WashPost. Based in Cayman and Traded on Nasdaq: Stock of China.com Raises Many Red Flags
By Allan Sloan
Tuesday, July 13, 1999; Page E03
It's got a great name, a lot of hype, a really high price and a warning list 14
pages long. Should you invest in it?
On the surface, buying stock in China.com is a no-brainer. Hey, you're
surfing two of Wall Street's favorite waves: the Internet and China. What's
not to like? When you look closely, quite a bit. Like, for instance, a high
price. China.com, which is going public on the U.S. Nasdaq market rather
than in Hong Kong or China, where it does business, is likely to have a
stock market value of well over $1 billion shortly after the stock is issued.
Which poses the following question for investors: Other than a marvelous
stock symbol, CHINA, and the imprimatur of recent investor America
Online, what do you get by investing in China.com, whose allure is its
Internet portals in China, Hong Kong and Taiwan? The first -- and to me,
most distasteful -- thing you get is Xinhua, the Chinese government's
propaganda arm, as a partner. Xinhua is one of the founders and big
stockholders of China.com, which began operating in China and later
expanded to Hong hKong and Taiwan. Xinhua censors -- excuse me, edits
-- the content on the company's China Web site. Yes, objecting to Xinhua
may be a little prissy. But would you invest with that nice Mr. Milosevic in
www.serbia.com?
Second, China.com is based in the Cayman Islands, which the company
says probably puts it out of reach of the U.S. legal system. Third, the
marketing of the stock is so much better than the product the company
sells that it would give anyone pause.
Let's take a look at www.china.com, the company's big selling point. One
day last week the top story was "Tanzania Follows Closely With China's
Reform Process." The "highlights" section consisted of pictures of coast
guardsmen running through drills. What excitement! Could this be why the
site registers fewer than 100,000 hits a day, by industry estimates? That's
less than 5 percent of the 2.1 million hits recorded by China's hottest site,
jazzy, U.S.-style sina.com.
Where am I getting my information? A reasonable question. No one in the
deal would talk to me, because China.com, which may get its sale done as
early as this week, is in the Securities and Exchange Commission's
so-called quiet period. So I've based this article on my reading of
China.com filings, some background interviews and reporting from Hong
Kong by my Newsweek colleague Mahlon Meyer.
Read China.com's SEC filings and snoop around an Asian Web site or
two, and you get a real bad feeling. No fewer than 14 pages of the SEC
filing outline some of the risks you run buying this stuff. I've got no room for
even the highlights. The filings indicate a sale of 4.2 million shares at about
$15 each, though the issue will probably end up larger and the price,
higher. The $15 price is what insiders have been paying since April. That
includes a deal in May in which Xinhua sold about half its stock to a Hong
Kong construction company, apparently to make the offering more
acceptable to Western investors, and a June deal in which AOL paid
$25.48 million for its 10 percent stake and the right to buy an additional
8.5 percent at the offering price. AOL says that Xinhua has no special
rights at China.com, and that AOL's investment is designed to support the
upcoming launch of AOL in Hong Kong and shows "our strong
commitment" to the region.
At $15, China.com would have about 30 million shares outstanding
(including options and AOL's purchase rights), and would thus be valued
at $450 million. But because there will be only a few shares available for
trading, you can see this baby going to $50 or more, if only briefly. At $50,
the company would be valued at $1.5 billion. What are you getting for
your money? A lot of sizzle, not much steak. China.com's major business
consists of helping companies set up and administer Web sites. Not exactly
high-margin stuff. The company had $3.45 million of revenue last year, and
a loss of $8.54 million. So you're buying not an actual business but the
company's potential, its political influence with the Chinese government, its
salesmanship and the AOL connection, whatever that may turn out to be.
China.com's track record, though, isn't particularly inspiring -- deals with
the likes of Bay Networks, PointCast and Netscape have fizzled.
The bottom line: Yes, China's 1.2 billion people make it a great potential
Internet market. But foreigners frequently make the mistake of imposing
their own world views on investments in big, complicated places like
China, Japan or the United States. A reason they frequently come to grief.
This offering has more red flags flying than Tiananmen Square on National
Day. Ignore them at your peril.
SLOAN is NEWSWEEK'S Wall Street editor. His e-mail address is
sloan@panix.com.
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