What's Chinese for bubble?
By MATHEW INGRAM
Globe and Mail Update
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As its economy continues to grow at an annual rate in the double digits, China has become synonymous with growth, and everyone seems to be trying to find a way to capitalize on it — including Chinese tech companies, which have been listing on the Nasdaq stock market by the dozen. Although the demand for things such as e-mail and cellphone ring-tones continues to grow dramatically, some wonder whether the Chinese tech sector isn't going through its own little valuation bubble, just as U.S. stocks did in the late 1990s.
Part of the attraction for Chinese start-ups is that the Nasdaq is more welcoming than their own local stock markets. Companies are prevented from listing on the domestic stock markets in Shanghai and Shenzen unless they have more than three years of consecutive profits and registered share capital of $6-million; rules that are designed to prevent investors from buying into speculative ventures and losing all their money. The Nasdaq stock market, on the other hand, thrives on the speculative.
One of the recent additions to the Nasdaq, a wireless company called Linktone — which went public with its depositary receipts in early March — saw its stock leap Tuesday after the company reported a blockbuster quarter. Linktone, which sells ring-tones, icons, horoscopes and other subscription services for use on mobile phones, reported that its profit soared by more than 400 per cent in the latest period, and its revenue climbed by 2,600 per cent. The stock jumped 40 per cent on heavy volume.
Like other wireless service providers in China, Linktone is seeing a rapid rise in its customer base, which grew more than 30 per cent in the quarter, to 6.5 million subscribers. According to one industry analysis, more than 200 billion text messages were sent in China last year. China analysts say many consumers prefer to use text messaging and other mobile-phone based services rather than a regular phone or their desktop computer. "Here in China, people don't live by their PCs, they live by their cellphones," Hurst Lin, the chief financial officer of Sina.com, told the New York Times earlier this year.
As with any sector that is in high demand, all the attention paid to Chinese tech stocks has made them volatile. Linktone issued its shares at $14 (U.S.) and saw them climb to $19.50 the same day, but the price later dropped as far as $7 as some of the enthusiasm for the stock evaporated. Tuesday's activity shows that there is still plenty of interest out there, however — primarily because the lure of strong growth is just too hard to resist. Linktone may be relatively small, but it won't be for long if it continues to grow at the pace it did in the latest quarter, the fifth in a row in which sales rose by more than 30 per cent.
Like the wireless sector, the Internet-based Chinese tech stocks have also seen a dramatic increase in interest since Internet usage doubled last year and is expected to do so again this year. Sohu.com, NetEase.com and Sina.com, the three leading Chinese Internet "portals" — which, like Yahoo, offer a broad range of subscription and rely primarily on advertising — saw their stocks rise by between 100 and 250 per cent last year, although they have dropped back somewhat this year. The trio are the grand old men of the U.S.-listed Chinese tech sector, since they listed way back in 2000 and fell off a cliff along with the rest of the Nasdaq later that year.
In addition to Linktone, the latest wave of Chinese tech stocks includes on-line travel company Ctrip.com and Tom Online, an Internet gaming company controlled by billionaire Li Ka-shing. On deck are Shanda Networking, an on-line game company that was expected to go public Wednesday and hopes to raise $300-million; Baidu.com, a search engine; Tencent Technology, which hopes to raise $300-million, and wireless company Mtone, which hopes to raise $400-million. Auction site Alibaba and network gear maker Harbour Networks are also said to be considering a Nasdaq IPO.
Some analysts are excited about the growth of the Internet and wireless sectors in China. Mary Meeker of Morgan Stanley, for example — the only Internet analyst left at a major brokerage firm from the original bubble — recently released a 217-page report on Chinese Internet stocks. She said "investors still underestimate the impact the Internet will have in changing business process and consumer behaviour on a global basis -- and we believe that China is emerging as a market that helps prove this point."
Ms. Meeker's report notwithstanding, investors should still do their homework before buying high-priced Internet or wireless stocks, however, whether in China or elsewhere. Many of the recent crop are trading at fairly rich multiples, even for the tech sector. Shanda Networking, for example, expects to raise $300-million, which would value the company at $1.2-billion — or more than 40 times its annual revenue. Even Yahoo, one of the most highly-valued Internet stocks, only trades at about 17 times revenue. And in the case of Shanda and several other IPOs, the company founders are also selling large portions of their stake (insiders account for 45 per cent of the Shanda issue).
In other words, investors should keep in mind some of the lessons they supposedly learned during the first bubble. |
