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Tuesday, January 4, 2000
Groome Capital Ideas
Companies In This Report Initial Recom. Price Recent Price Shares Out-
standing (M) Market Cap. (M) Current Recom. 12 month Target Price
Xin Net (XNET-U) US$7.50 US$$7.50 21.3 US$160 Speculative BUY Under Review
Initiating Coverage on Xin Net Corporation
Capturing China's Internet Growth
Xin Net Corporation, a U.S. company headquartered in Vancouver, BC, is poised to become a major player in the booming Chinese internet market. Xin Net provides Internet access and content, online domain name registration and an online auction in China. With a subscriber base of over 50,000, Xin Net is in the early stages of significant growth in one of the hottest emerging Internet markets. Xin Net's first ISP (Internet Service Provider) opened in Beijing, China on April 1997, and became profitable for the year 1998. Xin Net currently has over 120 employees in China, in four major cities: Beijing, Shanghai, Shenyang and Guangzhou.
The Company
Xin Net has two operating arms; ChinaDNS, the Company's new Domain Name Registration (DNR) business and the first to offer true on-line domain name registration in China, and Xin Hai Technology Development (Xin Hai). Xin Hai, an ISP, Domain Name Registrar, Auctioneer (the Company recently created XINBID.COM, the first online live auction site in China, serving Chinese speaking customers in China, Hong Kong, Taiwan and internationally) and soon-to-be full-fledged e-Commerce facilitator, is one of only a few (only one in Beijing) profitable ISP's in China.
Xin Net currently has licenses to operate in ten cities: Beijing (where Xin Hai is the 5th largest ISP), Shanghai, Guangzhou and Shenyang (3rd largest ISP) - with a combined population of 35 million - as well as Taiyuan, Xian, Chengdu, Wuhan, Dalian and Nanjing. Xin Hai has accumulated over 50,000 Internet subscribers and over 13,000 Domain Name Registrations - nearly 1/3 of all DNRs in China over the past two years. The Company has enlisted over seventy agents, including the Bank of China, the Beijing Post Office and Ji Tong, China's third largest Telecommunications company, to sell its hosting services and prepaid Instant Internet access cards. Together with a dedicated marketing and advertising effort, management expects to achieve a 10% market share in the six cities in which it plans to operate.
Company Strategies
The Company is positioning itself to become a major provider of Internet services in the Chinese market, offering
Bundling of services with PC manufacturers and retailers
Long term reward program for customers
Systems integration services
Value added services (e-commerce).
Business Partners
Xin Hai has maintained a long and successful relationship with the The Ministry of Information Industry (MII) and the Beijing Telecommunication Administration Bureau and has recently signed a joint venture agreement with Unicom China to offer their email Pager service to Unicom's customers. Unicom is the only authorized telecommunications service company in China besides the MII. By early 2000, Unicom is projected to have 10% of China's long distance market and 30% of the cellular market. Xin Hai's e-mail to Pager and other Internet related products and services will be offered to all of Unicom's over-400,000 subscribers.
Recent Events
December 23, 1999 - Xin Net has been accredited by ICANN (Internet Corporation for Assigned Names and Numbers) to provide domain name registration services. This ICANN accreditation enables ChinaDNS to register domain names in the .com, .net and .org domains. Xin Net has recently signed more than one hundred agents to sell its services in China, including local telecom companies Beijing Telecom and Luo-Yang Telecom. Xin Net joins the 88 other accredited companies that were previously announced by ICANN (starting in April, 1999). Before April 1999, registration services in the .com, .net, and .org domains were provided solely by Network Solutions, Inc., under a 1992 Cooperative Agreement with the U.S. Government. With this accreditation, Xin Net can charge for DNRs and remit to ICANN a minimum amount (currently US$14.00 per DNR), as opposed to US$45 to US$70 per DNR when they were not accredited by ICANN.
The Company expects to meet the eligibility requirements by the S.E.C. for full Nasdaq listing (National Market) by Spring 2000. XNET has approximately US$5MM in cash on hand and we expect that, following the exercise of outstanding warrants, the Company should have an additional US$40MM. As such, Xin Net should have sufficient resources to carry out an aggressive expansion plan during 2000.
January 3, 2000 - Xin Net has signed a Letter of Intent with Beijing San Jie Heng An Technology Company Ltd. (San Jie), a major computer and computer supplies distributor in the North China region and Guangdong Xin Na Te Electronics Company Ltd. (Xin Na Te). Xin Na Te is a major computer hardware distributor of monitors and optical drives for the South China region. Under the terms of the Letters of Intent, both San Jie and Xin Na Te will utilize Xin Net (including ChinaDNS and XinBid) as their exclusive Business to Business (B2B) e-Commerce platform and pay a commission to Xin Net for online sales, using online catalogue, ordering, transaction, inventory, and accounting, etc.
A Letter of Intent to acquire control of Future Computer Company Ltd. (Future) has also been signed. Future is an established systems integrator specializing in the retail sector. Based in Hainan, China, Future will bring their expertise of the China retail industry and existing business to the Company.
Market Potential
The Internet market in China is in its infancy. According to Dow Jones, China will be the world's largest economy in 15 years. Computer sales are increasing at approximately 50% per year (2.75 million units in 1998, 6.7 million by end of 1999).
The Opportunity. China is leading all other Asia Pacific countries in the number of Internet hookups, according to the IDC (International Data Corporation), an industry research firm. IDC expects that China will have about 3.7 million Internet users (17% of the Internet population in the Asia Pacific region outside Japan) by the end of 1999, 7.2 million by next year and 33 million at the end of 2004 (35% of the region's total online users). China's Internet user base will be growing at an annual rate of nearly 60% over the next five years, when ISP and related services will represent a US$4 billion market, according to BDA China and The Strategis Group. Each new user that comes online in China creates new opportunities for Internet-related business ? e-commerce, portals, hosting, DNRs, etc.
On March 1, 1999, the MII announced a 50% reduction in Internet access fees, a 20% cut in international phone charges to many parts of the world and a 70% reduction in the cost of domestic telephone line installation for some urban residences, as well as free installation of a second phone line. This has created a huge surge in demand for Internet access, and introduced the concept of e-commerce to a country with so much to gain from advertising to the world.
Barriers To Entry
The Chinese government controls all licensing and pricing for ISPs. The barrier to obtaining an Internet license (ISP license) is still substantial for new entrants. It is critical for Xin Hai to build up its subscriber base before any changes to government policy occur that may reduce the barriers to entry.
China and the WTO - On November 15, 1999, China and the United States reached an agreement concerning China's entry into the World Trade Organization (WTO), 13 years after China first bid for entry into the General Agreement on Tariffs and Trade (GATT), the forerunner to the WTO. Entry into the WTO is a big gamble for China, and should be viewed by foreigners not only as a significant opportunity, but also as a work in progress. In a country where economic reforms are tied so tightly with democratizing politics, we should expect continued volatility.
China's Internet market will not be fully open to foreign investors even after China gains entry into the World Trade Organization (WTO). As such, approvals for foreign investment will still be done on a case-by-case basis. Many issues still remain, for example:
how approvals will be granted
what foreign-invested Internet businesses will be able to operate in China
which Chinese Internet businesses will allow foreign investment.
At the end of the day, any foreign Internet investment in China will be factored into China's long term economic and political interest. Foreign companies still need to partner with a Chinese company who will need to abide by local rules. ISPs are tightly controlled, especially those providing international gateway services.
Bottom Line
Foreign companies, with no established Chinese partner, are expected to be barred from investment in ISPs even after China enters WTO because the central government wants to control the inflow of information from abroad. XNET is one of only a handful of ISPs with established relationships in China, which poses a significant regulatory barrier for competition. Given the tremendous Internet potential in China, the gradual removal of regulatory barriers and Xin Net's early entry and established foothold in the country, we believe that XNET could become one of the premiere Internet success stories in China over the next few years. We are initiating coverage on XNET with a Speculative BUY. Our 12 month target is under review.
An investment in XNET is particularly suited for investors with above-average risk tolerance, who are seeking a potential for capital appreciation and who have diversified investment portfolios.
?CHRIS BONNET, MBA and CLARENCE REBEIRO, MBA
The information contained within has been obtained from sources which we believe to be reliable, but we cannot guarantee their accuracy or completeness. This report is not, and under no circumstances is to be construed as, an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that GroomeCapital.com Inc. is to be under no responsibility or liability whatsoever in respect thereof. The inventories of GroomeCapital.com Inc. and the holdings of its respective Directors and Officers may, from time to time, include the securities mentioned herein. No part of this report may be copied or reproduced in any manner without the prior written consent of GroomeCapital.com Inc.
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