CONTACT: Ray Dirks, or Consulting Analysts: Leo Murphy or Tom Heysek,
theysek@att.net, 212-832-4285 or 800-774-0778, fax, 212-486-4857, all of Dirks & Company, Inc. (NWLL)
UPDATED RESEARCH REPORT ON NEW TEL
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Story Filed: Wednesday, March 01, 2000 3:53 PM EST
NEW YORK, Mar 2, 2000 /PRNewswire via COMTEX/ -- The following is being issued by Dirks & Company, Inc., a member of the National Association of Securities Dealers, CRD number 42185:
We are updating our research report from November 1999 that initiated analyst coverage of New Tel Ltd. (Nasdaq: NWLL; Australia: NWL) to reflect the fact that our short term target price objective has been met (A$2.50) and to now establish new short term and long term target stock prices.
New Tel Ltd.
(NWLL: ADR's on NASDAQ Small Cap)
Australian Stock Exchange NASDAQ ADR's
In Austr. $ in US $ in US $
Recent Price A$3.00 US$2.00 $23.00
52 Week High 4.30 2.80 51.00
52 Week Low 2.00 1.30 3.00
Share Outstg. (mm) 105 105 See
Market Cap (mm) A$315 US$210 Note
Note: New Tel is listed on the Australian Stock Exchange under the symbol NWL. The Company's ADR's are listed on NASDAQ under the symbol NWLL. There are ten shares of New Tel common stock underlying each NASDAQ ADR.
Contents:
-- Common Stock Data (above)
-- Projected Operating Results through 2003
-- Summary & Investment Conclusion
-- History & Nature of Business
-- Industry Environment & Outlook in the New Economy (introducing a new
economic model, with graph)
-- China Star Trek -- The Final Frontier (really), its potential role in
the rapidly changing global political economy, and some Statistical
Comparisons
No Statement or expression of opinion or any other matter contained herein, or is likely to be, directly or indirectly, an offer or solicitation of an offer to buy or sell the security referred to above. The information contained herein is taken from sources believed to be reliable, but its accuracy cannot be guaranteed. There can be no assurance that future recommendations by these sources will prove profitable or equal the performance of past recommendations. The principals and employees of this company may trade in securities mentioned herein subject to self-imposed restrictions; such affiliated persons may at any time hold positions in issues recommended.
Projected Operating Results
FY Ends Mkt Cap to Earnings Book
June Revenues Revenues Per Share P/E Value
(mm) (mm)
2000 (e) A$20 15.8 times $0.02 150 times A$839
2001 (e) 50 6.3 times 0.15 20 times 900
2002 (e) 100 3.2 times 0.40 8 times 1,062
2003 (e) 200 1.6 times 1.00 3 times 1,467
Summary & Investment Conclusion New Tel Ltd is one of the younger, though faster growing companies providing telecommunications services and equipment in Australia. Its established focus on the Chinese community within that country has positioned the Company with a unique, highly-focused "niche-craft", that more recently has created the prospect of rapidly catapulting New Tel onto the worldwide telecommunications landscape.
In 1998, New Tel teamed up with an arm of the Chinese Government to become one of the six companies authorized to provide telecommunications services and equipment in Australia. This reflected the end-result of strategic planning and working relationships dating back to the early 1990's, i.e. this was not an overnight strategic development. It is now expected that New Tel will consummate the acquisition of 18 web sites owned by the Chinese Government, for which New Tel will become the ISP and China's Internet Portal. In exchange, the Chinese Government will ultimately become a 49% stakeholder in New Tel.
We believe this commercial development has yet to be fully reflected in New Tel's stock price. Admittedly, China has a third-world mind-set with many western investors. However, it is just that ... a mind-set. On page 6 we attempt to dispell this mind-set by providing some comparative statistics between China and the USA. For example, China's GDP is about half that of the USA's, the dollar amount of Bank Loans fueling China's economy is remarkably similar in amount to the USA's, and based on currently available information, it appears that the rapid growth potential for Internet use in China is as great, if not greater, than in other countries.
Consequently, we are revising our short term (6 months) target stock price for New Tel to A$6/share, which represents a multiple of 40 times next year's earnings, or US$39 / ADR. We've established a longer term (12 months) target stock price at A$18/share (US$115 / ADR), which represents a multiple of 45 times our EPS estimate for the following year. Our shorter term valuation, post-asset acquisition shares issued to acquire 18 Chinese Government web sites, imputes a market valuation on New Tel of A$2 Billion (US$1.4 Billion). To put this valuation into perspective, Cable & Wireless HKT, serving a relatively small market was recently valued at US$38 Billion. We emphasize that our projected valuations for New Tel, serving a considerably larger and faster growing market represent a mere fraction of that amount.
History & Nature of Business New Tel is one of six telco's in Australia authorized to provide telecommunications services and equipment. Specifically, New Tel is more widely-recognized as part of the younger, faster growing second-tier telecommunications companies that has emerged amidst the still shifting milieu of worldwide deregulation.
The Company actually dates back to 1988 when it was a business unit of Transcon ... also a public company traded on the Australia Stock Exchange. Transcon's R&D business included applications of imbedded software technology in mobile equipment, and in July 1998, from this genesis, these commercial applications were bundled together under one corporate entity: New Tel.
In 1998, New Tel formed a strategic alliance with Xinhua News Telecommunications (Australia: XNTL), initially owning a 25% equity interest. XNTL, in turn, is a wholly-owned subsidiary of Xinhua Holdings of Hong Kong, the commercial arm of Xinhua News Agency in China and the fourth largest news agency in the world.
XNTL's stated business focus is to provide telecommunications services to Chinese speaking people throughout Asia using its Australian telecommunications license as the operating base. It was a means to commercially ally with this operating base in Australia that compelled New Tel to acquire an equity interest in XNTL. That operating base fit snugly into New Tel's existing retail base of business, providing telecommunications services, digital data communications and cellular systems to more than 25,000 subscribers in Australia.
This indigenous customer base is forecast to increase to over 200,000 subscribers (about a 20% share of the Chinese market in Australia) over the next three years. New Tel services this customer-base with language-friendly customer service representatives on a 24x7 basis.
More recently, New Tel has leveraged its growing telecommunications presence in Australia to pursue the China market, specifically to provide IPS and Internet Portal services in China -- an organic extension of its basic business in China, though much larger. New Tel's strategic alliance with Xinhua Holdings has not only deepened, but expanded, significantly. Before the end of this month, it is widely expected that Xinhua and New Tel will announce an asset-exchange whereby New Tel acquires 18 web sites currently owned by the Chinese Government for A$400 million via the issuance of 200 million shares of New Tel common stock (imputed value -- A$2.00, however, the stock had been selling at A$1.20 at the time negotiations were opened).
Following this asset-exchange, New Tel immediately becomes THE leading Internet Service Provider and Internet Portal in China. This is a statement of commercial fact.
At the time negotiations began (November 1999), there were 7 million daily Internet users in China. We site a recent Wall Street Journal article quoted below for two reasons:
-- it confirms the raging pent-up demand for Internet use in China; and
-- there are now about 10 million daily Internet users, up 43% since just
last November.
Indeed, previous forecasts of daily Internet use within China of 33 million by 2003 now seem hideously conservative and uninformed.
Wall Street Journal article follows:
"The Internet is beginning to make inroads in China, but it's still
slow-going -- 10 million people (less than 1% of the population) are
currently online. For those who want to send email but aren't yet
online, the post office in Shanghai will deliver. Customers can take
a written message to the post office, which will scan it and email it
anywhere in the world. Wired customers who want to send email to
their non-wired friends and family can send the message to the post
office, which will print it out, put it in an envelope and deliver it
via regular express mail. The post office charges $2 a message."
(Wall Street Journal, February 23, 2000)"
Upon consummation of this investment, Xinhua will initially own a 66% interest in New Tel (200 million shares out of 305 million then outstanding). However, concurrently, New Tel intends to issue another 100 million shares to European and American investors at A$4 / share before the end of fiscal year 2000 (June). Post-financing, therefore, Xinhua will maintain a 49% ownership interest.
Australian alliances with non-Australian companies is nothing new. Last year, Nippon Telephone & Telegraph acquired a 49% interest in Australian-based Davnet (PWT) for A$118 million. This imputed a total valuation on Davnet (with annual revenues of a measly A$3 million) of about A$240 million. Comparables are essential to determine relative valuations and last November, we translated that transaction into a defensible market valuation for New Tel of A$2.50 per share by March 2000. This target valuation has now been surpassed.
Post-Xinhua's stakeholding, New Tel becomes the premier ISP/Portal in China. Our new short term (six months) target stock price of A$6 / share represents a multiple of 40 times next year's EPS, a defensible valuation for a company fully participating in the New Economy, whose top line is doubling and whose bottom line is more than doubling over each of the next three years. This translates into an ADR target price of US$39 / ADR.
Twelve months out, we have a target price of A$18 / share. By the middle of next year, the market will be looking to EPS in 2002 or even 2003. This target price represents a moderately expanded, though still defensible, multiple of 45 times the following year's projected EPS at that time. This translates into an ADR target price of US$115 / ADR.
Balance sheet highlights follow and illustrate our expected financial impact of these operating results and investments: Balance Sheet Highlights (in millions of Australian Dollars)
(Fiscal Year Ends June)
Actual Projected
6/98 6/99 6/00 6/01 6/02 6/03
Cash $0.2 $ 7.6
Accounts
Receivable 0.4 0.4
Inventory/Deposits 1.8 1.6
OCA 2.0 1.1
Total Current
Assets 4.4 10.7
Total Current
Liab's 3.9 4.1
Net Working
Capital 0.5 6.6 $428.6(i)
Fixed Assets 1.5 1.1 400.0(ii)
Goodwill 1.7 10.4 10.0
Other Assets 0.8 0.1 --
Total Net Assets 4.5 18.2 $838.6 $900 $1,062 $1,467
Represented By:
Long Term Debt 1.6 1.1 --
Shareholders'
Equity 2.9 17.1 838.6
Total
Capitalization 4.5 18.2 $838.6(iii) $900 $1,062 $1,467
Book Value
Per Share $0.18 $2.07 $2.22 $2.62 $3.62
(Shares Outstanding
... in millions 105 405
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(i) Includes A$22 million in equity raised last December (at A$1.20 per
share), and A$400 million before June 2000 via the issuance of 100
million shares of new stock at A$4.00 per share.
(ii) Reflects the acquisition of 18 websites in Mainland China from XinHua News Agency for A$400 million in exchange for which New Tel
issued 200 million shares of new stock.
(iii) Virtually all of the increase in FY2000 Shareholders' Equity represents issuance of stock to stakeholders (either former assets-holders or to new investors). The increase in Shareholders' Equity beyond represents accumulated earnings as per our table on
Projected Operating Results.
Industry Environment & Outlook As analysts, we have long concurred that there is indeed a New Economy, however, we have been unable to contribute an economic model to the field that satisfactorily explains this phenomenon ... until now. The Classical Demand and Supply graph at the top left of the next page is standard-issue ... a downward sloping demand curve that says lower prices generate a greater level of demand, but that the marginal profit diminishes as that demand increases. We believe the graph depicting this picture in the New Economy is at the right (Figure 2), and says that after a certain level of investment and product-pricing, a company can meet all demand without limitation and without reducing prices.
**** Actual Graphs Shown on Hard Copy of Report ****
The graph in Figure 2, depicting limitless demand, only applies, however, to those companies who are first, to those companies that make those earlier, and risky investments in infrastructure. This explains the economic phenomenon of a Netscape in 1994, or a Yahoo! in 1996 (or for that matter, a Microsoft in 1987). That company which is First-Arrived will reap the benefits of the economics depicted in Figure 2, a new model for the New Economy. We believe New Tel represents such a First-Arrived Company.
Selected Statistical Comparisons Between
CHINA USA JAPAN
Population: 1,247 mm 273 mm 126 mm
% <15 26% 22% 15%
%15-65 67% 65% 68%
% 65 7% 13% 17%
Geographic Area(sq. mi): 3,705 mm 3,718 mm 146 m
% Arable 10% 19% 11%
Number of Telephones 85 mm inestimable 60 mm
Gross Domestic
Product ('98): $4.1 Trillion $8.1 Trillion $3.1 Trillion
Imports 142 Billion 822 Billion 339 Billion
(Largest Trading
Partner) Japan Canada USA
Exports 183 Billion 625 Billion 421 Billion
(Largest Trading
Partner) Hong Kong Canada S.E. Asia
International Reserves:
Currencies $150 Billion $ 61 Billion $245 Billion
Gold (@ $300/oz.) 4 Billion 79 Billion 7 Billion
Total Reserves $154 Billion $140 Billion $252 Billion
GDP to Int'l Reserves 28 times 58 times 12 times
Bank Loans $1,130 Billion $1,021 Billion n/i
Sources: The Year 2000 Book of Facts; The Wall Street Journal; Barron's
SOURCE Dirks & Company, Inc. (C) 2000 PR Newswire. All rights reserved. prnewswire.com
GEOGRAPHY: New York
INDUSTRY CODE: CPR
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