Renren New Coverage $3.17 Estimate: Diverse Chinese Internet Company With Bright Prospects

April 30th, 2013 by Trefis Team
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Quick Take

  • We launch coverage of Renren Inc. with an estimate of $3.17.
  • The company operates a social network called Renren, a gaming platform dependent upon the social network, a group buying service called Nuomi, a professional networking site similar to LinkedIn and a video sharing site, 56.com.
  • Renren’s social network faces strong competition from other social networks and micro-blogging platforms.
  • Renren’s revenue growth in the recent past has come from the growing popularity of its multi-player games.

Renren Inc (NYSE:RENN) operates the Chinese social networking service Renren.com, which is similar to Facebook and was previously called Xiaonei.com. The company also owns and operates its own gaming platform, a group buying service called Nuomi, a video sharing site called 56.com and a professional networking site similar to LinkedIn (NASDAQ:LNKD) called jingwei.com. The social network operates primarily in China and is popular among youngsters. Competitors include Tencent, Sina’s (NASDAQ:SINA) Weibo.com and kiaxin.com.

Renren.com is a real name based social network with an activated user base of 178 million. The user base is growing at 20% with the monthly unique log-ins growing at 47%. Growth in monthly unique log-ins is slightly outpacing the growth in user base and suggests growing usage of the service by users. This is critical for Renren’s revenue growth. The primary revenue sources for the company – online advertising and online gaming are heavily dependent upon the popularity of the social network among its users.

Advertising revenues accounted for half of Renren’s total revenues last year. However, the slowdown in the Chinese economy has resulted in the growth in online gaming revenues outpacing that of advertising. In 2012, online gaming revenues accounted for half of Renren’s total revenues.

We recently launched coverage on Renren Inc with a $3.17 Trefis price estimate for the company’s stock which is 15% above the current market price.

We have broken down our analysis of Renren Inc. into four main businesses and cash components:

  1. Online Gaming – 11%
  2. Nuomi – 8.7%
  3. 56.com and Other IVAS – 3.3%
  4. Online Advertising – 1.4%
  5. Cash – 75%
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Social Networks in China

There are approximately 564 million internet users in China and about half of these use social media in some form. [1] [2] The social network industry is also very fragmented. The primary players besides Renren.com include Sina’s Weibo, Tencent’s Weibo, Douban.com, 51.com, Kiaxin001 and Qzone. In terms of active users, Sina’s and Tencent’s Weibo outrank Renren by a substantial margin.

The Chinese government maintains strict control over the social networks to control spread of sensitive news and to monitor content. This initiative has led to the government insisting on users registering with their real identity. The majority of social networks in China initially permitted users to use fake usernames to create a profile or post anonymously. [3] [4] In December 2012, the Chinese government granted approval to a law that requires users to register their names. ((China Real-Name Registration Is Now Law In Country, The Huffington Post, December 2012))

Renren Is China’s Facebook, Zynga and Groupon Combined

Renren’s popularity is backed by its Facebook like features and the absence of Facebook in China due to the government’s ban. Its total activated user base grew to 178 million in 2012. This is commensurate with the growing penetration of internet in China. [1] The core of Renren’s business is its real name social network and its other businesses rely upon the social network’s user base to generate revenues. The company derives revenues through advertising on the social network, online games and group buying.

Renren is also capitalizing on the growing popularity of mobile devices as an internet access point. Renren became the number one publisher of mobile games on the App Store in China in 2012. [5] Mobile is also a major contributor to transaction volumes on the company’s group buying site, Nuomi. With more and more people turning to mobile devices to access the Internet, mobile apps are expected to drive revenues for Renren in the near future. [1]

Our price estimate for Renren Inc. stands at $3.17, which is 15% above the current market price.

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Notes:
  1. CNNIC Released the 31st Statistical Report on Internet Development, CNNIC, January 2013 [↩] [↩] [↩]
  2. Penetration Rate of Wiebo and SNS In China, China Internet Watch, November 2012 [↩]
  3. Confusion Follows China ‘Real Name’ Policy Deadline for Micro blogs, Voice of America News, March 2012 [↩]
  4. China May Extend Real Name Policy To Internet, South China Morning Post, December 2012 [↩]
  5. Renren’s CEO Discusses Q3 2012 Results, Seeking Alpha, November 2012 [↩]