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Could this be the next...
Getting In On The Ground
Floor: Dig a Hole to China
The Chinese have so few phones most use a code
book with a pager. If you called a Chinese friend on
his pager, you might, for instance, punch in 2134456,
to say, "Bring your wife to dinner. Ho! Ho! Her
mother is out." Soon, many pagers will have two lines
for Chinese ideographs to allow more detailed
messages. Voice phones are years away for most
Chinese. China has 1.2 billion people and has had
double digit growth for one of the fastest growing
economies in the world. Moreover, China's annual
growth rate is expected to be 9 to 10 percent well
into the next century.
Jumping into this breach is a developmental American
company called AVIC Group, (AVIC, OTC.)
AVIC's chosen role is to set up Chinese foreign joint
ventures in telecommunications. It has done four so
far. AVIC's key assets are its seasoned managers
and directors, two of them from the Reagan
Presidency. Other key officials are Chinese or
Chinese American.
AVIC is chaired by CEO Joseph R. Wright, once a
Booz Allen man. He later helped CitiCorp set up its
credit card business. Wright was President Reagan's
last director of the Office of Management and
Budget. At W. R. Grace he set up a confectionery
unit in China financed by Oppenheimer.
KEEP PAGING DOWN
Wright was joined at AVIC last week by another
former Reaganite: R. T. McNamar, who began at
McKinsey & Co., management consultants. As
Reagan's Deputy Secretary of the Treasury,
McNamar specialized in international finance.
McNamar negotiated the 1983 U. S./Japanese
Yen-Dollar accord. He served as the government's
administrator of the Chrysler loan guarantee and he
guided the sale of Conrail. McNamar has since
advised the World Bank on international debt
restructuring policies.
American born Michael J. Lim, formerly with Bear
Stearns, is AVIC's CFO and executive VP,
operations. He negotiates AVIC's deals in China.
Chen Li, vice chairman of AVIC's board, and AVIC
director Ju Feng, are both with Beijing CATCH.
Beijing CATCH, is an affiliate of AVIC's dominant
owner(46 percent of the stock) Beijing Municipal
Government. Beijing CATCH is the leading operator
of paging stations in China. AVIC states flatly in its
filings that its success depends on Beijing CATCH.
Some 30 million pager subscribers in China already
outnumber their counterparts here 10 for 1 as AVIC
develops 100 pager stations to serve 3.1 million
subscribers on a new national frequency. Stations
cost $500,000 to $600,000 each. Initially, AVIC will
upgrade 50 for a cost of $50 million. AVIC's
China-based executive vice president, Xiao Jun, a
Chinese native, is also a director. Except for Wright
and McNamar, both aged 57, most of the AVIC
managers are in their late thirties or early forties. This
is a lot of resume detail, but the team, its connections,
financial, business, legal and executive, will be critical
to the company's success.
KEEP PAGING DOWN
Basically, AVIC is a facilitator not an operator. It
must win contracts for major telecommunications
installations, secure the financing for them, (mostly in
the United States), hire builders/operators and make
sure each deal is properly structured for mutual safety
and with all parties satisfied. Unlike the U. S. where
telecom franchises cost hundreds of millions of
dollars, AVIC gets the franchises without cash
upfront. It uses its common stock to reward joint
venturers. More AVIC shares will be issued in future
if and when AVIC turns a profit, but AVIC's interest
will not be diluted.
Wright told me that the contract negotiations in these
telecom deals is complex and time consuming. He
said it can take more than a year to do a deal, longer,
in fact, than it will take to start service in some
projects. But he said each negotiation adds to the
"model", making the next one easier. Hai Wen
Partners a top Asian firm works for the Chinese Los
Angeles based Gibson, Dunn & Crutcher works on
the US side. Wright told me that once the first deal
was locked up, the contract was turned over to a top
law firm here in the U. S. for appraisal. The firm said
the terms were sound.
AVIC's first deal was a European mode cellular
phone project in Hebei Province. Hebei encircles
Beijing like Virginia and Maryland surround
Washington, D. C. But Hebei has a vastly larger (63
million) population. Cellular phones require cell
towers, the main infrastructure element so this project
was relatively cheap. AVIC will be installing wire line
telephones in Hebei which cost much more. Old
fashioned, they still offer the best hope for quick
phone service for the 1.2 million subscribers AVIC
hopes to sign up. The operating partner on the
cellular project is Japan's Nippon Telephone. The
wire line phone project could cost $1.4 billion, the
costliest project so far. Cellular stations, like paging
stations, are relatively inexpensive. Merrill Lynch and
Wasserstein Perella are to help seek the needed
capital.
KEEP PAGING DOWN
Caution: From 10-Q papers filed with the SEC for
the quarter ended June 30, 1996: AVIC Group,
International "is a development stage company [that
is] devoting substantially all of its present efforts to
establish a new business and its planned principal
operations have not commenced yet." AVIC hopes
to have 10 million subscribers for its projects by the
end of 1997. If AVIC does this, it should be well in
the black.
Outcome: uncertain. Here are some other risk
factors, from the company's 10-K filing: AVIC
generated losses of $5.2 million and $5.6 million in
the fiscal years ended March 31, 1995 and March
31, 1995, respectively. There can be no guarantee
that AVIC will ever be profitable or that its revenues
will cover its on going operating expenses. To attain
profits, the company will have to obtain adequate
financing to achieve its goals and there is no
assurance of this. AVIC needs high sales to support
the company cost structure, too.
KEEP PAGING DOWN
There is also the possibility of discord with Chinese
interests and disaster. AVIC has been a public
company for a year and the firm has already drawn
the fire of short sellers. They pounced on the
company when it did an offshore financing causing
some dilution. Short sellers often seize on dilution as
an occasion to short stock. As a result, AVIC, which
hit 15 in the Spring, now sells at 2 1/2. If everything
works, gains could be substantial. At 2 1/2, AVIC
Group has a market cap of $71 million. At 15,
market cap was $425 million. But there is, of course,
no guarantee of any gains.
Newcomer McNamar remarked that AVIC was a
"pure play" and "the only way I know that an investor
can own a U. S. public security directly tied to the
promising future of telecommunications in China." I
met with both McNamar and Wright in their
sumptuous tower offices at 599 Lexington Avenue on
Manhattan's fashionable East Side. Salaries don't
seem excessive. Wright has deferred most of his
$143,750 yearly pay. The incentives are in substantial
stock options. AVIC had $407,000 in cash on June
30 and has taken up $1.75 million from escrow since.
The burn rate is said to be "very low" by Cheryl Bell,
director of investor relations. |
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