The love affair between investors and Asian internet stocks has soured - for now at least. Companies seeking to list their shares will find it harder, and many of those already on the market could collapse amid skepticism they will make a profit, analysts say.
"People's stupidity only goes so far, and that threshold has been reached," says Marc Faber, a Hong Kong-based investment advisor and editor of the newsletter The Boom, Gloom and Doom Report. "New issues will be much more difficult to place, and many that are in the pipeline won't go through at all."
Last month iMerchants, a Hong Kong-based electronic software and services provider, received a lukewarm response when its shares began trading on Hong Kong's Growth Enterprise Market, a secondary market designed for non-profitable companies. iMerchants' shares closed at HK$1.49 on March 31, their first day of trading, barely up from an opening price of HK$1.48. Earlier, Sunday Communications, a Hong Kong mobile-phone company, saw its shares fall below the issue price of HK$3.78 on the broader Hong Kong Stock Exchange market.
The lacklustre performances come amid a global decline in technology stocks. The technology-heavy US Nasdaq market fell 15.58% in March vs a 7.69% gain in the Dow Jones Industrial Average. The Hang Seng was down 2.27% over the same period. Investors were also disappointed by several high-profile initial share offerings, such as florist retailer 1-800-Flowers in the US and World Online International, a Dutch internet service provider. Investors in Asian internet stocks are similarly spooked.
"We've been advising our clients to reduce their holdings in technology stocks to a bare minimum," says Herbert Lau, head of research at Hong Kong-based brokerage house Celestial Asia Securities Holdings.
A more discerning market
That's not to say there will be no successful Asian internet listings. Investors will simply be pickier about where they put their money.
"I think the market is becoming more discerning, and it's increasingly concerned with where the money is going to come from," says Jonathon Brooke, an advisor at Wharton Investment Advisors, a hedge fund in Hong Kong. "If you've got good management, a good business plan, good broadband access that's cheap to the consumer and good content, then maybe you'll be a winner."
Those that fail to meet the more stringent criteria could find themselves with few avenues to pursue for alternative funds.
"Underwriters are taking a more cautious stand relative to their potential clients now, and even the venture capital funds will be very cautious, only picking the best and undervalued companies," says Lau.
For companies with little track record, a sinking share price and no sign that they will make money any time soon, the chances of raising more money, through public markets, high-yield debt, or private investors is slim. Without assets to borrow against, bank debt would incur prohibitively high interest rates, while placing unsecured convertible debt with private investors can also carry crippling interest rates.
"Because of the way the market works it is cheaper to go to the market than to any other source," says Kevin Randolph, chief executive of Asia Online, a holding company for a range of Asian internet services such as line-leasing, web design, advertising and e-commerce. Asia Online so far has avoided a public listing. The company has raised venture capital from Japan's Softbank, JP Morgan, GE Capital and other private institutions.
"We could have gone to the market last summer but I made a decision to be a real company," Randolph says. "There's no-one on my executive team under the age of 40."
A tough road
With such substantial backing, Asia Online should have few problems if it decides to list, analysts say. For others the road will be tougher.
"I think that of the pure portals and advertising revenue-based websites, 90% will have a lifespan of one year if they aren't able to raise new funds, and undercurrent market conditions that's going to be very difficult," says Lau.
Still, there is enough interest from investors to support internet companies as long as those companies can prove they have a viable business plan.
"I think there will still be demand for top quality companies," says Hani Abuali, an analyst at Donaldson Lufkin & Jenrette in Hong Kong.
"The recent volatility in the markets is a healthy process that is separating the real companies from the slew of 'internet companies in disguise'. Remember, the internet is still at a very early stage of development in Asia."
April 4, 2000
