China.com's NASDAQ IPO Will Be Red Hot Despite Major Risk
BRIDGE NEWS REPORT via Business Week July 9, 1999
New York--July 9--The only thing greater than Hong Kong-based China.com's potential is its risk. The Internet company's market is huge, but it must tip-toe around the release of information China considers "offensive" and confront a basic fact of life for E-commerce: Credit card sales are not common in Asia, even in face-to-face transactions. All this raises a basic question: Can a company built on the decentralized, open, and freewheeling Internet prosper in a country where there is a meddlesome bureaucracy and an underdeveloped legal system?
The answer is years away but likely to be yes -- as long as China.com remains a quasi-official Web site and operates with Beijing's blessing. What is immediate and certain, however, is that the startup's planned initial public offering on NASDAQ, which is likely to be priced next week, will be a screamer. Latin American portal company StarMedia opened with a bang on May 26 and, driven on potential rather than fundamentals, soared in the aftermarket. China.com's market potential appears to be greater, and interest in the deal is much stronger.
"The company is a trailblazer moving into an area people are excited about," says Irv DeGraw, research director of worldfinancenet.com. "The hook is the size of China -- the huge numbers suggest a monster market. But how many of the billions of people in China can pay, and how will they pay? On closer examination, the market isn't what it appears to be."
China.com delivers content and E-commerce services through its portal network to Chinese audiences in China, Hong Kong, and Taiwan. Each of the company's four Web sites, www.china.com, www.cww.com, www.hongkong.com, and www.taiwan.com, serves as a Chinese-language gateway to the Internet. The company is also developing a bilingual portal. It provides Internet advertising and corporate online strategy and development services to clients throughout Asia. The startup also offers E-mail, message boards, searches, and E-commerce.
International Data Corp. estimates that the number of Internet users in Asia, including Japan, will grow to 98.7 million by the end of 2003, from 23.4 million at the end of 1998, a compound annual growth rate of 33.4%. The more developed U.S. market is expected to grow 20.9% annually, to 181.1 million users by 2003. Estimates of future growth in China are not broken out.
Like most Internet companies, China.com is a business plan, a brave smile, and a balance sheet soaked with red ink. For the year ended Dec. 31, 1998, the company reported a loss of $8.5 million on revenues of $3.5 million, compared with bleeding $4.1 million on revenues of $509,000 for 1997. China.com warns that it expects to incur losses for the "foreseeable future" as it spends heavily to build its name and computer system.
But the real sticking point for the company's future E-commerce revenue growth is the paucity of credit cards in China. Its prospectus notes: "Until the use of credit cards or another alternative viable means of electronic payment becomes more prevalent, the development of E-commerce through our portal network will be seriously impeded."
There are other warnings in the prospectus that should chill investors (but probably won't in this fevered market.) The Information Ministry (no kidding) hold online information providers like China.com liaible for content on their portals and the actions of users on their systems. This includes "liability for violation of Chinese laws prohibiting the distribution of content deemed to be socially destabilizing," according to China.com's prospectus. In a quiet understatement, the startup notes: "We cannot predict the effect of further developments in the Chinese legal system, particularly with regard to the Internet."
However, the company has made politically correct alliances. The state-run Xinhua News Agency is one of China.com's shareholders. Xinhua controls access to all foreign economic news distributed in China. But Xinhua's involvement sits oddly with the company's other alliances: Agence France-Presse, Reuters, and Central News Agency, the official news agency of the Taiwan government until 1998, when it was privatized.
The strange bedfellows don't end there. After the IPO, America Online will hold about an 8% stake in the company, and 24/7 Media will hold a 7.6% stake. The Xinhua News Agency will have 10.9% of the company. China.com plans to offer 4.2 million shares at $14 to $16 each in a deal led by Lehman Brothers. The IPO represents about a 20% stake in the company. Net proceeds from the IPO will be used for capital expenditures and to expand marketing. Existing shareholders paid an average of $2.08 a share.
Superficially, China.com looks like a more lucrative version of StarMedia Network. But before tucking China.com's stock into your kid's college fund, keep in mind the Chinese government's influence. Investors who are in at the offering price and out quickly will pocket a huge profit. But there is no reason to pay a stiff premium for the shares in the aftermarket because the stock will fade quickly. In short, China.com is a flip and forget. There are too many better opportunities available elsewhere, and none comes with the heavy hand of the Chinese government.
(By Scott Reeves, BridgeNews) |
