21, 2000 VOL. 26 NO. 28 | SEARCH ASIAWEEK
the IPO Game
a thought: Short Internet stocks on the very day of their initial public
offerings. It's one way to beat the street
By ASSIF SHAMEEN
A tech fund manager from the U.S., a firm believer in the Internet revolution,
recently crisscrossed Asia talking to analysts, managers of Internet companies
(both listed and unlisted) and other investors to get a grasp of Asia's
online prospects. The fund manager has a huge bundle tens of millions
to invest. From the trendy bar districts of Jalan Mohamed Sultan
in Singapore to Lan Kwai Fong in Hong Kong to Apkujong in Seoul, he sipped
drinks with just about everybody in the Internet business. After the end
of a two-week swing through seven Asian countries, he returned home and
told his boss that he'd found the perfect way to make money in Asia's
Internet sector. Since Web outfits were mostly me-too operations with
copied ideas and little new technology and since 90% of Asian dotcoms
will fail, the best way to make money is by shorting the region's Internet
stocks on the day of their initial public offerings.
I have heard several versions of this story from analysts, fund managers
and fellow journalists and have no reason to disbelieve its authenticity.
After all, the rationale is simple: Even though it's hard to pick winners
this early in the industry cycle, your chances of picking losers are incredibly
good as the dotcom dead pile up. By quickly shorting Internet IPOs
where short-selling is allowed, of course you simply increase your
chances of making money.
Internet companies in Asia are eager to list for three reasons. First,
they want to get the highest possible valuation to keep their operations
going. Second, they need a currency stock, that is to finance
the acquisitions that will help them grow. Third, their original venture
capitalists and angel investors, who believe greed is good, are getting
spooked by the dotcom slide. Pre-IPO investors who came in at high valuations
want the company to list at even higher ones.
Most of Asia's recent Internet IPOs have pretty much been disasters. Take
some of the better known Singapore listings, SPH AsiaOne and Horizon.com,
both of which are trading below their offering prices. MediaRing.com (which
is into Internet protocol telephony) is selling slightly above its IPO
price, mostly because of a 35% surge last week on rumors of a takeover
or strategic partnership.
Things aren't any better in Hong Kong, especially for tech stocks on the
Growth Enterprise Market (GEM). Almost all of the 30-odd stocks on the
new bourse are trading below their IPO price. Among those three or four
bucking the trend: Hong Kong-based portal tom.com. "Don't quote me on
this, but tom.com has a big Li Ka-shing premium attached to it," says
one Hong Kong-based fund manager, who doesn't own the stock but wishes
he did. With Li Ka-shing, Hong Kong's richest and most powerful figure,
backing the unimpressive portal, investors know that there will be plenty
of money to burn and plenty of reasons to keep the company going (not
losing face being one).
So forget fundamentals and cash flow when the Internet stock has a brand
name like Li behind it. In Singapore, the closest thing to a magical moniker
is a connection to a big company. That's why most analysts I have spoken
to believe SPH AsiaOne, which debuted at 60 Singapore cents a share nearly
two months ago, is hovering around 50 cents now, when it is actually worth
no more than half that. Fund managers figure AsiaOne is selling for 65%
or so above fair market value because it is backed by the huge, cash-rich,
newspaper monopoly, the SPH Group.
Among Asia's most successful Internet IPOs are those listed on the Nasdaq.
Many analysts had predicted that the Chinese portals, which had to separate
their mainland content from the rest of their business in order to get
Beijing's permission to list, would bomb in the new dotcom-unfriendly
environment. But leading Chinese portal Sina.com, which went public when
Nasdaq was in a free fall, has held up pretty well, at one point even
surging beyond 100% of its IPO price before correcting a bit. Sina's counterpart
Netease, a community-based portal which listed last week, wasn't that
successful. Its stock slid 19% on the day of its listing short-sellers
take note though it has recovered a bit since. This month's big
Nasdaq IPO: Sohu.com.
"I reckon there will eventually be only five or six big portals in Asia
outside Japan," says Sunil Gupta of Morgan Stanley. "A couple of them
will be from China. So out of Sina, Sohu, Chinadotcom, Netease
maybe two would survive. Then there would one big portal in Korea, one
in India, and maybe one elsewhere in Asia." Of the global survivors in
the region, Gupta believes "one would be Yahoo! and another could be msn.com."
The Internet mania reminds me of the infrastructure craze in Asia a decade
or so ago. As long as your company had a toll road or was building something,
anything, your stock just rocketed. Few investors bothered about where
the toll road was located or how accurate the revenue projections were.
Then reality set in and Asia went into shock. Morgan Stanley's Gupta told
me the other day, "Investors are waking up to the reality that whether
it is the Internet or anything else, business models do matter. Cash flows
are important." Tell that the investors who subscribed to Asia's Net IPOs.
Those who shorted them already know.
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