Other Fish in the Sea
By Maureen Tkacik, AsiaWise
14 Feb 2001 16:00 (GMT +08:00)
Where's the Love? provided an anatomy of two unhappy mega-mergers -- the three-way bank merger in Japan that formed Mizuho, and PCCW's acquisition of Hong Kong Telecom. Here we pick up the tale...
The point is, both Pacific Century CyberWorks and Mizuho/the Japanese banking sector are practically clichés at this point. Both saw mad, mad, heart-racingly good returns in 1999 on the back of giddiness and optimism they could never justify. Both came down like kids from crystal meth when the truth started to hurt. And don't discount that word, "truth." The conventional wisdom, these days, is closer to reality than it ever was in '99. Thanks to recent stories in the Economist, the Asian Wall Street Journal, Barron's, Asiaweek and just about every other mag or rag at the newsstand, we know that Japan's mega-mergers are coming along slowly thanks to labor and turf wars, that stock sales and reduced technology spending are really the only reasons the banking sector was able to get back to the black in 2000, that bad loans are always going to be worse than anyone "estimates" they will be, that "good" loans are often backed up by land and property collateral that is still being accounted for at those bubble-yum 1989 valuations, that bankruptcies were up 24% in 2000 over 1999 (and that's the good news)... that they could fix all these problems and still come up dry because the Japanese economy remains so bloody, bloodlessly bad.
Thanks to these selfsame media outlets (and a little help from AsiaWise) we're wary of CyberWorks, too -- for a similarly rich stew of reasons. There's the gearing. There's the rising interest rate premium on that gearing -- despite the falling rates themselves. There's 3G; the price of the license, and the price of building the network. The fear that cash flows, in a recession, just might not cover costs. The fear of more gearing. The broadband plans gone bust. The layoffs at broadband "vortal" NOW. The absurdity, looking back on it now, of NOW in the first place. The absurdity of the word "vortal" (or come to think of it, "viewsers"!) The $1.5 billion they were going to spend on NOW. The $645 million they still plan to spend on NOW. The shriveled-up incubator portfolio, the missing-in-action ventures, the lost-in-orbit satellite plans... the sad, sad Nasdaq.
The moral here, dear reader, is not to let thyself count the ways these stocks have broken shareholder hearts. There are other fish in the sea, even in the Hong Kong telecom and Japanese banking sectors. But in any downturn, investors usually have better luck with the minnows than the whales. Many a canny investor actually made money during the crisis by sticking with small caps. And as a bonus, analysts think both Hong Kong's telecom sector and Japan's banking sector are still rarin' for consolidation. The small-caps should be first to get scooped up. Here are some smaller-caps that might just see suitors in 2001:
SmarTone and Sunday, for starters, are both in the Hong Kong mobile telecoms arena, competing with PCCW's newly spun-off CSL division. Both gained market share in 2000, and neither carries the same kind of baggage (i.e. debt, waning long-distance revenues) that PCCW does. Both look like attractive acquisition targets, which is the reason Credit Suisse First Boston's NiQ Lai upgraded both to "Buy" last month. (British Telecom owns a 20% stake in SmarTone that it is apparently trying to unload, but Lai says they'd probably only do it at a premium; C&W shareholders are purportedly ready to take whatever they can get for PCCW shares once their first lock-up ends later this month.)
According to Lai, another SmarTone/Sunday positive is that Hong Kong's cellular price war looks like it's coming to an end, with providers finally trying to focus on profitability. The caveat, of course, is that we've heard all this before. But both stocks have come down nearly to year-end levels after initially shooting up after Lai's upgrades, and both were miserable (Smartone down 65%, and Sunday off 80% since IPO) performers in 2000.
Oita, Higo, Miyazaki and Kagoshima Banks. James Fiorillo, a Tokyo-based banking analyst at ING Barings, singled out these four regional banks in his last major sector research piece because he prefers the unloved shares of regional banks to the sector's higher-liquidity, higher-multiple behemoths, and because he thinks the Kanto and Kansai regions of Japan are ripest for consolidation. A pessimist on the so-called "glamour" stocks in the sector (ahem, the megabanks, which aren't exactly looking like Catherine Zeta-Jones these days -- Fiorillo thinks the government will need to pump ten trillion yen into the banks to ward off a meltdown) the Barings bear likes the little regional banks because he sees more room for synergy, cost-cutting and -- gasp! -- profitability among them. He laid out a convincing case for a four-way merger between Kyushu banks Oita, Higo, Miyazaki and Kagoshima based on the fact that the four don't have much branch overlap or the money to make the requisite technological expenditures by themselves. Fund managers also like Suruga Bank, another regional bank that recently started putting Starbucks stores at its branches.
Suruga's risky -- Moody's just downgraded its credit -- but management obviously knows how to deal with a market that's crying out for stimulants. And in the years ahead, it's going to be the smaller, nimbler banks -- Softbank's Aozora Bank, the foreign-owned Shinsei and Kofuku banks, the soon-to-emerge banking arms of Sony and retailer Ito-Yokado -- that will probably fare best in the sector.
It looks, however, like the market has fallen out of love with the big guys. Analysts are even cautious about stocks that could do no wrong last year, like Hutchison-Whampoa. But while there may be happy returns among the smaller plays, they won't fare all the same. Each will make its way through the slowdown in its own way.
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