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November 30, 2000

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FEBRUARY 18, 2000 VOL. 26 NO. 6

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.

    ALSO IN ASIAWEEK
Cover: After the Bubble
Who will survive -- and thrive -- after Asia's Great Technology Stocks Bubble?

IPO
Awaiting a deluge of new Internet public offerings

List
Asiaweek sums up the stocks getting highest in the tech craze

Warning
Cautionary tales from Dotcom Land

  RELATED STORIES
ASIAWEEK
The Asiaweek/CNN Tech Index
Our index tracks the top internet companies in the region

Editorial
Asia's tech-stock boom is looking dangerously like a bubble

Intelligence
All Aboard the Dot.Com Express

Money & Investing
Riding the Tech Stocks

E-vesting
Taking Stock of Tech

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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