Best Firms Rode Out Asia's Tech Storm
By JASON BOOTH
Staff Reporter of THE WALL STREET JOURNAL
OK, enough bad news about Asian tech stocks. Let's move on.
From the rubble of April's Internet-stock crash, companies are emerging that will lead Asia's technological evolution in coming years, say investors and analysts. With the sell-off, the share prices of most of these companies have come down to more rational levels -- meaning that if you are a believer in the so-called Internet revolution in Asia, now might be the time to buy.
One fund manager on the hunt for buying opportunities is Aaron Pong at RBC Investment Management (Asia). "We feel the sell-off in the technology sector as a whole is somewhat overdone," he says. "By virtue of that we have started to accumulate."
Shift to Web Developers
But while six months ago investors were willing to buy anything with a dot-com angle, fund managers say they are now looking primarily at companies that make money by building the Internet rather than by using it. In the words of Samir Mehta at Lloyd George Management: "We still don't understand the valuation of most pure Internet companies. So we like to take positions in companies that are working on the development of the Web in Asia."
One increasingly cited company that fits that description is Hong Kong-listed Computer & Technologies Holdings. The company is a leading systems integrator in China, which means it builds computer networks and tailors software packages for customers. Compared with many Asian technology companies, C&T is a relative veteran, established in 1991. And it's even profitable, with earnings of 13.8 million Hong Kong dollars (US$1.8 million) in 1999, up from HK$2.9 million a year earlier.
The company also has ties to some of the biggest names in the business. C&T is Cisco Systems's largest networking vendor in China and the company has a strategic relationship with Hong Kong conglomerate Hutchison Whampoa.
Get it while it's cheap. This stock, which was trading as high as HK$30 in March, now stands at just over HK$5.
If you want the transparency that comes with a listing on the Nasdaq Stock Market in the U.S. but the growth potential of the Chinese market, there is AsiaInfo Holdings. Founded in Texas in 1993 and currently headquartered in Beijing, the company designs and builds Internet networks, and counts China Telecom and China Unicom among its customers.
The company's revenue is forecast to hit US$150 million, more than double 1999's level, while the company is expected to turn a profit in 2001.
Datacraft Turns Heads
Another tech company that's widely praised and growing fast is Singapore's Datacraft Asia. With operations throughout Asia, the company specializes in helping companies set up e-commerce capabilities, as well as more fundamental network-integration services that facilitate high-speed communications within companies and with their customers. With earnings for the year ended June 30 estimated at more than US$30 million and a return on equity of more than 27%, this is no Internet start-up looking for a path to profitability. It even pays a dividend. The company is expected to announce earnings Thursday.
Again, Cisco Systems, the mother of all systems integrators, is used as a benchmark to judge Asia's up-and-coming tech companies. "Given that Cisco is going to see 60% revenue growth, [Datacraft's] earnings should be good," says Mr. Mehta. Indeed, Datacraft Asia is expected to see annual earnings growth of more than 40% over the next three years.
Yet because the market views Datacraft as a quality play, the stock isn't cheap. At Monday's close of US$7.90, the stock carries a price/book ratio -- the ratio of a stock's price to its book value per share -- of almost 40 and a current price/earnings ratio of around 100. So the advice may be to buy on weakness.
Strategy for True Believers
For the true believers, there are some purer Internet plays that are now seen as long-term survivors. But again, it's the technological prowess of these companies that comforts investors.
While Chinadotcom is widely known as a Greater China portal, it's the company's information-technology operations, as well as its Internet-advertising operations, that pay most of its bills. A subsidiary, Web Connection, which helps companies build and maintain Web sites and Internet strategies, accounts for around 52% of revenue, while another subsidiary, 24/7 Asia, which helps clients develop and implement Internet-based advertising campaigns, accounts for 44% of revenue.
Most fund managers believe the management's predictions of profitability in 2001. And the company is well-heeled, with more than US$500 million in the bank, which it can use to acquire both partners and competitors as it sees fit. Meanwhile, the stock has become a lot more affordable, having fallen 75% since March.
Other Asian Internet companies that, while risky, are seen to be long-term survivors include Sina.com, China's most popular portal, and Satyam Infoway, India's leading private Internet-service provider. Besides having the biggest market share in their respective markets, what reassures analysts is that each is venturing into software development and other technology services.
And then there is Pacific Century CyberWorks. It's now in the middle of absorbing Cable & Wireless HKT and, in the words of one analyst, is a "jigsaw puzzle" that may take years to come together. But given its global approach, ambitious management and strong corporate backing, the company is seen as a good long-term investment whose growth should mirror the growth of the Internet in Asia. The price of shares in CyberWorks also has taken a drubbing, down almost 40% from its high set in January.
Stocks Are 'Overowned'
Despite their strengths, most of these stocks remain sidelined. A prime reason is that Asia's more risk-tolerant investors are now focused on Asia's other great speculative market, China. And as Mark Konyn, director of marketing at Dresdner RCM Global Investors, sees it, the hard-core tech devotees already own these stocks so it will take an influx of new money to drive them higher.
"The trouble is they are overowned," says Mr. Konyn. "There is no one left to buy the stock, plus you still have the uncertainty over volatility. As better results come out they get cheaper and cheaper."
That could start to change in coming months, investors and analysts say. The Chinese rally is likely to peter out, sending investors in search of alternative investments. The fourth quarter also is a period when investors turn to Internet stocks in anticipation of holiday-season profits.
And given that International Data estimates that Internet-commerce revenues in the Asian-Pacific region, excluding Japan, will rise to more than US$87 billion in 2004 from US$5.5 billion this year, profit at some of these companies could be substantial indeed.
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