Asia's internet leaders: Asia's new economy


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Extraordinary scenes have unfolded as Asian investors rush to buy shares in new vehicles set up to profit from growing use of the internet. The police have even been called in to restore order among hopeful punters. Asia's new economy is changing the face of capital markets in the region. Hong Kong no longer sees itself as a property-based economy but as a centre for capital formation in the internet age. Growth estimates for internet revenues are mouthwatering, with the Chinese language market as the ultimate prize. But this is still Asia. The new economy entrepreneurs are the old economy billionaires minus their suits. Their plan might be to use temporarily overvalued internet shares as currency to grab real assets, reports Phillip Moore

You don't need to be too long in the tooth to recall the stunt pulled one April Fool's Day by a leading Hong Kong-based broker. At the height of the emerging markets frenzy of the early 1990s, Smith New Court sent its clients a research bulletin dated April 1 which urged them to buy into a forthcoming IPO from Bhutan Dry Docks. The response was a handful of preliminary orders from investors apparently oblivious to the fact that Bhutan is a tiny, land-locked country with no stock market. 

The joke has come closer to reality with the technology IPOs that have gripped Hong Kong's imagination this year. Just how close is anybody's guess, but internet-related companies with no earnings and negligible track records are cascading onto Hong Kong's stock market, and local investors can't get enough of them.

The most striking example of mass internet hysteria came at the end of February, when Hong Kong's police were called out to control more than 200,000 individuals who besieged HSBC's offices to hand in applications for shares in the IPO of The cocktail of the dot com element of the offering and the involvement of Li Ka-shing was too much for Hong Kong's investing public to resist. Demand for the issue, which closed oversubscribed more than 600 times, was so great that the stock of prospectuses ran out towards the end of the offer period, earning the listing's sponsor, BNP-Prime Peregrine, a slap on the wrists from the Securities and Futures Commission (SFC), Hong Kong's market regulator. Such minor details were irrelevant in both primary and secondary markets. Priced at HK$1.78 a share, the issue surged by 335% on the First day of trading to reach HK$7.75. By the eve of Nasdaq's mini meltdown in mid-March, shares had soared to HK$14.30.

The story of is truly extraordinary.

Described by its owners as a "multi-lingual portal and portfolio of China-related content targeted at both PRC and global audiences to bring China to the world and the world to China", it has a track record which makes a company like the UK's look like a veteran. Its owners, Hutchison Whampoa and Cheung Kong, announced the launch of on December 16. The following week it appointed Carl Chang, who had headed Metro Broadcasting since February 1998, as the company's CEO. And in January it unveiled the soft launch of its "unique Chinese language information and entertainment content platform" which reportedly attracted some 2.5 million pairs of eyeballs in its First month of operation. This pedigree, apparently, was enough to justify a market value at the stock's peak of close to US$7 billion - comfortably propelling into the top 20 Hong Kong stocks by market capitalization and making the infant internet company larger than the likes of Cathay Pacific Airways.

Tom dot foolery?

So should investors dismiss the episode as Foreign&Colonial Emerging Markets (FCEM) did in a recent newsletter by wishing buyers "". Some local analysts agree - baffled by the maths of Hong Kong-based portals. "I can't see how Asian portals can expect to break even within three or four years," says one. "In 1999 the advertising revenue for Hong Kong as a whole was only HK$5.2 billion. If you make the very generous estimate that in Five years' time internet advertising will account for 10% of the total that gives you HK$520 million. And if you assume even more generously that the most successful portals will account for 10% of this revenue, that equates to sales of HK$52 million. That can't possibly be break-even territory."

The same analyst is also "astonished" at's relative acquisition costs per registered user. This is defined as the money spent by the portal on advertising and marketing to attract each "higher quality eyeball" which registers and then might - repeat, might - use the portal commercially.

He says that for this works out at US$100, which compares with US$5 for Lycos, US$3.80 for Yahoo! and US$2.50 for Sohu, the search engine which in April 1998 became Intel's First investment on the Chinese mainland.

And the extraordinary corporate manoeuvrings that brought into existence, explored in detail by ex-BZW and Wheelock banker David Webb ( have also raised questions about the company. Who are the shadowy Figures behind the tax-haven-based Firms that have benefited so dramtically from the Flotation without, it seems, having made any significant investments in the Firm? What is the connection between these companies and influential Figures in mainland China? And who is Ms Chau Hoi Shuen, whose effective stake - though she is not on the board and was not on the board of the companies which became - of 868 million shares in the company was acquired at negative cost and which at a share price of HK$10.50 is worth a cool US$1.12 billion? Potential investors should remember how business is done in Hong Kong: may be fundamentally Flawed, but at least we know who owns what and why.

Connections still count

Those who are more optimistic about the prospects for Asian portals in general, and for in particular, base their prognosis on two magic ingredients. The First of these, which supposedly differentiates the Asian internet world from its equivalent in Europe or the US, is the Midas-like influence of individuals within the Li Ka-shing empire. 

"What investors in Asia tend to be comfortable in backing is the business acumen of the individual or family behind any given concept," says Cecilia Melin, corporate Finance director and head of telecoms at HSBC Investment Bank in Hong Kong.

Others agree, suggesting that the Li Ka-shing label at the IPO stage effectively acts as a guarantee, in Hong Kong at least, for the starting point of a virtuous circle. Taken to hypothetical extremes, what this means in today's climate is that if a company with the Li family imprimatur calling itself were to launch an IPO, it would probably be oversubscribed a hundred-fold, allowing it to use an inflated share price to acquire real assets. In this extreme version, is just an internet venture fund. Investors put their money into it expecting it to be the best buyer of internet-related assets around.

The members of the Li family now control some 25% of the value of the Hang Seng Index, so their cachet with investors is exceptional.

The credentials and perceived charisma of individuals and brands, rather than track records, have also acted as powerful magnets in other recent internet-related IPOs in Hong Kong. One of the key draws of the recent IPO of Sunday Communications, for instance, was that the company's co-chairman, Richard Siemens, was head of telecommunications at Hutchison Whampoa between 1984 and 1993 and was therefore very closely associated with the highly successful launch of Orange. For institutional accounts, this reportedly more than compensated for the loss incurred by Sunday in the year to September 1999 of HK$1.96 billion, as well as for the fact that its internet portal,, was only launched in February of this year.

A second (and related) cause for optimism over the prospects for, say the company's champions, is that it does not view its future as being restricted to the Hong Kong market.

Far from it. Branded "tom" websites are to be launched soon targeting the Chinese speaking populations of Taiwan, Singapore, Sydney, San Francisco and Vancouver as well - critically - as Beijing and Shanghai. " was a recognition that in media channels generally and in new media channels especially the Chinese language consumer audience is still inadequately served," says Frank Sixt, group Finance director at Hutchison's Hong Kong headquarters and chairman of

"Whether it is in terms of access to e-commerce offerings or in terms of information, education and entertainment, the quality of the product the consumer in Chinese-speaking communities is offered is well below world standards. We view that as an immense opportunity because the Hutchison Group has an established track record in China and has the ability to attract the sort of talent which is required to succeed in the Chinese market.", he adds, has plans to expand way beyond the narrow confines of acting only as a portal, by adding, inter alia, sales of Chinese language CDs and videos and through the establishment of an on-line travel agency aimed at consumers in mainland China.

"If we get all that right," says Sixt, "we really do have the potential to become the equivalent of America On Line for the Chinese speaking world."

The starting point for all analysis of the impact that the internet will have on Asia is the potential for increased PC and mobile telephone penetration of the region, and in turn for increased use of the internet and for the resulting growth of e-commerce.

Mesmerizing projections

The stats can be made to look very compelling. 

Take PC penetration and internet usage.

Interpretations of macro- and socio-economic indicators such as GDP growth, population expansion, demographic trends and the affordability of PCs and mobile telephones can be used to justify predictions of surging growth across Asia. Take, as an example of this, the basic cost of a PC to consumers in the billion-strong Indian market. According to Figures published in January by Credit Lyonnais Securities Asia (CLSA), the average price of PCs for multimedia configuration have progressively nosedived from Rs150,000 ($3,400) in January 1996 to Rs30,000 in January 2000, a drop of 80%. "Though the trend is similar globally," CLSA notes, "the price fall in India has been greater due to the government's pro-IT reforms, resulting in lower import duties."

Then come the projections of how all these influences will feed through into individual ownership of PCs and the web access that will arise as a result. For internet analysts the world over, the authority in this area is the International Data Corporation (IDC), and few brokers' reports fail to highlight the organization's estimates of internet users in Asia. Between 1998 and 2003, according to IDC, the region as a whole will see a compound annual growth rate (CAGR) in internet users of 40%, with India (76%), China (51%) and South Korea (49%) leading the way. This growth rate will comfortably eclipse predictions of increased internet usage in the US. Goldman Sachs says in its latest report on the subject that by 2003 Asia will have 64 million internet users. "At end-1998," it adds, "the United States had 62 million internet users, and this is expected to grow to nearly 150 million by 2003. The expected 20% CAGR of US users is half that of Asia."

These forecasts drive those for the market for e-commerce. Goldman Sachs for example believes that "the e-commerce market in Asia is expected to be worth US$32 billion by 2003 (a 145% CAGR), versus US$700 million in 1998."

While the projected CAGR rates for e-commerce look relatively sluggish in economies such as Australia and Hong Kong (posting CAGRs of 84% and 110% respectively between 1997 and 2003), they are breathtakingly high at 243% in China and 246% in India over the same period.

One data source analysts are unwilling to draw on is the way the e-markets in the US have developed. The Asian internet market, they say, will develop very differently and the differences will mean it develops faster.

Jay Chang, a Hong Kong-based vice-president in the CSFB Technology Group, explains that in its initial phases in the US, the development of the internet and its supporting nuts and bolts was chiefly an academic phenomenon, which spawned a number of dedicated or "pure" internet plays. Asia, by contrast, has leapfrogged this phase of development. "From day one management at Asian Fortune 500 companies have recognized that they have to get on-line and invest substantial resources in building their wireless supply chains," he explains.

Also, the "new economy good, old economy bad" generalization that is already losing credence in the US is definitely wrong in Asia. At Nomura in Hong Kong, for instance, managing director of the Asia equity division Jim Walker believes that "once the internet generation is in place with business to consumer (B2C) and business to business (B2B) e-commerce channels in place, then surely the biggest winners from the process on a day-to-day basis will be the old established companies". Already, he says, clear examples of this are emerging. Simply slicing away the middleman from a series of commercial transactions, and replacing him with an intelligent screen, could result in savings of up to 20% for conglomerates in some countries, such as the Lippo Group in Indonesia.

Hybrids, not pure plays
As a result the leading beneficiaries of the internet revolution in Asia will be hybrid companies - long-established but responding early to the opportunities presented by the new economy. "We are already seeing many of the hybrid models working much better than the pure internet plays," says Rajeev Ahuja, director and head of internet investment banking at Deutsche Bank in Singapore. "Companies are recognizing that they need to combine the real assets of the so-called old economy with the speed, efficiency and mass customization of the internet, rather than take the two in isolation and say that one will replace the other. Of course there will be successful pure internet models as well as pure old economy plays but the vast majority will be hybrid models." Ahuja says there are already signs that the two are converging in the US: "we are seeing companies like Amazon stepping back into the old world by building warehouses and so on and those like Wal-Mart which are moving forward by establishing dot com operations, so there is a growing acceptance that the two have to co-exist," he says.

Solid examples of this process in the Asian world are listed in a recent CLSA report entitled Asian Internet Strategies - Companies that have "Got It". The CLSA short-list includes a number of companies at the forefront of internet development in Asia - such as Hong Kong's PCCW, India's Satyam and Singapore's Creative Technologies - but also incorporates a number of less obvious candidates. Examples include the South China Morning Post, Finance companies such as Korea's LG Investment&Securities, and, perhaps most surprisingly of all, India's Asian Paints, which at First glance would appear to be just about as "old economy" as it is possible to be. Scratch beneath the surface, advises CLSA, and you Find a company that will double the rate of gain of market share should its new internet venture take off successfully.

Some US/Asia differences are not so positive.

In terms of regulation, language and culture, Asia's market for internet services is highly fragmented. "The main difficulties or hurdles we face in expanding outside the home market are mainly in the regulatory field," explains Chiam Heng Huat, director of Finance at the Singapore-based Pacific Internet, which has aggressive expansion ambitions throughout the region. "In several of the countries we are targeting, ISPs are deemed to be telecommunications companies and are therefore subject to foreign ownership limits, which is why in India, for example, we control only 49% of our local operation. The strategy for the time being is therefore to position ourselves in regional markets and to negotiate ways in which we can acquire controlling stakes as and when ownership restrictions are lifted."

The low level of penetration of credit cards in some Asian economies makes business to consumer applications much harder than in the US. As BNP Prime Peregrine notes in a recent analysis of the Thai potential for e-commerce, "looking forward, we believe that an obstacle for the business-to-consumer (B2C) trades to take off in a big way in Thailand is low credit card penetration (2.8% as of 1998).

Moreover, only three banks offer payment gateways and the fees imposed are still as high as 5%. We believe that B2C transaction rates in Thailand will grow, but at a slower rate than that of the more developed markets."

Relative population densities and levels of infrastructure also drive differences between the two regions. As Deutsche Bank's Ahuja points out, the US had developed a very advanced infrastructure in terms of delivery and logistics supporting mail-order shopping well in advance of the emergence of the internet. This in turn allowed for the development of efficient payment systems long before the concept of e-commerce had been translated into a buzzword. "All the on-line and e-commerce advertising estimates which have been made for the Asian region are still well below US levels," he says, "and that is a reflection of the way consumers spend. For many Americans it takes a 50-mile round trip to make a purchase because of the way in which the population is scattered around. Most people in Singapore only have to walk 15 yards to be in their nearest supermarket."

Valuations in internet space

Regardless of these fundamentals, valuations of Asian internet stocks have become every bit as stretched as on Nasdaq or in European markets such as techMARK in the UK or Germany's Neuer Markt. The result, say some bankers, is that issuers are being tempted to cash in on the current boom at unrealistic price levels. "I'm concerned that some of the big Hongs here which don't want to wait around for six months are pushing prices to the limit" says one banker who singles out IPOs for I-Cable (spun off from Wharf Holdings last year) and Sunevision (the internet arm of Sun Hung Kai) as examples of issuers that have "pushed the envelope to the maximum in terms of valuation".

But investment bankers pricing internet-related IPOs in Hong Kong run the risk of being damned if they do and equally damned if they don't. Price them too steeply and they are accused of being sharpshooting opportunists; price them too generously and they are held responsible (as BNP Paribas was in the case of for creating riots.

BNP Paribas, which led the transaction, is defensive about charges that it underpriced the deal. "The First investors into a dot com company have to make decent profits, and a lot of profits," says a source at the bank in Hong Kong. "Because these companies have no cashflow to service debt, equity is their only option, and they will want to return to the market for second and third round equity Financing in the same way that PCCW did. That means they have to make a good impression on investors, so if an IPO from an internet company fails to triple or quadruple in value within the First few days of trading it is generally regarded as having been a failure."

One way to avoid the volatility of retail demand is to do away with the retail offer altogether. This was the approach taken by companies within the Chinadotcom stable, which recently spun off some of its participation in in a transaction earmarked exclusively for institutional accounts. BNP Paribas says this decision was reached in consultation with the vendor long in advance of the episode. It was not a direct result of the euphoria surrounding recent IPOs.

At Lehman Brothers, which co-led the IPO, head of Asian equity capital markets William Bowmer elaborates: "There are some very onerous clawback restrictions that require you to allocate a certain amount to the retail tranche depending on the degree to which an individual issue is oversubscribed.

That can force you to put an enormous amount of stock into retail hands, which did not want to do. Had the regulations been such that we could have exercised more control about how much went to individuals we may have incorporated a retail tranche."

Peter Hamilton, chief operating officer at Chinadotcom, which itself concentrated on institutional demand in one of the most successful IPOs of 1999, adds: "Of course we could have generated more demand if we had offered to retail investors. We were oversubscribed by 50 or 60 times and I suppose if we had involved retail we could have been as oversubscribed as was.

But our philosophy has been to build relationships with institutional investors on a global basis who have a strong understanding of what the opportunities are in this sector and also what challenges a company such as ours faces."

Old versus new

Valuations in the internet sector - whether absurd or not - are certainly restricting fund-raising opportunities for companies labelled as being old economy plays. Nomura's Walker points out that recently of 10 expected IPOs in the Hong Kong market, nine were for internet or other new economy issuers. The tenth, says Walker, was for a furniture company, Decca. "In today's environment you can hardly imagine a less sexy industry than furniture," he says. "But Decca is a small but very good company with an unbroken profit record stretching back 10 years. It has a state of the art factory and is a supplier to top quality organizations such as the Shangri-La Group. In other words it has all the characteristics which Five years ago would have made it an ideal candidate for a second board listing. Yet it is being offered in the IPO at about 3.8 times its earnings to March 2000, which is an absolute steal. I'm not saying it's the most wonderful company in the world, but if I was told I could retire tomorrow and have Decca's earnings for the rest of my life or's, I would sleep easier at night with Decca's."

In today's environment, these old economy companies get little support from investment banks. "The old economy is becoming marginalized," says one banker, "and that is a reflection of the fact that everybody in investment banking has increasingly stretched resources. Every bank on the street is losing people to venture capitalists and internet companies. So if you have a spare body to throw at a deal are you going to throw it at an old-fashioned paper manufacturer which no investor wants at the moment or at a telecoms, media and technology (TMT) company which everybody is clamouring for? Yes, there is some screaming good value in the old economy right now, but investors only want new economy stock." Ironic, since it is only the success of the old economy in delivering returns that has provided investing institutions with money they are prepared to burn in internet-related venture capital.

Reality or hype?

"I think one of the issues everybody is grappling with today is the extent to which the internet phenomenon in Hong Kong is real or hype," says Sixt at Hutchison Whampoa. "And I am convinced it is real, predominantly because the transparency and effectiveness of the markets and quality of the regulatory environment in Hong Kong has created a massive capital market for technology. What follows from that is that the market for capital here will progressively be able to attract ideas and talent."

Leaving aside inconvenient facts, such as the stock exchange's relaxed attitude to the requirement that companies should have two years' audited accounts before they list, Hong Kong's credentials as the centre for high technology capital formation in north Asia have been boosted by a number of developments.

One is the establishment by Richard Li in April 1999 of Pacific Century CyberWorks (PCCW), which is now acknowledged as being Asia's purest internet play (and owner of 121 million shares in The second is the launch in November last year of Hong Kong's equivalent to Germany's Neuer Markt, the Growth Enterprise Market (GEM).

The 33-year old Li founded PCCW a year ago.

Having built up, and then sold, Star-TV in the early 1990s, realizing a net profit estimated at more than US$800 million, Li went new economy through the acquisition in April 1999 of Tricom Holdings, a local manufacturer of telecoms equipment, for US$109 million.

Reinventing the company as PCCW through a reverse takeover, and attracting key backers such as Intel, Li has since built his vehicle into Hong Kong's seventh largest company. In January it was capitalized at some HK$166.4 billion , or 3.7% of the entire Hong Kong market.

BNP Paribas Peregrine has been at the helm of PCCW's fund-raising binge from the early days, most recently acting as lead manager and sole bookrunner on a $1 billion Valentine's day blitz in which the new equity was snapped up by institutions in 45 minutes. But according to a source at the bookrunner, when PCCW First moved into the new economy, few saw its potential to be Asia's premier internet operator. "Initially the Hong Kong market took the First PCCW transaction as being just another property play," he says. This was chiefly a reflection of PCCW's Flagship project at the time, which was the construction of Hong Kong's "Cyber-Port", a $2 billion six million square foot strategic IT cluster being built in partnership with the Hong Kong government.

Today, the market's perception of PCCW could scarcely be more different. As CLSA advises in its Asian Internet Strategies tome published in January, "PCCW is probably the best pan-Asian internet growth play and can probably be looked at as a combination of Excite @ Home (broadband connectivity), Yahoo! (advertising/e-commerce via portal) and CMGI (venture capital investments)." This mix of operations and investments has led some local analysts to dub PCCW an "opervestor".

PCCW is certainly talking big. Its head of research John Comley, says the company's mission is to be "the employer of choice of top internet talent" in Asia; to "create the world's largest broadband internet business"; to become "Asia's preferred internet partner" for multinational operators and to "facilitate the entry of the best international internet brands into Asia"; and to "establish PCCW as the pre-eminent channel for prudent institutional investment in Asia's rapidly expanding internet economy."

This last objective has been achieved through a whirlwind series of investments in what CLSA describes as "nearly 40 Asian and North American internet and media companies with capabilities in everything from IT solutions to traditional Chinese medicine". Prior to its latest and most audacious acquisition these investments amounted, according to CLSA, to more than $1.2 billion. With holdings in companies such as Singapore's Media Ring, India's Saytam, Korea's Thrunet, the leading Chinese portal and Hong Kong's own, this effectively means that for institutional investors looking for exposure to the Asian internet story, PCCW has already established itself as an ersatz investment trust.

All this, however, has been eclipsed by PCCW's part-cash, part-equity, US$36 billion bid for the 54% stake previously owned by Cable&Wireless in the territory's largest telephone company, Hong Kong Telecom (HKT). HKT has Fixed line as well as mobile and internet interests throughout Asia. At a stroke, this transaction would give PCCW access to 3.6 million Fixed lines, one million wireless customers, 400,000 internet users, 90,000 interactive television watchers and 22,000 broadband subscribers.

PCCW/HKT: where now?

As Euromoney went to press the deal was not completed. If eventually it is, PCCW's plans for HKT will become clearer. Right now investors are uncertain whether the deal represents a strategic build-up of a powerful regional telecoms and internet operator or opportunistic Financial sleight of hand.

PCCW itself is coy. Head of research Colmey concedes that for a company with its eyes on the triple-digit growth rates of the internet side of HKT's business, Fixed line and IDD operations are not very attractive. So will the aim be to sell off the IDD and Fixed line operations? "Not necessarily," Colmey replies, "because we could still take advantage of having access to those Fixed-line customers, all of whom are a potential addressable audience. So we could spin them off, but we could also bring in strategic partners to help develop them. We have always said that we are not going in to HKT to slash and burn."

Perhaps. On the other hand HKT won't be PCCW's last acquisition and issuing equity to fund future acquisitions will create progressively smaller additions to the stock's fair value.

Given the levels of debt being incurred to fund the HKT deal, asset sales look inevitable.

Analysts are also dubious about the strategic purpose in retaining the "old economy assets". "Although the HKT deal makes a lot of sense," says one banker close to the transaction, "the obvious concern is that PCCW will lose much of its cyber-allure. It will have a more conventional P/E ratio and people will start to value it relative to mainstream telecoms companies such as China Telecom. In order to continue to use its shares as an acquisition currency it would be preferable for PCCW to retain its cyber valuation."

Beyond these considerations, bankers question whether PCCW has the capacity to absorb the large number of staff it has acquired in HKT. "Some people in this region talk about skilled staff being the most valuable asset you can acquire," says one. "But I would have thought that in PCCW's case the head count at HKT is probably the biggest liability they face. If you walked round to PCCW's offices a couple of months ago and asked them for a cup of tea they would have been stretched because they simply didn't have the human resources.

How they are suddenly going to absorb 13,000 or 14,000 people is beyond me. It would have been a formidable enough challenge for SingTel, let alone for a company with a track record stretching back all of 10 months."

Colmey says that HKT's people were one of the biggest attractions in making the acquisition, although in so saying he makes no reference to the 13,000 but talks instead about the much smaller team of individuals dedicated to the internet. "There is a serious staff deficit in Asia," he says, "and we have just hired a team of more than 800 people, which is double the size of our company, who have huge internet backbone. These are people who are experts in web site technology, xDSL and broadband. In terms of its human resources this is one of the most advanced internet companies in Asia."

Mainland influence again

The most intriguing aspect of PCCW's acquisition of HKT was the role played by Beijing, which officially had no comment to make on the transaction. "What is undoubtedly true but almost impossible to substantiate," says one banker in Hong Kong, "is that the influence of Beijing aimed predominantly at keeping SingTel out of the deal was enormous."

Others agree. "My personal opinion," says another observer, "is that somebody in the corridors of power in Beijing whispered to Richard Li that if he took up HKT it would provide him with the key to the Chinese market. I think a huge carrot must have been dangled in front of Richard Li which was simply too big for him to refuse, and that carrot was a licence for the Chinese market."

Nobody will say so publicly, but at issue here, say local bankers, was the sensitive political imperative of ensuring that HKT did not free itself from the control of one former colonial power (in the form of the British) only to jump straight into bed with another commercial colonizer in the form of a company which to all intents and purposes remains under the control of the Singaporean government. Public opinion in Hong Kong was reportedly very antithetical to the concept of HKT falling into the hands of a bidder from Singapore, so much so that some local bankers describe the SingTel bid as having been a non-starter, for political reasons, from the outset.

Beyond the political intrigue surrounding the acquisition, its significance is that it was Asia's most unequivocal statement to date that the equity of internet companies has emerged as a valuable and real acquisition currency.

In this respect, most agree that the transaction even eclipsed the union of America Online (AOL) and Time Warner, given that AOL had established a clear track record in the new economy long in advance of its deal.

Indeed, some local bankers point out that in the case of PCCW and HKT the acquirer's equity served as an even more valuable currency than in the precedent established in the US market. "I am astounded," says one, "that C&W agreed to value the shares it was being offered at something like HK$23 per share when PCCW was trading at HK$25. This compares with Time Warner which valued AOL shares at a discount to where they were trading of about 60%. For some reason, it seems that C&W doesn't think the PCCW share price is in danger of coming off much, which is surprising."

In fact, the structure of the deal and the way that C&W has chosen to take payment is a very strong indication that they are indeed concerned about the longer-term value of the PCCW paper. As long as PCCW stock stays above HK$18.62, then in C&W's best case the company will receive around US$11.3 billion in cash plus 11.2% of PCCW. If the share price falls below that, the cash element falls sharply.

C&W is also offering to sell the paper it will receive at a price well below the market price at the time of the deal's announcement - that price being its breakeven on a cash plus shares deal versus a share only deal. C&W does not want to keep too much PCCW paper not just because it is fearful about price falls. It also wants to account for its stake as an investment so that it can hold it at book value (again see

The Financing of PCCW's bid for HKT, say bankers, was also significant because it included the largest syndicated facility ever launched in the Asian Pacific Region. The US$12 billion loan portion of the Financing was arranged and underwritten by Bank of China, BNP Paribas, HSBC and Barclays, and was split into a $3 billion 90-day loan and a $9 billion one-year facility, part of which carries an extension option for two years.

According to Grace Tam, managing director of global loans at Barclays Capital Asia in Hong Kong, the $3 billion tranche, which is backed by cash collateral, is expected to be repaid as soon as PCCW's acquisition of HKT has been completed. Tam expects the larger tranche to be refinanced well before maturity, via a combination of the equity, bond and conventional loan markets.

Bankers in Hong Kong believe the PCCW loan indicates the evolution of a more efficient market for leveraged Financing which will support consolidation in the telecoms, media and technology (TMT) sector in Asia. "The PCCW deal shows that lending philosophy among banks is moving away from its traditional model in Asia and Hong Kong," says Tam at Barclays. "Because of the perceived value of real estate in this region, the majority of loans tended to be based on Fixed assets, and above all on property. Now we are seeing lenders increasingly prepared to lend against future cashflows to companies with healthy and solid business strategies. I think we will see much more lending of this type in the future, given that so many potential borrowers in the region have very strong asset bases and are very modestly geared."

A centre for capital raising

Hong Kong's Growth Enterprise Market (GEM) seems poised to emerge as the regional stock exchange for high technology newcomers. As with other junior or secondary exchanges, the principal attraction of GEM for issuers is that the listing requirements are far less onerous than those which govern main board listings. The most important of these is that companies do not require a track record of profits.

GEM was officially launched at the end of November, when Timeless Software and China Agrotech Holdings raised the curtain for the new market with a brace of hugely oversubscribed IPOs which surged to First day premiums of 80% and 60% respectively. By the middle of March, 14 companies had listed on Hong Kong's new exchange bolstering its market capitalization to HK$83.8 billion. "Three months ago," says KS Lo, chairman of the GEM listing committee, I was telling the media that by the end of 2000 I expected us to have about 100 listed companies with a total market capitalization of HK$100 billion. I now believe we can revise those expectations, because based on the applications we have already received from companies we are now expecting to reach a market capitalization of HK$125 billion by the end of the second quarter. By the end of the year I think we can expect to reach at least HK$200 billion."

In part that confidence reflects the number of domestic companies which are lining up to list on GEM. In part it also reflects the number of enquiries which Lo has already received from companies outside Hong Kong - mirroring the experience of Germany's Neuer Markt which has now attracted listings from companies in Austria, Switzerland, Israel and elsewhere. "Recently a leading Asian internet company indicated that it wanted to list on GEM," says Lo, "and we have also had enquiries from companies in south-east Asia. Our original target was to establish a foundation for capital formation for technology companies in the Greater China region, namely Hong Kong, Taiwan and China. But suddenly we are being approached by companies from throughout Asia which do not have sufficiently developed home markets in which to raise sizeable amounts of money."

An Asian Nasdaq

Bankers confirm this. "Many of our regional corporate clients outside Hong Kong are looking at the possibility of listing on GEM, so it has been a very positive development not just for Hong Kong itself but for North Asia as well," says Michiel Steenman, head of Asian capital markets at Jardine Fleming in Hong Kong.

At Lehman Brothers in Hong Kong, head of Asian equity capital markets William Bowmer says that the distribution of some recent IPOs on GEM demonstrates that the market has been quick to establish international confidence.

In the recent IPO of, for example, which Lehman led alongside BNP Paribas, Bowmer says that although the majority of demand came from Asian accounts, in terms of quality demand was skewed more towards US institutions, even though there was no offering of the issue on Nasdaq. "As a result we ended up allocating more to the US than to Asia or Europe," he says, "with about 40% going to the US. That is interesting because it shows that the local markets are here to stay and that GEM has already overcome much of international investors' initial scepticism that it would be a market predominantly attracting second-tier companies."

Perhaps the most important by-product of the launch of GEM is that is has opened up a much quicker and more cost effective alternative to Nasdaq - which Lo sees as GEM's key competitor - than has traditionally been available to regional high-growth companies.

At Deutsche Bank in Singapore, Rajeev Ahuja, says that part of his team's initial focus in Asia was inevitably geared towards guiding regional issuers towards the Nasdaq market. "But what we have seen over the last three or four months is that a whole new high-technology Asian capital market is evolving here," he says, "which has led us to thinking about whether or not markets such as GEM and Sesdaq in Singapore are going to emerge as the resident markets for Asian hi-tech issuers."

Lo is quick to explain why GEM could replace Nasdaq for high-growth companies in Asia: the US market is domestic - US listings account for 95.2% of Nasdaq's capitalization and for 96.1% of its trading volume. And 13 of the 19 Hong Kong and Chinese stocks listed on Nasdaq underperformed the Nasdaq Composite Index in 1999 and 16 of the 19 have a lower turnover ratio than the average for the index.

And there is a cost issue. "American investment banks always like to tell their clients that a Nasdaq listing is great," he says. "Why? Because they charge a 7% commission for arranging a Nasdaq IPO. On GEM the commission is only 3%."

The other advantages GEM has over more established rivals are more controversial. In particular, critics argue that listing requirements are too lax. In the early stages of GEM's development the number of offerings that fell below their issue price raised concerns about the quality of listed companies. Potential mis-use of proceeds generated from IPOs was also a concern. GEM is still making concessions to newly quoted companies in the form of substantial waivers to its listing requirements which were drawn up last year as a means of maximizing investor protection.

Worse still, say critics, the exchange seems more willing to grant concessions to powerful local companies than anyone else - above all to the Li Ka-shing empire and to Sun Hung Kai.

Take the two important concessions made in the IPO of The First allowed for the share option component of the company's share capital to be raised from the usual limit of 10% to 50%, while the second reduced the lock-up period for management shareholders from the prescribed two years to six months.

At least one banker says he is certain about why these waivers were made in the case of and why a number of other waivers have been granted to several IPO candidates on GEM. "It's simple," he says. "GEM had to grant these waivers or the companies in question would have gone to Singapore instead."

Lo makes no effort to hide his frustration at comments such as these. "That's not true at all," he counters. "And in any event our major competitor is not Singapore but Nasdaq. But I can tell you, categorically, that no preferential treatment was been given to or to any other company that has listed on GEM."

Concessions to the new reality
On the subject of the relaxation of the options limit and the lock-up period, Lo says that was not the First and will not be the last company to have enjoyed these waivers, and that the original rules were drawn up at a time when GEM's authorities could not have foreseen the boom in demand for internet-related issues.

On the other issue of lock-up periods, Lo appears to suggest that in retrospect the GEM simply did not think through the implications of this restriction sufficiently in advance of the market's launch. "Quite frankly," he says, "which management shareholder is going to agree to having his shareholding locked up for two years when the internet world may be upside down in six months'` time?"

By late November, says Lo, GEM and the SFC had already recognized that the continued insistence on this regulation would only serve to drive more potential listings to Nasdaq. As a result, almost as soon as it was open for business it was announced that the exchange would be permitted to consider waiving applications, reducing the moratorium period "if it was satisfied that the management shareholders were able to demonstrate a high level of commitment to the long-term development of the company's business."

So no concessions at all were granted to the Li Ka-shing empire when it listed

Well, not quite, Lo concedes. tom was allowed to take up "8001" as its stock code number which, apparently, it was believed would help investors remember the company more easily.

Lo says that even this scarcely amounted to preferential treatment, given that the company agreed to pay US$100,000 to charity in exchange for the number.

The dotcomming of Asia's SMEs

Keong Saik Road in Singapore is not noted as a hotbed of technological research. Taxi drivers ferrying single businessmen to this narrow street in the centre of Chinatown wink conspiratorially at their customers, reassuring them that the girls in this red-light district are among Asia's most desirable.

However, as rents here are a fraction of those in the skyscrapers of Shenton Way, it makes a convenient and economic location for a start-up internet company. Today Keong Saik Road, tomorrow the world, is clearly the vision of Douglas Stevenson Ng, who in 1996 incorporated The Active Idea Company (TAIC), which describes itself as a "forerunner in a unique market niche which we call innovative portal technology". The brief biography of Ng that TAIC includes in its promotional material says that this "technopreneur" - as Singaporeans insist on calling individuals like Ng - "aims to build an international organization, after which he plans to retire at 35 and become a business angel to groom new companies to IPO."

For the time being, however, he is happy enough to continue grooming his own company, using the restaurant next door as his boardroom, with the aim of breaking even in 2001 and, in the same year, listing TAIC on the Singapore Stock Exchange and possibly even on Nasdaq. By the same time, Ng says that he believes his headcount of staff will have risen from 22 today to 60, which compares with just seven in July 1999.

The fact that Ng is able to set his business such ambitious targets at all is a telling commentary on the changing environment for Singaporean businesses. "Two years ago there was zero finance available in Singapore for small internet companies such as this one," says Ng, adding that until recently it was even prohibited for budding entrepreneurs to establish companies based in their own homes.

Today, says Ng, banks are far more supportive of start-up companies, while he adds that he knows of at least 27 venture-capital firms that are actively pursuing internet-related investment opportunities in Singapore.

More important, as far as Ng's business is concerned, is that the Singaporean government is actively and enthusiastically promoting the use of the internet from a grass-roots level upwards. The main driver behind this promotion has been the government's "Singapore One" project, which is officially described as a "national initiative to deliver a new level of interactive, multimedia applications and services to homes, businesses and schools throughout Singapore".

According to Glenn Lim, an associate at TAIC, within this sub-sector of businesses the Singaporean government is most committed to giving small and medium-size enterprises (SMEs) a helping hand in ensuring that they are sufficiently wired up to compete on a global stage. He adds that the government has identified some 24,000 SMEs that will qualify for state-funded support in hooking them up to the worldwide web, and as TAIC describes one of its principal activities as "dotcomming SMEs" this initiative will provide the company with a tailor-made addressable audience.

Allied to the government's drive towards putting virtually everybody and everything in Singapore on-line, bankers say that wholesale and complementary reform is under way in the Financial services industry also aimed at improving the international competitiveness of the Lion City. "Singapore is a very different place to what it was three years ago," says one Hong Kong-based banker. "Look at what's happening at DBS, for example, which has recently appointed a non-Singaporean from JP Morgan as its new chief executive. It is highly un-Singaporean for an organization like that to appoint a foreigner and he is working hard at changing DBS from being a bureaucratic agency of the government into a real go-go regional player."

For its part the Singapore Exchange (SGX), as the merged stock and derivatives exchanges are now collectively known, is also showing a new-found Flexibility to ensure that the island does not successfully spawn new hi-tech companies only to see them launch their IPOs overseas. The loudest wake-up call for the exchange came in February 1999 when Pacific Internet, the local provider of internet access and internet services in the Asia Pacific region, chose to bypass the domestic stock exchange altogether when it launched its IPO on Nasdaq. In so doing, the company became Asia's First pure internet play to list on the US exchange, and the success of the transaction - which was oversubscribed some 30 times - alerted regional companies as well as stock exchanges to the depth of overseas demand for fast-growing internet stocks. Some 70% of the Pacific Internet IPO was placed with US investors, with about 15% going to accounts in Europe and the balance to institutions in Asia.

"When we made the decision to go to Nasdaq instead of Singapore in the middle of 1998," explains Chiam Heng Huat, Pacific Internet's finance director, "it was very clear that valuations for internet companies were much higher in the US than they could expect to be in any of the regional exchanges. At the time US investors were clearly far better informed and much more appreciative of the potential of hi-tech stocks, meaning that we could achieve a better valuation on Nasdaq than in Singapore and hence raise a lot more capital." Chiam acknowledges that today this situation has changed, and that a further round of equity raising some time in the near future could include a listing in Singapore.

Pacific Internet's decision to head for Nasdaq prompted the SGX to overhaul the listing regime in Singapore. Most important for companies in the new economy was the dismantling of the regulation which insisted that new entrants came with a track record of profits.The First company to take advantage of the new regime, in November 1999, was the internet voice communications company MediaRing, which had posted a pre-tax loss in 1998 of S$5.7 million. Local investors starved of exposure to internet plays were clearly untroubled by this track record, with the MediaRing IPO led by SG Securities and DBS Bank oversubscribed by almost 43 times. Priced at S$0.53 a share, MediaRing closed after its First day of trading at S$1.50 .