Asia's technology stocks

Asiaweek
Issue 18th February 2000

After the Bubble
Asia's technology stocks are defying gravity. Which companies will
survive - and thrive - when the mania ends?
By CESAR BACANI and ASSIF SHAMEEN

Who wants to be a millionaire? Everyone in Hong Kong, it seems. The
American TV phenomenon has not hit town, but you can watch a splashier
show at the stock exchange. Punters are betting big on unremarkable
companies that they hope will be transformed into Internet plays. It
has happened to three stocks in the past six weeks. Last month,
Japanese Net incubator Softbank took over property firm Cheung Wah
Development. Those who bought the stock at HK$0.056 reaped instant
wealth when the price leaped 18,650%. On Feb. 1, U.S. investment
companies H&Q Asia Pacific and JH Whitney announced that they were
buying Acme Landis, a seller of bathroom fixtures. The share surged
2,643% to HK$10.70, from just HK$0.39 when Acme was suspended from
trading Jan. 25.

The latest millionaire-maker is likely to be carton manufacturer
Cheong Ming Holdings. Its stock rose 33% to HK$0.97 before the company
asked that trading in its shares be halted Jan. 31. (The voluntary
suspension was still in force on Feb. 9.) Sega.com, a subsidiary of
Japanese videogame maker Sega Enterprises, is said to be negotiating
to buy Cheong Ming and turn it into an online videogame seller. Last
week, the buzz focused on cordless-phone maker IFTA Pacific Holdings.
Japanese telecommunications giant NTT is rumored to be looking at the
company. The hope: a takeover that will lead to a makeover into
something like Net icon Pacific Century Cyberworks, which closed at
HK$22.05 Feb. 9 - up more than 20,000% from April last year, when
young technology tycoon Richard Li took over the original company.

The Great Asian Bubble? You bet, says Hong Kong-based fund manager
Marc Faber, who describes what is happening in Japan, South Korea,
Singapore and other parts of Asia - not to say the U.S. - in the same
scary terms. "The tech bubble of today makes the [17th-century mania
for] Dutch tulips look like value investments," says the contrarian,
who is popularly known as Dr. Doom. Many of Asia's high-flying tech
stocks are certainly losing tons of money. The few that are
profitable, mostly computer and semiconductor makers, are trading at
towering price-per-earning ratios. For all that, stock prices continue
to defy gravity after brief corrections. America's tech-heavy Nasdaq
has just notched its umpteenth record close, and is now up 100% over
14 months. The Asiaweek/CNN Internet Index, which tracks 20 Asian tech
companies, has surged 134% since July last year.

But other analysts are more positive. "Tech stocks in Asia may appear
to be overvalued, but that's because some people are using the old
yardstick to measure the high-growth stocks of the New Economy,"
argues Bhavin Shah of CS First Boston in Hong Kong. What is fair value
anyway? asks Hong Kong-based Boris Petersik of Donaldson, Lufkin &
Jenrette. "It's a moving target. What was fairly valued last night
looks cheap this morning" as new numbers prompt revisions of growth
expectations. No one knows to what extent the Internet and other
technological advances will change the global economy. But everyone
agrees that there will be changes in the way we do business and make
money. Just last week, the U.S. announced a 5% growth in productivity
in the last quarter of 1999, stunning proof that technology can
squeeze more value from existing resources.

Asia has yet to experience such productivity leaps. But they will come
as traditional businesses turn to the Internet to source supplies,
sell products, track orders, deliveries and accounts, keep in touch
with customers and employees. Such efficiency should boost bottom
lines - and stock prices. Companies will be calling on software
developers, consultants and systems integrators to help them make the
most of the Net. And what about the New Economy start-ups, the
Internet service providers that connect people to the Web and each
other via e-mail, the portals that pipe in information and
entertainment, the online auctioneers, booksellers, newspapers, travel
agents, stockbrokers? Similar companies in the U.S. like AOL are
already in the black. Says Bernard Tan, a technology analyst with
Merrill Lynch in Singapore: "The risk of not being in technology
stocks today is far higher than being in tech stocks."

For the serious investor, the challenge is to buy and hold only tech
companies that will survive and thrive even if the bubble bursts.
There is already a bewildering array of choices, but the Asian tech
universe will expand even more this year as some 200 initial public
offerings are expected in the Internet sector alone. So how to choose?
It helps to first impose order on this galaxy. Lim Kok Boon, who runs
CMG First State Investment's Asia Innovation & Technology Fund,
divides technology stocks into two segments: traditional tech
companies like Samsung Electronics and Taiwan Semiconductor
Manufacturing (TSMC), and newer concept stocks like Softbank and
Chinadotcom. The traditional segment boasts an earnings track record,
but will not yield 3,000% returns. Concept companies can bring
stupendous growth. "But the attrition rate among the purely conceptual
stocks is going to be very high," warns Lim.

He is partial to the traditional segment. "Demand in this sector is
outstripping supply, particularly in semiconductors, where capital
expenditure is very high, which presents a huge barrier to new
entrants," says Lim. One favorite: Samsung Electronics, Korea's most
profitable company. Emerging from the Asian Crisis leaner and meaner,
it expects to earn $1.3 billion this year - up 60% from 1999. Samsung
has nearly 20% of the global market for dynamic random access memory
(DRAM) chips. In a widely applauded diversification move, it has also
become a global player in wireless phones and TFD-LCD screens. Another
Korean chipmaker, Hyundai Electronics, is benefiting from renewed
demand, which is expected to grow stronger. "We are only in the second
year of the cycle that could last four to five years," says Petersik
of Donaldson, Lufkin & Jenrette.

But aren't Asia's semiconductor stocks looking very expensive?
Petersik says their U.S. counterparts have gone up 350% in the past 16
months. "If an Asian semiconductor company like TSMC or UMC, which are
globally competitive foundries, are up less than 350%, they have
underperformed their peer group," he argues. In five years, he
predicts, TSMC and UMC will be bigger and far more competitive than
they are now. The world's largest dedicated semiconductor foundry,
TSMC recently grew even bigger after acquiring fellow Taiwan maker
Worldwide - it now accounts for 40% of the global foundry market.
Petersik also favors Via Technologies, a Taiwan microprocessor and
chipset maker taken to court by Intel for copyright infringement.
"Intel only sues companies that may become formidable challengers," he
says.

There is no shortage of other good buys in the hardware group, among
them Advantest and Tokyo Electron, which make equipment for
semiconductor companies, cellular-phone producer Kyocera and Taiwan
notebook-computer manufacturer Compal. Software is another favored
sector. "Investors are increasingly seeing companies like Satyam,
WIPRO, Infosys and VisualSoft as global software companies rather than
Indian companies," says CS First Boston's Shah. "These are globally
competitive companies." Lim says the Indian software players have been
seen as overvalued. "But they are growing earnings very rapidly, and
there is no reason why they should not have valuations similar to U.S.
software companies." The Y2K millennium bug scare brought in a lot of
business. That has ended, but strong demand for Internet-enabling
software and consultancies has taken up the slack.

That's the traditional segment. What about those risky concept stocks?
They can be categorized into four broad groups. Incubators invest in
an array of concept stocks at an early stage, getting in cheaply and
exiting with huge premiums when (or if) the start-ups make a
successful public listing. Business-to-business (B2B) companies focus
on linking buyers and sellers in various industries.
Business-to-consumer (B2C) firms offer individual customers services
like search engines, auctions, plane tickets and other consumer goods.
Internet service providers - ISPs - connect individuals and companies
to the Net through dial-up modems and, increasingly, broadband
networks that allow rapid downloading of multimedia productions.
Internet software and hardware enablers specialize in readying a
company's systems for the Internet.

Incubators are seen as having the strongest case for post-bubble
survival, partly because they have made too many bets to go wrong
everywhere. Mahindra Negi, Merrill Lynch's Japan Internet analyst,
likes Softbank and Hikari Tsushin. By far the world's top Internet
investment firm, Softbank bought stakes in Yahoo and other Nasdaq
Internet companies before they hit it big. Softbank also has exposure
in more than 100 international start-ups that have yet to list. On
paper, it is already the second most valuable company in Asia, with
market capitalization of $134 billion - higher than premier U.S.
incubators CMGI and ICGE. (Fellow Japanese corporation NTT Mobile
DoCoMo has a market cap of $333 billion.) Hikari Tsushin is valued at
$62 billion. Unlike Softbank, it focuses mainly on Asian enterprises.

Analysts also like Pacific Century Cyberworks (market cap: $18
billion), despite the huge run-up in its share price. "It will
probably have to finetune or redefine its business plans as it moves
along, but the company has the expertise and the people to move
forward," says Greg Feldberg, an analyst at Indosuez W.I.Carr in Hong
Kong. Pacific Century is an incubator-plus - it has stakes in U.S. and
Asian start-ups, but it is also building a pan-Asia broadband network
and a technology center and housing complex in Hong Kong. "Richard Li
has assembled the best, most talented group of people in an Asian
company outside Japan," says Ilyas Khan of online investment firm
techpacific.com. "There are better individual people elsewhere, but as
a group, no one comes close to Pacific Century."

Given the inapplicability of traditional measures like p/e ratios,
analysts are turning to intangibles such as quality of management in
picking concept stocks. Other benchmarks include business plans and
financial resources. "If it has $300 million in the bank and a $2- or
$3-billion [stock market] valuation, the company can buy
fundamentals," says Antony Yip, co-founder of Chinese portal
MyRice.com. "That is essentially [portal] Chinadotcom's strategy."
After listing on Nasdaq last year, Chinadotcom accumulated a hefty war
chest and now boasts a $3.5-billion market capitalization. "It is
turning out to be a much better company than anyone could have
imagined when it first listed," says Yat Siu, CEO of Hong Kong's
Outblaze, which sells software to run portals. "Not only has it made
all sorts of strategic investments and gotten its footprint in as many
places as possible, it has also hired some of the best people."

The number of visitors an Internet site attracts is an obvious
benchmark. "Everyone is now trying to spend their way into the
market," says Yip. Portals that already have heavy traffic have the
edge. "Sina, Sohu and Netease in China, Kimo and Yam in Taiwan will
still be around when the bubble bursts," he says. These companies plan
to list on Nasdaq this year. Singapore Internet service provider
Pacific Internet, which trades on Nasdaq, looks like another survivor.
"It has enough money to last 15 years," says David Kim, a Softbank
executive in Hong Kong. Other analyst favorites include Korean telecom
firm Dacom, which owns a leading ISP, and Nasdaq-listed Indian ISP
Satyam Infoway.

No Asian B2B company has yet listed, though at least ten are seen as
likely candidates this year. They include Softbank-backed Alibaba. com
in China, Hutchison E-Commerce in Hong Kong and Advanced Manufacturing
Online in Singapore. Because Asia is a manufacturing hub, B2B stocks
can become more successful than B2C companies that focus on e-commerce
for consumers - and have to contend with inadequate-to-non-existent
credit-card and postal-delivery infrastructures. Don't forget
Net-savvy media and entertainment companies. Two standouts: Singapore
Press Holdings and Malaysia's Star Publications. A third: Hong Kong's
Paramount Holdings, which is owned by Jimmy Lai, the maverick
publisher of bestselling Chinese-language publications Apple Daily and
Next magazine. "He knows what he is doing and has articulated one of
the clearest [Internet] strategies," says analyst Feldberg.

Telecommunication companies have also been benefiting from the
technology boom. "Many telcos have some sort of Internet exposure, but
that doesn't make them real Internet plays," says Feldberg. An
exception is VSNL, which controls a leading ISP in India - and is
currently trading at just 16 times last year's earnings. The analyst
favorites, though, are mobile-phone stocks. NTT DoCoMo is a clear
world leader. In Japan, it boasts 3.6 million subscribers to its
pioneering i-mode service, which allows users to send and receive
e-mail and surf the web through their mobile phones. Another favored
stock is Korea's SK Telecom, which has bought competitor Shinsegi.

Other good companies can still emerge. "The boom started about six
months ago," says Outblaze's Yat Siu. "This is the New Economy, and it
changes every six weeks. It is still defining itself." Of all the
evolving benchmarks for valuing concept stocks, he singles out human
resources as the key. "You need people who are dynamic and able to
reinvent themselves. This isn't like selling cars. It's more like
fashion. Some people know how to manage, how to follow through, how to
adapt to a constantly changing industry." You also need stock
investors who know that careful and intelligent buying is still the
best way to go.

- With reporting by Maureen Tkacik/Hong Kong
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