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September 2000

Hi-tech leads restructuring and after


Asia’s equity markets have seen their fair share of triumphs and disasters in the past 12 months, with technology stocks still baffling market watchers in some markets and seducing them in others.




The company that everyone is still talking about is Richard Li's Hong Kong's Pacific Century Cyber Works. "PCCW has actually helped the economy of Hong Kong. A lot of people made a lot of money and that went back into the system and kick-started the Asian recovery," says Darius Yen, director of equity capital markets at BNP Prime Peregrine Securities.
       
Li's PCCW is helping the Asian recovery
Certainly PCCW got the year off to a good start with a $1 billion IPO lead-managed by BNP Paribas that gave it ammunition to buy Hong Kong Telecom. "PCCW is everyone's largest corporate client in Hong Kong. It is extremely active and very aggressive in acquiring. It was just amazing to watch what happened and I definitely think they will do more in the fourth quarter," says Kirsty MacTaggart, syndicate manager in the equity capital markets division of Salomon Smith Barney. "They got the money when the market was hot, which gives them an extremely strong position. They got to the market First and got there at the right time, so they have been able to grow exponentially," she adds.
Technology-related issues this year have included tom.com, hongkong.com, and Across Asia out of Indonesia, and a number of portal sites, but Yuen sees the sector as broader than direct internet plays, extending to hardware and support services as well. He adds: "There's more out there and investors are clearly very conscious of technology, but it has to be profit-making, and an extremely good idea, with growth potential.
Unfortunately there are issuers out there who are still dreaming and they will continue to dream until they run out of cash."
Most of the dot com ventures are now focusing on raising private equity. "Companies that are cutting edge, with lots of money and which can continue to beat their business - those are the people who will survive while the 'mom and pop' businesses will write off their investments," predicts Yuen. "No matter how good they are, they still need investors, and investors are very sceptical," he says. He also detects a polarization in technology stocks in Asia, mirroring what is happening in the US where the big players can command valuations of 20 times earnings and the smaller ones remain with single-digit multiples.
Tom.com is an example of the new breed of more sensible management, says one banker, pointing to the company's recent lay-off of 80 people and its recognition that it "couldn't burn cash".
Internet Technology Group out of Singapore is another one to watch, says Yuen. "The technology bubble burst in Hong Kong but elsewhere in the region it has not really started," he says. In terms of investors, much of the money fuelling Asia's technology stocks is coming from the US. London investors "just don't understand" Asia, while there are pockets of interest elsewhere in Europe, in Italy for example.
Aside from technology stocks, much of the focus in the new issues equity market has been on China. The trend now is China concept stocks, says Yuen. "A lot of money is going that way, and it will continue to drive the market," he says. PetroChina's $2.9 billion IPO had a tough time earlier in the year despite its high-profile billing. "Hats off to Goldman," says Yuen. "It was a very difficult sell and they did a good job." China Unicom was more successful, with a $4.92 billion IPO led by Morgan Stanley Dean Witter. Beijing Airport was less of a triumph, with BNP pulling out of the $351 million IPO in a spat with lead-manager ABN Amro over research and its position in the underwriting hierarchy.
There has been a noticeable change in the China market this year compared with last year, says MacTaggart. "The US investor base has woken up to the fact that there is huge growth potential in China," she says. The Chinese privatization calendar looks big. "China will probably take over from Korea this year in terms of privatization and the US retail demand will see it being able to take full deals," she adds.
In Hong Kong 1998-99 was a slow year in the equity market, but things started to pick up in the second half, says Peter Wong, group managing director of Tai Fook Securities and a member of the working committee on the territory's Growth Enterprise Market (GEM), which opened in November and is now trading at near record lows after being branded as one of the world's worst-performing stock indices. "The GEM market has been rather disastrous," says MacTaggart. "They have been somewhat lax in waiving certain restrictions and letting companies through that are ideas rather than businesses," she says. "The Hong Kong retail market has allowed that to happen.
It can be so hyped - they queued for miles to subscribe to tom.com. But now it has tainted sentiment and the investor base is extremely wary," she says, adding that a lot of companies were now waiting until they qualified for a main board listing rather than Floating on GEM.
"At the beginning GEM got a very good reception and the market did raise a lot of money for technology shares," Wong says, acknowledging that the market has had a harder time more recently. "Hong Kong has to learn to Find its way," he says. "There is a lot of adjustment, and that is a healthy sign. Too much aggression in valuation is not a good thing. Now issuers have been more realistic in pricing and the market has given signals that they need to come up with good revenue streams and business plans. Current pricing on the GEM board is more realistic and we feel more comfortable, but the level of investor confidence still needs more time," says Wong, who reckons it could take another two or three years before investors are fully aware of GEM's direction.
Cultural and language benefits will mean that Hong Kong will strengthen its position as a gateway for investors into mainland China, says Wong. The rush of IPOs at the beginning of the year kept the Hong Kong SFC on its toes, and resulted in a backlog of approvals that acted as natural brake on issuance.
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