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JULY 21, 2000 VOL. 26 NO. 28 | SEARCH ASIAWEEK

Playing the IPO Game
Here's a thought: Short Internet stocks on the very day of their initial public offerings. It's one way to beat the street

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, both of which are trading below their offering prices. (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 "Don't quote me on this, but 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, 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:

"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"

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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