Lashou IPO: 5 reasons avoid investing in China’s Groupon

Earlier this year, an expose aired by CCTV showed Lashou employees admitting that they’d exaggerated the number of deal participants the company touted.

It’s looking like Groupon’s going to get beat to market. Lashou.com’s IPO plans, which were announced last week, could make the Chinese company the first daily deals coupon site to go public in the U.S. Here are five reasons why I plan to steer clear of the stock:


Ge You

1) Metoric growth can’t be sustained. One of the first daily deals sites in China, it’s hard to believe Lashou was founded in March 2010. That makes it just 18 months old, and already, it’s the 74th most-visited web site in China (per Alexa). In April, a $110 million round of funding from China’s GSR Ventures valued the company $1.1 billion. That valuation was $600 million higher than a similar valuation just five months earlier. Thanks to aggressive marketing campaigns (including one starring well-known Chinese actor/comedian Ge You), the company now has more than 10 million registered users and has the widest reach of any daily deals site in China covering more than 170 cities (per Business Insider). Sales revenue in July hit RMB167 million ($26 million USD). But how long can it last?

Already research firm Analysys International is predicting a dramatic slowdown in growth for daily deals sites in China. First quarter growth of 65.7 percent, could tumble to 21.3 percent in the fourth quarter as user activity on the sites declines.

2) The demise of Gaopeng.com. Groupon operates in China at Gaopeng.com – a site that launched earlier this year and experienced rapid growth before hitting a few stumbling blocks earlier this year. Traffic has fallen off dramatically at the site:

Last month, Groupon fired a big chunk of its staff at Gaopeng, but the company insists it’s “financially viable and still hiring” (per Bloomberg). The rapid plunge in traffic at Gaopeng should give investors pause and serve as a warning that continued growth at Lashou is far from guaranteed.

3) Shady business practices = lukewarm reception from investors. Chinese firms in just about every industry from coal mining to timber, lighting and media have U.S. investors nervous about dumping dollars into Chinese companies. Any rumor of shady accounting or business practices can be enough to push a Chinese ADR down 20 percent in a day.

Earlier this year, an expose aired by CCTV (China Central Television) showed Lashou employees admitting that they’d exaggerated on the number of deal participants the company touted on its web site (per Business Insider). That could be the very last thing you want to happen when you’re planning to hit up American investors for cash. If nothing else, it’s enough to convince me to steer clear of the stock.

4) Price gouge. It’s little wonder that Lashou has garnered a lot of interest from consumers considering the fact that they offer merchandise that’s as much as 70 to 80 percent off retail price. That’s much higher than Groupon’s 30 to 50 percent discounts. Convincing groups of merchants to sell their products at 80 percent off might be easy enough if you’re tapping a new market that’s never been exposed to daily deals sites, but if you’re competing in an established market with dozens of daily deals sites trying to lure the same group of merchants, business gets tougher. Merchants will likely burn out, and that’ll leave Groupon and Lashou selling discounts to obscure products or discounting much less.

5) Copy and paste. One of the biggest reasons I’m not an advocate for investing in Groupon is the fact that the company’s business model is so easily copied (see my post 3 reasons NOT to invest in Groupon’s IPO). Lashou faces the same problem. It’ll have to add value to its service beyond just being a place to go for coupons. If it can strike a balance between innovation and top-line growth, the stock could reward investors. I’m just not prepared to take that risk.

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