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Could this be the next... Getting In On The Ground Floor: Dig a Hole to China The Chinese have so few phones most use a code book with a pager. If you called a Chinese friend on his pager, you might, for instance, punch in 2134456, to say, "Bring your wife to dinner. Ho! Ho! Her mother is out." Soon, many pagers will have two lines for Chinese ideographs to allow more detailed messages. Voice phones are years away for most Chinese. China has 1.2 billion people and has had double digit growth for one of the fastest growing economies in the world. Moreover, China's annual growth rate is expected to be 9 to 10 percent well into the next century. Jumping into this breach is a developmental American company called AVIC Group, (AVIC, OTC.) AVIC's chosen role is to set up Chinese foreign joint ventures in telecommunications. It has done four so far. AVIC's key assets are its seasoned managers and directors, two of them from the Reagan Presidency. Other key officials are Chinese or Chinese American. AVIC is chaired by CEO Joseph R. Wright, once a Booz Allen man. He later helped CitiCorp set up its credit card business. Wright was President Reagan's last director of the Office of Management and Budget. At W. R. Grace he set up a confectionery unit in China financed by Oppenheimer. KEEP PAGING DOWN Wright was joined at AVIC last week by another former Reaganite: R. T. McNamar, who began at McKinsey & Co., management consultants. As Reagan's Deputy Secretary of the Treasury, McNamar specialized in international finance. McNamar negotiated the 1983 U. S./Japanese Yen-Dollar accord. He served as the government's administrator of the Chrysler loan guarantee and he guided the sale of Conrail. McNamar has since advised the World Bank on international debt restructuring policies. American born Michael J. Lim, formerly with Bear Stearns, is AVIC's CFO and executive VP, operations. He negotiates AVIC's deals in China. Chen Li, vice chairman of AVIC's board, and AVIC director Ju Feng, are both with Beijing CATCH. Beijing CATCH, is an affiliate of AVIC's dominant owner(46 percent of the stock) Beijing Municipal Government. Beijing CATCH is the leading operator of paging stations in China. AVIC states flatly in its filings that its success depends on Beijing CATCH. Some 30 million pager subscribers in China already outnumber their counterparts here 10 for 1 as AVIC develops 100 pager stations to serve 3.1 million subscribers on a new national frequency. Stations cost $500,000 to $600,000 each. Initially, AVIC will upgrade 50 for a cost of $50 million. AVIC's China-based executive vice president, Xiao Jun, a Chinese native, is also a director. Except for Wright and McNamar, both aged 57, most of the AVIC managers are in their late thirties or early forties. This is a lot of resume detail, but the team, its connections, financial, business, legal and executive, will be critical to the company's success. KEEP PAGING DOWN Basically, AVIC is a facilitator not an operator. It must win contracts for major telecommunications installations, secure the financing for them, (mostly in the United States), hire builders/operators and make sure each deal is properly structured for mutual safety and with all parties satisfied. Unlike the U. S. where telecom franchises cost hundreds of millions of dollars, AVIC gets the franchises without cash upfront. It uses its common stock to reward joint venturers. More AVIC shares will be issued in future if and when AVIC turns a profit, but AVIC's interest will not be diluted. Wright told me that the contract negotiations in these telecom deals is complex and time consuming. He said it can take more than a year to do a deal, longer, in fact, than it will take to start service in some projects. But he said each negotiation adds to the "model", making the next one easier. Hai Wen Partners a top Asian firm works for the Chinese Los Angeles based Gibson, Dunn & Crutcher works on the US side. Wright told me that once the first deal was locked up, the contract was turned over to a top law firm here in the U. S. for appraisal. The firm said the terms were sound. AVIC's first deal was a European mode cellular phone project in Hebei Province. Hebei encircles Beijing like Virginia and Maryland surround Washington, D. C. But Hebei has a vastly larger (63 million) population. Cellular phones require cell towers, the main infrastructure element so this project was relatively cheap. AVIC will be installing wire line telephones in Hebei which cost much more. Old fashioned, they still offer the best hope for quick phone service for the 1.2 million subscribers AVIC hopes to sign up. The operating partner on the cellular project is Japan's Nippon Telephone. The wire line phone project could cost $1.4 billion, the costliest project so far. Cellular stations, like paging stations, are relatively inexpensive. Merrill Lynch and Wasserstein Perella are to help seek the needed capital. KEEP PAGING DOWN Caution: From 10-Q papers filed with the SEC for the quarter ended June 30, 1996: AVIC Group, International "is a development stage company [that is] devoting substantially all of its present efforts to establish a new business and its planned principal operations have not commenced yet." AVIC hopes to have 10 million subscribers for its projects by the end of 1997. If AVIC does this, it should be well in the black. Outcome: uncertain. Here are some other risk factors, from the company's 10-K filing: AVIC generated losses of $5.2 million and $5.6 million in the fiscal years ended March 31, 1995 and March 31, 1995, respectively. There can be no guarantee that AVIC will ever be profitable or that its revenues will cover its on going operating expenses. To attain profits, the company will have to obtain adequate financing to achieve its goals and there is no assurance of this. AVIC needs high sales to support the company cost structure, too. KEEP PAGING DOWN There is also the possibility of discord with Chinese interests and disaster. AVIC has been a public company for a year and the firm has already drawn the fire of short sellers. They pounced on the company when it did an offshore financing causing some dilution. Short sellers often seize on dilution as an occasion to short stock. As a result, AVIC, which hit 15 in the Spring, now sells at 2 1/2. If everything works, gains could be substantial. At 2 1/2, AVIC Group has a market cap of $71 million. At 15, market cap was $425 million. But there is, of course, no guarantee of any gains. Newcomer McNamar remarked that AVIC was a "pure play" and "the only way I know that an investor can own a U. S. public security directly tied to the promising future of telecommunications in China." I met with both McNamar and Wright in their sumptuous tower offices at 599 Lexington Avenue on Manhattan's fashionable East Side. Salaries don't seem excessive. Wright has deferred most of his $143,750 yearly pay. The incentives are in substantial stock options. AVIC had $407,000 in cash on June 30 and has taken up $1.75 million from escrow since. The burn rate is said to be "very low" by Cheryl Bell, director of investor relations. | ||||||||||||
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