009 to $26 in 2011. For the nine-month period ending September this year, it reported revenues of $88 million. Losses widened from $53 million in 2009 to $326 million in 2010. It has since managed to cut its losses and ended 2011 with a loss of $49 million. During the first three quarters of this year, YY reported marginal earnings of $9 million.

YY has received venture funding of more than $96 million from venture funds, including Morningside China, Walt Disney‘s Steamboat, GGV Capital and Tiger Global, and Chinese angel investor Lei Jun.

YY’s IPO was priced at $10.50 per ADS and aimed to raise $81.9 million in funding from the market. Within a few weeks of listing, the stock is trading at $14.54.

The company plans to use its IPO-raised funds for further investment in voice and video technology and infrastructure. Even today, YY claims to be the biggest provider of a live voice- or video-enabled online social platform in China. But competition is increasing with players like Skype expanding their presence in the region. YY plans to deploy some of these funds to invest in technological infrastructure, improving user experience, product research and development, and sales and marketing to grow and maintain its market leadership.

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