One more gambling table at the casino that is Hong Kong. The boys and girls are excited. The "tai-tais" (BMW driving gambling and shopping wives of Mercedes driving gambling and fooling around husbands) are excited. The secretaries and flower selling ladies are excited.
Report from Hong Kong - home of Golden Power (603) and Chung Wha (648), outposts of Hikari and Softbank, Pacific Century and Chinadotcom. From nothing and financial depression one year ago, staring into the abyss of Soros, now center of SEAsian/Greater China dotdotcom. Enthusiasm and capital works its magic.
Sunday morning again. Reflection time. Balcony door and windows open to clean ocean air that is a rarity in Hong Kong. Spring is early this year, and not usually failed to be marked by the Chinese New Years (akin to Farmers Calendar). Also unusual is the line up of CDs in the changer: Jennifer Lopez, Ricky Martin, Mariah Carey, Gloria Estefan. Thoughts of returning to Ecuador, the rose plantation, and the Galapagos. What ever happened to my Nina Simone, Ella Fitzgerald and Louis Armstrone? Energy music to go with the times. Wonderful companies ? Time Warner, Columbia Music, and of course Sony Music.
Internet business plans still warm from the printer heat all around me. Magicaldesk.com, Qingniao.net, Renren.com, Texwatch.com. What Apple II did for KKR, Hewlett Packard is doing for all gamblers. One constant is my Frappucino from Starbucks, not a plan but a delicious drink from Starbucks, a crushing competitor to The Coffee Station in which I have a private equity investment. Uhm, Magicaldesk or AOL, Texwatch or Softbank? More energy drinks and energy music, a little sail boat comes into view of window and the sun should tear the morning fog soon.
Saw my first AOL advertisement on the Hong Kong double-decker buses yesterday. Wife?s fund management plans are coming together. Traveled to China last week and met many technically sophisticated mainlanders. Attended discussion groups in Hong Kong and met financially sophisticated Hong Kongers, and will be meeting a bunch of Taiwanese at the Hawaii conference who are venture daring (Taiwan is an exporter of things and capital).
Friends coming over for brunch. Strawberries, country sausages, fresh bread, and goodies from fishes in Blacksea. Discussion will be the upcoming meetings with folks who are too rich. Signs of market peak everywhere. Fear, greed and happy intoxication creates a mini-weather system of storm within ourselves. Turn up the energy music and back to the tables. As Ricky sings "I count the minutes, count the hours, count the seconds ... set me free, set me free"
Excuse me for the long lead in. Here is something - topic at hand, finally ...
Far Eastern Economic Review January 20 (www.feer.com)
Shopping Spree
They're buying like crazy, and their stock prices are soaring as buzz builds. But are Asia's Internet-investment giants--Softbank, Pacific Century CyberWorks and the rest--worth the premiums they command? Look closely at what they are doing, and a method emerges out of what at first seems a mad spending spree.
By Charles Bickers in Hong Kong, Chester Dawson in Tokyo and Ben Dolven in Singapore
Issue cover-dated January 20, 2000
Chinadotcom, the Hong Kong-based Internet company, occupied just one floor at the Citicorp Centre half a year ago. But after its sensational Nasdaq launch last July, which saw its share price gain 235% on the first day of trading, Chinadotcom embarked on one long shopping spree. It has announced 23 acquisitions and partnership deals--an average pace of four per month--snapping up e-mail services, Web-site hosts, on-line retailers and more in a voracious drive for market share. Back at the Citicorp Centre, like an army on the march, it now claims four-and-a-half floors. Its new young workforce (average age 22) throngs the elevators, their cargo pants and baggy sweaters setting them apart from the dark-jacketed office crowd.
"Our strategy is build through acquisition," says Chinadotcom Chief Operating Officer Peter Hamilton, "and we intend to build a pan-Asian presence."
For all that, Chinadotcom's frantic expansion looks modest compared with the recent activity of Japan's Softbank and Hikari Tsushin, two other corporate giants that are gobbling up Internet companies in Asia. Two other big buyers are Hong Kong's Pacific Century CyberWorks and Singapore's Creative Technology.
Sometimes acting together and sometimes in competition, these five represent an emerging breed of Internet investors who are critically shaping the new economy in Asia. Confronting a patchwork of markets--rather than a single huge market as in the United States--Asia's five Internet-investment giants are rushing to acquire a host of seemingly disparate companies and stitch them together to serve a long-term strategy. In that, says Rajeev Gupta, regionalInternet analyst with GoldmanSachs in Hong Kong, "Asia is unique."
All five companies have seen their rapid-fire activity rewarded with spectacular rises in their stock prices over the past six months. "Investors are buying into the first movers and perceived market leaders, and when you look at the U.S. Internet experience that does look like the best strategy,"says Stephen McKeever, regional analyst at Lehman Brothers in Hong Kong, which has acted as adviser to both Pacific Century CyberWorks and Chinadotcom.
The markets showed a flicker of doubt during the first trading week after the New Year, when a more than 3% dive by the Nasdaq Composite Index triggered a sharp slide in Asian-listed tech stocks. But the announcement of a merger between U.S. Internet company America Online and the Time Warner media empire has re-ignited excitement by showing that an Internet company can become powerful enough to take over a titan of the old economy. Asian Internet plays rebounded, including Chinadotcom, which is 7% owned by AOL.
Even so, investors in Asia's Internet-investment giants are taking a considerable leap of faith--that the companies will deliver revenues worthy of their high valuations, or will themselves be bought up at a premium. Apart from Softbank's Japan investments, none of the five can yet claim any significant Internet revenue in Asia. GoldmanSachs' Gupta believes strong management track records are what count. Also important:Having a disciplined strategy behind the spending sprees. PCCW, Creative Technology and Chinadotcom are staying closest to their core businesses as they buy and incubate promising Web-related start-ups, while Softbank and Hikari show few limits on their picks.
Infectious Charm
Softbank, by far the best-known Internet play in Asia, is two steps ahead of the pack in the U.S. and Japan but enjoys no guarantee that it can become just as dominant elsewhere in Asia. The Tokyo-listed firm runs on the supercharged energy and infectious charm of its founder, Masayoshi Son. By investing in Yahoo! as early as 1995 and Yahoo! Japan a year later, Son became one of the world's richest men and the toast of Tokyo. When not appearing on television, he's conferring with the prime minister or hosting an Internet conference.
But not everyone loves Son. Some analysts gripe about minimal disclosure when it comes to Softbank's balance sheet, fund-raising capacity and long-term divestment strategy. Son also has had some misses: Last year, Softbank sold off the troubled Ziff-Davis publishing unit and loss-making chip producer Kingston Technologies.
Profits fromSoftbank's core software-distribution business have stagnated, and the company is carrying more than Yen260 billion ($2.5 billion) in debt. Losses for the six months that ended September 30 totalled Yen3.5 billion. Analysts say Son has yet to prove that he can build a solid management team for his Japanese ventures; so far, he's tried to operate as virtually a one-man show.
"What we have is a big megaphone that says 'I'm going to be the world's biggest net-batsu," says Tokyo-based HSBC analyst Ben Wedmore, referring to Son's goal of creating an Internet zaibatsu, or conglomerate in the Japanese tradition. Says Wedmore: "I can't see the management structure that matches the old zaibatsu."
Of course, Softbank can always cash in its Yen3 trillion in paper profits from companies such as Yahoo! But that would dilute its prized share portfolio for a one-time gain subject to an effective 60% combined tax rate in the U.S. and Japan. And if its portfolio plunges in value, Son could have trouble carrying out his plans to seed ventures in virgin markets such as China.
Another Internet wave-maker in Japan is Hikari Tsushin, a mobile-phone sales agent best known for its ubiquitous "Hit Shop"outlets nationwide with their distinctive blue-neon signs. Its core business is elegant in its simplicity and profitability: It acts as shop window for Japan's big three mobile-phone service providers. Hikari Tsushin gets a commission when it signs up a new customer, and a monthly fee for keeping him. The parent company's net profits rose 96% to Yen9.8 billion in the year that ended last August, and prospects are for continued strong growth.
Until now, Hikari Tsushin has plowed its war chest into start-ups linked to its core business. Its investments include Inter Q, a Web site maintenance firm, and MTI, which develops content for mobile-phone screens, such as stock updates and news headlines. They were among four companies that Hikari Tsushin listed on Japanese markets last year. "Hikari Tsushin has been very successful in its previous investments," says Jardine Fleming analyst Toshiho Sato. But he cautions:"It still has a limited track record."
Moreover, Hikari Tsushin's 34-year-old president, Yasumitsu Shigeta, is splashing out into a much wider range of ventures, imitating Softbank. In the past six months, he's created a Yen33 billion venture-capital fund with global reach. Like Softbank, Hikari Tsushin is thin in managerial talent, raising questions about its ability to nurture start-ups to success.
Makers of Real Stuff
By contrast, Creative Technology of Singapore isn't trying to emulate Softbank. Creative actually makes things, chiefly audio and video components. It is the world's largest maker of sound cards, which enables personal computers to play stereo-quality sound. Last May, when Chief Executive Sim Wong Hoo created an Internet-acquisition fund, his goal was to turn Creative into a broader-based multimedia player. So far, it has plunked down $60 million for stakes in about 20 start-ups, many of which tie directly into Creative's core business.
Take Mediaring.com, an Internet-telephony provider. Creative packages the company's software into its own SoundBlaster Live! card. Another investment, hifi.com, sells stereo components over the Internet and is linked to sites that sell Creative's own audio products, such as the Nomad MP3 digital-music player. Athird investment, emusic.com, offers music that can be downloaded onto the Nomad. "Anything that's multimedia and ultimately increases the demand for multimedia, ultimately could make sense," says Theodore Teo, an analyst with Prudential-Bache Securities in Singapore.
Creative has set aside $40 million more for Internet investments, which will still comprise a relatively small share of the company's overall business. As a result, Creative's market valuations are well below the stratospheric levels of, say, Softbank. But Creative is also less vulnerable to a market downturn. It has profits, too--$115 million for the year that ended June 30. "If the bubble pops, big deal," says Teo. "You still have a company that brings in $1 billion of revenue a year. The bottom line is, I still like Creative but not for their Internet business. I like Creative for their core business."
Cash And Carry
Of all the Internet companies in Asia, Chinadotcom is by far the purest Internet play--it has virtually no non-Internet business. Its goal:to build an Asian-wide network of Internet portals--sites that serve as entry points for Internet users--and draw as many visitors to it as possible. After months of frenetic acquisition, Chinadotcom is moving now to build an audience for its portals by airing prime-time television advertisements, which themselves are advertised on buses and in newspapers. Chinadotcom also is expanding its already profitable business in designing and maintaining companies' Web sites.
Chinadotcom recently created a division called Jumpstart to nurture Web start-ups, and Hamilton said late last year that Chinadotcom was considering 20 targets. But Chinadotcom's operating losses were $12.7 million for the first nine months of 1999. For continued expansion, it needs a steady injection of outside funds. It announced January 10 a follow-up share placement on Nasdaq that will raise more than $200 million.
Pacific Century CyberWorks, headed by Hong Kong businessman Richard Li, is probably the best-focused of the five giants, says Lehman Brothers' McKeever. It has targeted investments that will quickly generate content or provide a distribution channel for the superfast Internet service that it plans to launch early this year, using a combination of satellite and local cable-TV links. The service is aimed initially at Japan, India and China. "I think they're focusing very hard on finding the right buys," McKeever says.
After a high-profile listing on the Hong Kong market and an initial surge, PCCW shares wallowed for a while as investors looked for signs that the company could deliver on its ambitious plan, which requires dealing with multiple governments and developing content in many languages. In December, PCCW entered into a deal with Transworld International of the U.S., the world's largest producer of sports programmes, to distribute its programming. "That was a critical deal," says Gupta of Goldman Sachs. It helped PCCW's stock triple in price.
PCCW's portfolio of 25 acquisitions is now valued at $1.3 billion, says Chief Operating Officer Alex Arena. In one recent deal, PCCWtook a 20% stake in Hong Kong-listed Golden Power International, Hikari Tsushin's new investment vehicle for Asia. Arena sees no conflict in joining with Hikari Tsushin. "All of our partners are potentially competitive to us," he says. "We'll see who turns out to be the biggest over time." |
