Baidu is looking for a payoff via its controlling stake in its unprofitable online travel search company Qunar Cayman Islands Ltd., which just filed for its initial public offering on the New York Stock Exchange under the symbol QUNR.
In its prospectus, the company says revenue from its website at Qunar.com was USD58.5 million for the six months ended June 30, 2013, and it recorded a net loss of USD2.8 million.
In recent years, accounting scandals and worries of malfeasance within Chinese listed companies have brought down the values of many of these firms. However in recent months, stocks for Chinese Internet companies like Sina, Sohu, and Baidu have bounced back by as much as 80% of their lows.
This does not necessarily mean that investors should rest easy. Qunar.com's prospectus spells out the problems investors may face: "We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through our WFOE [Wholly Owned Foreign Enterprise] and VIE [Variable Interest Equity/Entity] in China. All of our officers reside outside the United States and some or all of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action in the United States against us or against these individuals in the event that you believe that your rights have been infringed under securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits."
Furthermore, the company says, "We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations." Over the last 10 years, the SARS epidemic, earthquakes, typhoons, and tsunamis have all had a dramatic effect on the spending budgets for travel service providers because of lower service volume. And with recent Chinese government edicts that halt lavish spending by government officials, much of the 4-star and 5-star hotel revenue that relied on this spend has evaporated. This entire travel ecosystem in China still very much either relies on a good weather environment or favorable subsidized government spending to exist at a growth level.
Finally, much of Qunar's revenue is derived via a variable interest equity entity that is 40% controlled by co-founder and CEO Zhuang Chenchao, and the other 60% is controlled by a Baidu.com nominee. The relationship between this VIE and the Qunar Cayman company is a "dotted line" affiliation that is not legally recognized in China. That means Zhuang or the nominee could theoretically abscond legally with most of the revenue of the company, with difficult — if any — legal recourse for Qunar Cayman. Another listed Greater China technology company named Gigamedia had this problem a few years ago when the controller of its VIE took over the revenue-generating portion of the listed business.