What’s not to like? It’s a Chinese internet company, in the world’s biggest internet market. It’s a social networking site – literally China’s Facebook. It’s even got international backing – courtesy of Japan’s Softbank.

And soon, unlike Mark Zuckerberg’s outfit, you’ll be able to buy a slice of Renren – as the FT reported on Monday, it is planning a $500m IPO. Investors must be licking their lips.

As Kathrin Hille wrote, Chinese internet companies are doing something that their western counterparts aren’t – tapping into the desires of global investors:

As Facebook is not yet listed, Renren could become virtually the only choice for investors seeking to buy into the sector’s growth. The situation is similar with microblogs. While Twitter is not listed, investors can buy shares in Sina, Tencent or Sohu, the Chinese internet portals which all operate microblog services.

Being a technological follower – as many Chinese internet companies are – needn’t be a disincentive for investors. Baidu – China’s equivalent of Google, has shown that it’s all about market share, not innovation. In the past 5 years its share of China’s internet search market (by revenue) has gone up from around 25 per cent, to over 70 per cent.

Since it listed in New York in 2005 (i.e. over a similar time frame), its share price has risen 4,660 per cent. It’s gained over 800 per cent since January 2009.

Other Chinese internet giants have done pretty well too. Since the start of 2009, Tencent – which runs China’s top instant messenger service, QQ – has increased 273 per cent, while Alibaba is up 225 per cent (though is actually still down since its initial offering).

When it comes to social networking in China, Renren – which literally means “everyone” – is the dominant player by a long-shot, thanks to its strong focus on college graduates and students. It also owns Kaixin001 – a similar site designed for white collar workers.

Markets have already given the IPO plan a thumbs up. Shares in Softbank, the Japanese telecommunications company that owns a 40 per cent chunk of Renren, rose over 4 per cent in Tokyo on Monday.

But life isn’t so simple. While Twitter is no doubt a popular success, its revenues are a paltry $100m a year, which means it may not yet have made a single penny of profit. Facebook too has avoided listing this long, perhaps because its revenues may not live up to the hype, at least not yet (despite a $50bn valuation on the company through private share sales).

While buying into China’s internet growth, and buying into social networking, may be enough to create huge buzz around Renren’s IPO, there’s a history lesson worth remembering.

It doesn’t matter how many hot trends a company taps in to – money, or at least profit, ultimately talks. Just ask BYD.

Related reading:
Social networks steer China web evolution, FT
Bubble trouble over sky-high internet values, FT
Goldman deal values Facebook at $50bn, FT