AWSJ:Heard On The Street In Singapore:Watch Pacific Internet
Dow Jones Newswires -- February 9, 1999
By Wayne Arnold
Staff Reporter
Investors who believe no Internet stock is too expensive should make sure to buy some new shares in Pacific Internet, an Internet service provider based in Singapore.
Pacific Internet went halfway around the world to Wall Street last week and raised US$51 million in a market where investors go giddy at the mere mention of an Internet stock. On Friday, its first day of trading on the Nasdaq Stock Market, the company's shares jumped as high as US$88 from its listing price of US$17. Early Tuesday afternoon, the shares were trading at US$30.50, down 13%, or US$4.625, from Monday's close.
Back in Singapore, analysts aren't as wowed. Based on Pacific Internet's current business model of selling access to the Internet to more and more people around Asia, analysts insist the stock looks feverishly overpriced.
Investors in the U.S. have persuaded themselves to look at relatively forgiving ratios when valuing Internet stocks, ratios such as market capitalization and debt compared to sales. PI's stock price is high even by these measures, said an analyst in Singapore, adding, "It is a ridiculous number."
PI's buyers are banking on evidence that the company is tapping into an incipient online boom in Asia. But they also are hoping that while signing up subscribers, Pacific Internet might wind up with a more valuable product: an audience.
"Pacific Internet's sole purpose is to aggressively expand and promote its brand in the region," said an analyst whose firm helped sell the stock. If the company succeeds in building a sizable market, this analyst adds, "tie-ups, marketing, everything else that builds on that will come. They could even be a takeover target."
The stock sounds good, but even this analyst said it is speculative. And volatile. Most institutional investors, the analyst said, seem to be avoiding the stock. With only three million shares trading, the stock is simply too small for big players to buy or sell in any quantity, without running the risk of sending it on a roller-coaster ride. As a result, PI is a plaything for a new breed of retail speculators in the U.S.
PI's product, Internet access, is a commodity with ever-slimmer margins, detractors point out. And PI is a government-linked company that grew up in a regulated market being exposed to new competition for the first time next year. Its plans to expand regionally would take it into markets that are either backward technologically or hypercompetitive.
Pacific Internet's chief executive officer, Nicholas Lee, declined to comment about his company's challenges, citing U.S. market regulations.
However, and make no mistake, PI has a lot going for it. For starters, thanks to its IPO, Pacific Internet is flush with cash. It also has the backing of its majority owner, one of Singapore's largest conglomerates, SembCorp Industries. SembCorp is in turn majority owned by the government's investment arm, Temasek Holdings.
PI also has something unusual in the Internet world: profits. The company earned US$6 million in the first nine months of 1998 on US$31.5 million in sales to roughly 200,000 subscribers. It already has a 41% market share in Singapore; it owns Pacific Internet Philippines, an Internet service in the Philippines; and it has a stake in Hong Kong SuperNet, one of the largest Internet services in Hong Kong. Those operations make Pacific Internet Asia's only multinational Internet service provider, or ISP.
"They are sitting on the doorstep of the biggest Internet population in the next century," said Pete Hitchen, an industry analyst at International Data Corp. in Singapore.
PI plans to enter ventures not only in China, according to the prospectus for the stock sale put together by lead underwriter Lehman Brothers, but also in India, Australia, South Korea and Taiwan. IDC expects the market for Internet users in Asia outside Japan to grow to 35 million users in 2002 from just under 12 million users last year.
As PI expands, Lehman argued, its costs per subscriber should fall, boosting profit margins and helping PI defend itself against new competitors. At the same time, PI would be insinuating itself into the daily online lives of its subscribers, opening up cross-marketing possibilities for hot new Internet-related services such as online investing or electronic transactions between businesses -- the vaunted electronic-commerce segment.
"There is big money to be made on the corporate side," said Peter Walker at consultancy A.T. Kearney in Singapore. "And as e-commerce becomes more prevalent, the role of the ISP becomes more significant."
The trouble is, PI isn't the only ISP in Asia that realizes this. Its chief competitor at home, the Internet unit of fixed-line telecom monopoly Singapore Telecommunications, is hacking at prices. And next year, a new telecom venture, StarHub Pte., will enter the market with not only Internet services, but also fixed-line and cellular services. "People who own fixed lines will be in a better position," said Arthur Chai, an analyst at Merrill Lynch.
PI's overseas expansion won't be easy, either. Last year, Indonesia's currency crisis forced that country to dump its stake in a subsidiary there. Hong Kong's market is already so ruthless that unlimited Internet access sells for just US$14 a month, compared with US$80 in Singapore. Analysts said PI will face fierce competition in India's newly deregulated market and will need to cultivate high-level contacts if it hopes to get into China's government-controlled market. And in every country the company enters, PI will face new and unique regulatory hurdles.
PI also isn't the only company island-hopping around Asia. PSINet, a U.S. Internet service, has bought services in Japan, South Korea and Hong Kong and is now trying to buy its own telecom network to avoid paying to lease lines from other companies. Analysts predict Australian competitors also will seek to build markets in Asia.
PI has had mixed success building value-added services. It invested millions of dollars, including importing overseas programmers, to develop an online gaming subsidiary, only to disband the venture before going to market. (It later bought a stake in a U.S. gaming company.)
A PI supporter said events such as that might teach PI to be a more formidable competitor. But eventually, said Jon Kendall, a professor of business and information technology at Nanyang Technological University in Singapore, PI "has to figure out where it is in the value chain. And no one knows what the value chain is yet."
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