Short sellers active in Chinese social media stocks, despite forecast of profits ahead of US rivals

The Chinese seem to have cracked how to commercialize social media ahead of the US goliaths contemplating flotations at racy multiples. The Financial Times singled out Sina Corp (NASDAQ:SINA), owner of Weibo, China’s leading micro blog with over 100 million users and Renren (NYSE:RENN), the Chinese Facebook clone that listed in New York last week, as the dominant forces in online marketing in China. We’ll show that short sellers are sceptical. They are active in the US listed Chinese focused internet companies, including Chinese online video specialist, YouKu (NYSE:YOUKU).

Message

First up, we have just picked up the early short interest trades in Renren following its listing amid much fanfare last week. It must be said that some of this could be borrowing to aid settlement. We see 1.32 million shares are now available to borrow in lending programs as institutional investors build their holdings. Yet the share price has slumped around 25% in a week and short sellers have borrowed 0.8% of the company, which represents a third of the available supply of shares. One to watch ahead of US public short interest filings.

The enthusiastic uptake of Twitter clones in China as a commercial tool has led to huge expectations being placed on Sina’s development of Weibo, with the shares up over 250% over the past year. The data shows the company is popular with short sellers, who covered their positions too early, before the shares came off their annual high. Despite this, over 6% of the total shares remain on loan, which is almost half the available supply. There has been some hasty short covering so people are obviously fearful of good results. Institutional long only investors who lend their shares are sceptical and have reduced their holdings this year to 12% of the total shares.

Also of interest is Chinese online video site, Yoku. While the company has shown positive revenue momentum, it was not able to present evidence in its recent Q1 results that it could convert this into profitability. The company splits investor sentiment, with holdings of long only investors who lend at a high since flotation at the end of last year as the share price continues to skyrocket. Yet, there is significant demand to borrow this stock, with well over two thirds of the supply out on loan. Short interest may be off its peak, but remains considerable at 26% of total shares outstanding on loan.

Bottom line

From LinkedIn to Facebook, US social media/internet companies are gearing up to float, yet no one knows how to value them given the lack of precedent. One way is to read across to these Chinese firms. The observation after looking at investor sentiment on the above companies is that plenty of investors are not entirely convinced by this new breed of internet firm. Results will tell us more.