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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek

MARCH 31, 2000 VOL. 26 NO. 12

When Old Virtues Go Unrewarded
Singapore's Pacific Internet insists on being prudent - and its stock price gets pummeled
By ASSIF SHAMEEN Singapore


Munshi Ahmed for Asiaweek
"We will stick with our solid approach" says Lee

He heads one of Asia's leading Internet service providers (ISPs), but Singapore's Nicholas Lee sounds like the chief of an old-economy company. "We want to make money, not hype," says the Singaporean CEO of Nasdaq-listed Pacific Internet. "We have strong fundamentals. We have a good subscriber base and we are profitable. Yet our stock price continues to languish." He thinks he knows why. "We have an image problem," says Lee, who at 42 is considerably older than many of his Internet peers. "We haven't been very good at selling ourselves. We don't use buzzwords that the market wants to hear and we have tried avoiding the hype" - such as a big move into broadband, a service that Lee believes not very many Asians really want at this time.

It does not help that Pacific Internet has not swapped its shares for stakes in other Net companies, which is what other ISPs like Korea Thrunet are doing. "We couldn't do a lot of deals because there was a requirement for us to have at least 51% Singaporean ownership," says Lee. Pacific Internet is controlled by government-linked corporation Sembcorp. The restriction was lifted in October, but Pacific Internet has yet to announce a big buy. It lost a bid for OzEmail, Australia's No. 2 ISP, to newly listed Eisa, an Australian start-up controlled by two young immigrants from China. "Companies like Pacific Internet should have used their Nasdaq currency to expand and buy market share," says Pratik Gupta, an Internet analyst at Salomon Smith Barney in Singapore. "But just because they have not bought as much as Chinadotcom is not a big negative."

 
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Tell that to investors. On its first day of trading in February last year, Pacific Internet's share price soared 417% to $88. It closed at an all-time high of $94 two months later. The stock has now fallen 54% from its peak - it ended the trading day at $43.50 on March 21. "It's not an Internet company, just a boring old Singapore ISP," says one regional Internet analyst. Few investment houses now cover the company. Still, Pacific Internet has believers. Michael Ward, director of Florida-based International Asset Advisory Corp., is one of them. "They are misunderstood," he says. "Their stock appears to us as one of the few attractive Asian Internet plays with reasonable valuations. They have a solid base to build on. If I were them, I wouldn't be looking enviously at Chinadotcom."

Much depends on Pacific Internet's next moves. "We are the only real regional ISP in Asia-Pacific, with a presence in Singapore, Hong Kong, Australia, the Philippines, Thailand and India," says Lee. "We are expanding in Malaysia and China. We are also looking at Korea, Taiwan and even Japan. In two to three years, wherever you go in Asia, when you need Internet connectivity, you'd find Pacific Internet can give you that and more." The "more" is e-commerce. The company has launched a portal called PACfusion, which has an auction site and plans to offer Internet banking through a partnership with Standard Chartered Bank. (Be warned: It is not a very speedy site.) Lee is eyeing other telecommunications services: "We'd like to be able to offer international calls and be a player in third-generation mobile phones. Down the road, we might want to look at a fixed-wireless license."

But the business model is a tough sell with investors enamored of broadband and Internet content. Thrunet, which is also listed on Nasdaq, is flying high because its Korean broadband network will allow its subscribers to access not only the Internet but also full-length movies, TV shows and other bandwidth-hungry products. Another Nasdaq company, Chinadotcom, is a stockmarket darling because of its Chinese-language portals that offer news, financial information and other content. "I can get into broadband today if I want to and lose a lot of money," says Lee. "In the long run, I would need to give subscribers connectivity to broadband, but not now. And do I really need news and entertainment? On the Internet, content is free. I don't need to spend millions creating or buying a portal. I can just give my subscribers a link to the big search engines and news and entertainment sites."

Pacific Internet's game plan is to remain profitable while continuing to acquire narrow-band Internet-only subscribers across Asia, a customer base that can then be offered e-commerce products. Analysts expect the company to make $5.3 million on sales of $115 million this year (1999: $1.6 million on revenues of $57.3 million). But attracting new subscribers - and keeping existing ones - is getting more difficult. In Singapore, which is deregulating its telecommunications sector April 1, upstart Starhub Internet charges its customers nothing. The free service has signed up 200,000 subscribers - equal the number of Pacific Internet's paying customers - in just four months. Lee says his company will focus on quality services to counter the no-pay challenge.

In all, Pacific Internet has 300,000 subscribers across Asia. That is not a lot - Australia's Telstra has 450,000 customers in its home market alone, while Cable & Wireless HKT has half-a-million users in Hong Kong. Pacific Internet has signed up less than 45,000 customers in each of those places. "It's hard to compete against an incumbent telco," says Lee. "So we are entering emerging markets where we can build our brand name and a dominant market position as Internet access grows. We expect very rapid growth in Malaysia. Our partner there, Timedot Com, has the bandwidth and a unique fiber-optic backbone." Lee claims Pacific Internet is already the leading ISP in the Philippines with more than 20,000 subscribers. It has just set up in Thailand and India, and plans a rollout in China before the end of the year.

A quick way to build a subscriber base is to acquire other ISPs and e-commerce sites - and not necessarily with cash. Eisa got to buy OzEmail by swapping new shares valued at $155 million for the target company's stock. "I admit we joined the race for OzEmail a bit late and we were too slow," says Lee. He adds that Pacific Internet is ready to do big share swaps. "If I know that the Internet bubble would go bigger and bigger, I would have done a few big deals by now," says the CEO. "But everything is so expensive and everyone is fearing a Nasdaq collapse that we really don't see much value anywhere. There is so much crap for sale and people are asking so much for it that I dare not do it. Why would I want to buy crap even if I am not paying cash but just my shares?"

Isn't he being excessively prudent? His competitors may be buying inflated assets, but they are also paying for them with inflated shares. "We will stick with our solid approach," says Lee. "If that is to our detriment, so be it." In this he has the support of investors like Ward, who believes that organic growth is a better model for expansion. "A solid brand such as Pacific Internet can acquire customers at a more reasonable price," he argues. "The subscriber base it has built is a fantastic platform to turn page views into revenues." Sembcorp is also supportive. After failing to sell the ISP at a good price, it now says it will keep its 42.4% stake. "Sembcorp is a good parent," says Lee. "Since it is a government-linked company, we will never go bankrupt."

Perhaps so, but Pacific Internet will need to deliver on its e-commerce promise. "It is waking to the reality that its core business of narrow-band Internet access is slowly being commoditized," says Steve McKeever of Lehman Brothers in Hong Kong. "Narrow-band access is not the sort of business that is going to do well over the long-term in Asia," agrees Salomon Smith Barney's Gupta. "What Pacific Internet needs to do is to leverage its subscriber base to offer services like e-commerce." This steady turtle may yet reach the finish line ahead of the overextended hares, especially if there is a massive correction in Internet stocks. Or maybe not. When the rules of prudence, profitability and steady growth have been temporarily repealed, the virtuous may not even finish the race.

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