IPO Preview: Cheetah Mobile

Summary

• Diversified suite of mission critical applications optimizes internet and mobile system performance and provides real time protection against known and unknown security threats.
• Pre-IPO Kingsoft Corporation Limited owns 54% of CMCM. Kingsoft has a market cap of $29 billion.
• Income statement percent of revenue comparisons for the March '14 quarter vs. the March '13 quarter are not favorable for CMCM, except for revenue growth.

Based in Beijing, China, Cheetah Mobile (CMCM) scheduled a $162 million IPO on the NYSE with a market capitalization of $1.86 billion at a price range midpoint of $13.50 for Thursday, May 8, 2014.

The full IPO calendar is available at IPOpremium.

SEC Documents

Manager, Joint managers: Morgan Stanley, JPMorgan, Credit Suisse

Co-Managers: Macquarie Capital, Oppenhemier

End of lockup (180 days): Tuesday, November 4, 2014

End of 25-day quiet period: Monday, June 2, 2014

Summary
CMCM has a diversified suite of mission critical applications that optimizes internet and mobile system performance and provides real time protection against known and unknown security threats.

Pre-IPO Kingsoft Corporation Limited owns 54% of CMCM. Kingsoft has a market cap of $29 billion.

Income statement percent of revenue comparisons for the March '14 quarter vs the March '13 quarter are not favorable for CMCM, except for revenue growth.

				Comparing March '14 qtr with March '13 qtr
Revenue rate of growth				132%
Gross profit % of rev				-6%
Operating profit % rev				-57%
Net income % of rev				-25%

With this kind of negative performance companies always say they are "investing for growth," however.

Valuation

Glossary

Valuation Ratios	Mrkt	Price /	Price /	Price /	Price /	% offered
2013 yr	Cap (MM)	Sls	Erngs	BkVlue	TanBV	in IPO
Cheetah Mobile	$1,877	15.1	184.0	6.4	6.8	9%

Conclusion
The rating on CMCM is neutral+, primarily because Kingsoft ($29 billion market cap) owns 54% pre-IPO, and CMCM is big enough to be important to Kingsoft.

However, CMCM did have a poor March '14 quarter in terms of operating percentage trends compared with Q1 '13.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

CMCM's mission is to make the internet and mobile experience speedier, simpler and safer for users worldwide.

To achieve this mission, CMCM has developed a platform that offers mission critical applications for its users and global content distribution channels for its business partners, both of which are powered by its proprietary cloud-based data analytics engines.

For its users, CMCM's diversified suite of mission critical applications optimizes internet and mobile system performance and provides real time protection against known and unknown security threats. CMCM had 340.7 million monthly active users for all of its applications in February 2014.

CMCM's mobile applications attracted 222.5 million monthly active users in March 2014. CMCM's applications have been installed on 502.1 million mobile devices as of March 31, 2014.

For its business partners, CMCM's platform provides multiple user traffic entry points and global content distribution channels capable of delivering targeted content to hundreds of millions of people.

CMCM's business partners share revenues with CMCM and promote its products and services. CMCM has benefited significantly from its cooperation with over 380 online marketing business partners in 2013, including the major Chinese internet companies Alibaba (ABABA), Baidu (BIDU) and Tencent (OTCPK:TCEHY).

At the core of CMCM's platform are its proprietary cloud-based data analytics engines. For CMCM's users, the data analytics engines perform real time analysis of mobile applications, program files and websites on their devices for behavior that may impair system performance or impose security risks. For CMCM's business partners, the data analytics engines help create user interest graphs according to a number of dimensions such as online shopping, gaming and frequently used applications, thus facilitating targeted content delivery.

Dividend Policy

No dividends are planned.

Intellectual Property

As of March 31, 2014, CMCM has eight patents in the PRC relating to its software and other proprietary technology.

Seven of the eight patents are either independently held by Zhuhai Juntian or jointly held by Zhuhai Juntian, Beijing Security and Conew Network, and one patent is jointly held by Beike Internet, Beijing Security and Conew Network.

Competition

In the mobile internet space, CMCM generally competes with other mobile application developers, including those developers that offer products claiming to perform similar functions as Clean Master and Battery Doctor.

In the internet space, CMCM mainly competes with Qihoo 360 in China's internet security and anti-virus market.

In addition, CMCM competes with all major internet companies for user attention and advertising spend.

5% stockholders

Sheng Fu 13.4%

David Ying Zhang 6.3%

Kingsoft Corporation Limited 54.1%

TCH Copper Limited 18%

FaX Vision Corporation 13%

Core Pacific-Yamachi International (H.K.) Nominees Limited 8.2%

Matrix Partners Funds 6.3%

Use of proceeds

CMCM expects to net $147 million from its IPO. Proceeds are allocated as follows:

$50 million to penetrate selected international markets;

$35 million to expand and strengthen its sales and marketing efforts;

$35 million to invest in technology, infrastructure and research and development capabilities; and

balance for other general corporate purposes, including working capital needs and potential acquisitions.

Disclaimer: This CMCM IPO report is based on a reading and analysis of CMCM's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Source:http://seekingalpha.com/article/2200503-ipo-preview-cheetah-mobile