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Dangdang, Youku Shares Tumble as Lock-up Expires

Shares of two Chinese internet companies—Dangdang and Youku—are taking another beating Tuesday as their post-IPO lock-up period comes to an end, and millions of shares owned by company insiders become available.

Flag of the People's Republic of China
Eriko Koga | The Image Bank | Getty Images
Flag of the People's Republic of China

For battered online retailer Dangdang, an equivalent of about 58 million American depository shares (ADSs) will be released from lockup. That compares with the current float of 19 million ADSs.

The company, as with most new China-based IPOs, has performed dismally since going public with fanfare in December of last year.

Dangdang’s stock is down more than 45 percent since its first-day close. And the lockup expiration is adding to the selling pressure, experts say.

But investor concern over more competition in China’s e-commerce sector is still the leading factor.

“One of the main drivers behind the recent slide is that both revenue growth and margins have been somewhat disappointing relative to expectations at the time of its IPO, in part due to competitive pressures,” said Paul Bard, director of research at Renaissance Capital.

Gene Munster, a managing director at Piper Jaffray, agreed. Despite the concerns, his firm remains positive on the company, maintaining an "overweight" rating.

“Dangdang is well positioned to capitalize,” said Munster in a recent research note. “The company continues to pursue its strategy of investing to improve the customer experience, which we believe will lead to more repeat buying, more loyal customers, and lower marketing costs over time.”

Dangdang’s major pre-IPO shareholders included Tiger Global, DCM Capital and IDG Technology Ventures, according to Renaissance Capital. Together they held about 30 percent of Dangdang’s total shares post-IPO.

Co-founders still hold about one-third of the company, Bard said. “They are unlikely to sell any material amount near-term given that they already sold some stock on the IPO.”

Bard said the more likely scenario is that the company owners will wait to announce a structured follow-on offering, although the current stock price, below the IPO price, makes them likely to wait.

The management may also enter into a structured trading plan whereby they sell a specified amount over time.

Internet media portal Youku is also trading lower Tuesday in anticipation of more insider selling. The number of newly available shares will be 19.6 million of ADSs upon lock-up expiration, compared to the current float of 30 million shares of ADSs.

The company already completed a secondary offering in late May. Youku's total return since the first day close is 10.8 percent.

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