Heard in Asia
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.
Write to Jason Booth at jason.booth@wsj.com
interactive.wsj.com
Symbols and Quotes for Best Firms Road Out Asia's Tech Storm
Computer & Technologies Holdings [OTC BB: CXGEF]
quote.bloomberg.com
Asiainfo Holdings [Nasdaq: ASIA]
quote.bloomberg.com
Datacraft Asia [OTC BB: DKKBF]
quote.bloomberg.com
Chinadotcom [Nasdaq: CHINA]
quote.bloomberg.com
Sina.com [Nasdaq: SINA]
quote.bloomberg.com
Pacific Century CyberWorks [OTC BB: PCCLF] ADRs to be listed
quote.bloomberg.com
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