Ready to play the China card?
IPO Watch
March 06, 2000
by Janet Purdy Levaux
China-based AsiaInfo Holdings Inc.'s (ASIA)
debut Friday on the Nasdaq was hotter than a
sizzling string of firecrackers.
The stock, priced at $24, shot up 315 percent to
close at 99 9/16 Friday as 4.7 million shares
traded hands. The company's sales -- which
consist of network infrastructure equipment and
software -- were $44.2 million in 1998 on net
income of $1.5 million.
Alameda, California-based UT Starcom Inc.
(UTSI), which makes and sells telecom gear in
China, rose 278 percent to end the day at 68 1/8
on volume of nearly 13 million shares. It had
1998 revenue of $105 million and earned
$473,000.
Why all the interest in these China-related
offerings? What better way to get a piece of the
booming market for technology and IT services
in the world's most populous country! More than
$18 billion of capital investment poured into
China's telecom infrastructure last year. The
telecom service sector reported revenue of
nearly $30 billion in 1999, up about 25 percent
from 1998.
Explosive situation
Investors should be careful, analysts warn. With
the wild ride ahead for China's entry into the
World Trade Organization and the ever-present
conflict with Taiwan, these stocks could become
dangerously explosive.
Like UT Starcom, AsiaInfo, headquartered in
Beijing, has an interesting history. The company
was founded in Dallas in 1993 as BDI by James
Ding and Edward Tian, both American-educated
Chinese nationals. Ding is now CEO, while Tian
sits on the board and heads China Netcom
Corp., a new IP (Internet Protocol) phone
service provider.
AsiaInfo's major claim to fame? Designing and
building ChinaNet, China's first national Internet
infrastructure, starting in 1995. Today there are
five national networks.
"AsiaInfo is a very good company and has some
contracts that are very promising," said James
Shen, president and CEO of NeTrue
Communications of Fullerton, Calif., which
sells IP equipment and software worldwide.
"They have very close relations with their
customers."
AsiaInfo is gradually developing its own
technology, Shen says. In the meantime, its
business stems mainly from sales of routers and
equipment made by business partners such as
Cisco Systems (CSCO), 3Com (COMS),
Oracle (ORCL), Hewlett-Packard (HP),
Sybase (SYBS), Sun Microsystems (SUNW)
and others.
"They now put other people's pieces together (to
build IT infrastructures)," Shen said. "But
long-term, their intention is to put their own
pieces into a package as much as possible." The
reason? Higher profit margins.
China's Internet users now number roughly 9
million. That figure could reach 20 million over
the next few years, according to some estimates.
Others claim it will reach as high as 85 million
in 2005. "Most people in the past got access
through universities, cybercafes and at
companies where they work, especially foreign
companies," said Eric Silverstein, founder and
chairman of Idiom Inc., a Cambridge,
Mass.-based developer of Web globalization
software. "More and more people are accessing
the Net by modem via ChinaNet."
Information control
There are some 300 ISPs, 1,000 Internet content
providers and 15,000 Chinese websites. Content
is getting richer and richer as information is
copied onto the Net from print sources, Shen
explains.
That, of course, raises the question of
information controls in China, a nation that
recently said it could start a war with Taiwan if
the island didn't express a clear timetable for
reunification.
"The government wants to have tight control,"
Shen said. "At the same time, it doesn't want to
hurt growth."
But can the PRC -- and key contractors like
AsiaInfo -- have it all? "We see this as a
dilemma," Shen quipped, "but the government
doesn't." As a result, it's buying lots of
equipment, infrastructures and applications.
Other sources agree. "People talk about how
effective a government can be at limiting
information," Silverstein said. "Even if it could
control certain flows, it will be very hard to see
(the Internet) not growing rapidly in China."
Beyond censorship, there are also tricky issues
related to China's entry into the infamous World
Trade Organization, a topic U.S. politicians are
only too happy to beat their chests about.
If Congress were to block entry, U.S.-China
relations are sure to plummet -- along with
stocks sensitive to such matters.
On the other hand, China's WTO entry would
mean more open -- and hence more competitive
-- IT markets for AsiaInfo and UT Starcom.
Shen says that both U.S. and Chinese economic
interests have a lot to gain from China's entry
into the WTO. In addition, AsiaInfo's ties to
foreign firms and ability to form strategic
alliances should help it compete there over time.
They've established good relations with
companies like Cisco, so Cisco won't just say,
'We don't need you anymore,' " he explained.
If the WTO issue -- or a conflict over Taiwan --
does erupt, AsiaInfo and other China-centric
companies would be hurt badly. Given such
risks, Shen says, the company needs to develop
its own technology and sales presence outside of
the People's Republic.
Today's IPO should give it the cash to do so. |
