Post Mortem: July 10 - July 20, 2000 The GEM, a Harsh, Unjust Mistress
techbuddha.com
21 July 2000
Panda-Recruit, Henderson Cyber, Across Asia Multimedia…put 'em on ice until we can find a medic. The GEM has been unkind to new issues in the last week, but the NASDAQ has been downright impolite. Check out Sohu (See our article "Foxy Portal"), down 29.8% and Netease, down 31.4% since issue. Let's look into the most egregious and interesting of last week's IPO's.
Across Asia Multimedia (8061 HK)
Across Asia Multimedia (AAM) is the one anomaly, up 6.7% from IPO. If there ever was evidence of imperfect markets, this is it. Presently the largest stock by market cap (at US$ 2.3bn) in GEM, the holding company is a typical Lippo Group pyramid scheme.
The only real Internet-related business in the AAM group is a Jakarta-based cable operator, TBS. The operator has been in operation for 3 years, yet only has 21K subscribers and 100K home passes. If you estimate that TBS represents 75% of the value of AAM, it is trading at US$82,000/subscriber(!) And people thought I-Cable was expensive at 6,500 per sub when it came to market in November 1999.
TBS is also touted as a "broadband" service provider. This is debatable-sources on the ground in Indonesia claim that cable modem access tops out at 56K, largely due to constraints on international bandwidth connecting Indonesia to the rest of the world.
Other assets in AAM are truly pyramidal in nature. Virtually all of the company's revenue comes from its 50% stake in Multipolar (MLPL IJ), which AAM will soon replace in the TechBuddha Indonesia index. Multipolar is a computer vendor and holding company, with a 39% stake in department store operator Matahari (MPPA IJ), perhaps the only real business of the whole bunch!
Panda Recruit (8073 HK)
Panda-Recruit, on the other hand, actually seems to be a very solid investment. The company, effectively 39.1% owned by Great Eagle Holdings post-IPO, is a pure play on employment advertising in Hong Kong and China. The company will employ a online-backed-by-print strategy, aiming for dominance of the market for white collar employment advertising in Hong Kong and Guangzhou, and Shanghai, with plans to expand into other key Chinese cities.
Panda's print experience is extensive. Recruit magazine, a free magazine, has circulated in Hong Kong since 1992, reaching breakeven after 8 months of operation. China publications will be separated on a city-by-city basis. The company estimates that publications in each additional city will reach breakeven in 18 months.
The online entity, Pandaplanet, has a wider range of content and e-commerce offerings, but is not profitable. We see Pandaplanet largely as a mechanism for marketing and brand-building the print publication. The online version is ubiquitous and not subject to regulation, accelerating the rollout and acceptance of print publications in new cities.
China ambitions: The company believes that the China recruiting market is wide open, due to the lack of privately-run publications. It recently acquired the rights (at a cost of HK$1mn) to distribute a publication in Guangzhou subway stations, Panda's first foray into the Chinese advertising market. In Shanghai, the company has a relationship with state-controlled XinWenBao, which will act as Panda's printing agent.
The bottomline on Panda is that it will benefit from the type of advertising that clients in China are willing to pay for NOW. Its marketing costs are minimal and payoff is quick. Panda also has the benefit of experience in the arena of advertising sales, which is definitely not the forte of other online entities in China, such as Netease, which outsources most of its advertising sales.
Wrap-up:
The GEM has suffered slightly in the past weeks and is now termed the "worst performing market in the world" on a fairly regular basis. However, judging from the experience of our two newborn Chinese portals, it is still not as unforgiving as that other gambling den known as the NASDAQ.
Attitudes toward Netease (NTES US) and Sohu.com (SOHU US) have, we believe, been poisoned by a few new strands which have enmeshed themselves within the group psychology of investors in Asian Internet stocks. One strand, which we are guilty of propagating, is that the Chinese online advertising market is extremely limited in size and is unlikely to grow faster than the overall ad market.
Another mantra making the rounds is that global advertising growth has peaked and will fall off in the second part of this year. This, of course, may well be true in markets such as the US, where advertising generated by dotcoms has created an advertising bubble. Less true in Asia, where the dotcom adspend has begun more recently and is far less systemic. Even less so in China, which is progressing from a very low base of advertising spend and has the two factors of 1) potential media liberalization (WTO-induced) and 2) rapid economic growth to carry the advertising wave forward for years to come.
Finally, there is a practical consideration for the NASDAQ dotcoms. Once the market capitalization of your company dips below $500mn, you are screwed. This is the lesson to be learned from examples such as Myweb (MWB US) and Asiacontent.com (IASIA US). At a certain level of market cap, the liquidity just isn't sufficient for the stock to be attractive to institutional investors. And as for US retail investors, if the story isn't BIG-along the lines of PCCW-the stock doesn't even make it into the Raging Bull chatrooms. Instant death. Say good-bye to Sohu and Netease. |
