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Chinese Internet IPOs Feeling Listless
By Peter Marber, Emerging Markets Columnist
China's government may sideswipe these IPOs, but US market mentality may prove to be the great wall.
This may not be the week to talk about US Internet stocks, but keep an open mind about those based in emerging markets, particularly China -- potentially the world's largest market for online services.
Don't be fooled by the quiet emanating from China's Internet sector. It's simply a lull as several of China's most popular Internet portals -- including Sina.com, Sohu.com and Netease.com -- lay in wait. All three have filed with the SEC to list on the Nasdaq later this year.
Following the amazing success of Chinadotcom's (Nasdaq:CHINA - news) debut last July and AsianInfo Holdings (Nasdaq:ASIA - news) more recently, it is no wonder that investors are holding their breath.
China's Internet Frontier
Chinadotcom -- the sixth most popular Web site in China (behind Sina, Sohu, Netease and others) -- saw shares shoot up as high as $156 from the $20 IPO price, but is now trading in the 60s. AsiaInfo shares also rocketed on the first day of trading, but have come down since and now trade in the 50s.
The success of Chinadotcom and AsiaInfo shows international demand for access to China's exploding Internet market. The number of Internet users in China, now 10 million, is expected to double every six months.
According to Nielsen//NetRatings, in the month of June 1999, there were a total of 63.4 million active Internet users in the US and 105.4 million total US users with Internet access. At the rate China's online population is growing, it could surpass the US in a few years. There are already 50,000 registered Chinese domain names and the numbers are expanding exponentially.
The Mainland Idea
With these fundamentals, keep an eye out for three popular Mainland portal companies slated for IPOs. Sohu.com filed with the SEC in February for an $86 million initial public offering. The site focuses on directory search and e-mail services and boasts nine million page views a day and about one million registered users.
Sohu already enjoys an impressive list of investors including Intel (Nasdaq:INTC - news), Dow Jones (NYSE:DJ - news) and Pacific Century CyberWorks (OTC:PCCLF - news).
Netease, a Sohu rival, claims more than 14 million daily page views. Both Netease and Sina.com, the mainland's largest Chinese-language Internet portal, filed last week with the SEC to go public. Netease filed to sell up to $120 million in American depositary shares while Sina plans to sell 4 million ordinary shares.
With over 2.56 million registered users, Sina recently announced plans to move into the lucrative e-commerce arena -- shifting from a reliance on content-related services.
Dot-Communism
Before getting too excited about these potential bottle rockets, keep in mind that the Chinese government views the Internet as a threat to political stability. It's created a number of roadblocks for foreign investment in Chinese Internet companies, leaving many investors to question the stability of China's nascent Internet industry.
The lack of clarity has already led Sina.com and Netease.com to restructure as offshore companies, handing control of their portals to Chinese-owned sister companies in complex transactions. This allows the companies to comply with current Chinese regulations.
For the time being, government officials have grudgingly allowed the most recent US filings. However, as the past few months have shown, policies can change quickly.
E-Commerce Potential
For those nervous about a change of heart in Beijing, Internet companies that focus less on content and information may be safer bets. Indeed, a handful of local e-commerce companies are lining up for Nasdaq IPOs.
These companies' business models are based on online sales, which are accelerating much faster than the advertising revenues on which traditional portals rely. More importantly, there are fewer bricks-and-mortar Chinese competitors than what US business-to-consumer players face. So these companies may grow to be China's dominant retailers.
Dangdang.com and 8848.com are two privately held companies positioned to capitalize on China's huge e-commerce potential. Both are early movers and have garnered a fair share of foreign interest. Dangdang.com, an online bookseller, is looking to be China's Amazon.com (Nasdaq:AMZN - news). It's targeting local Chinese, as well as some of the 70 million Chinese living abroad. 8848.net claims to be China's largest online shop, focusing on software and computer sales.
Business-to-business commerce sites are also emerging. Meetchina.com, an online international trade portal, boasts over 30,000 listed manufacturers. Citigroup's (NYSE:C - news) Citicorp Capital Asia, Softbank's (OTC:SFTBF - news) Softbank Ventures China, and Motorola (NYSE:MOT - news) are just some of the investors in the company, which hopes to list before the end of the year.
Fragile China
The greatest threat to these Chinese Internet IPOs may be the fragile psychology of the US markets. The duration of the current reversal in Internet stocks could stall their Nasdaq floatation.
In the meantime, investors should keep an eye on Chinadotcom and AsiaInfo for indications on overall market strength for Chinese Internet plays. It is unlikely the private companies that have filed will issue if US market interest is weak.
And while the ups and downs associated with doing business in China will undoubtedly remain -- particularly until China gains WTO admission -- the agony of current growing pains could be worth much in the future. China is positioned to emerge as world's the largest market in this new century.
Peter Marber is president of a global asset management firm and author of From Third World to World Class: The Future of Emerging Markets in the Global Economy. His column normally appears every Thursday.
Marber doesn't hold positions in any of the companies mentioned.
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