Digitel Group, an applications service provider, plans to raise up to HK$110 million ($14.1 million) in an intital public offering on Hong Kong's Growth Enterprise Market. The funds will be used to research and develop web-based applications and software, enhance the group's internet infrastructure, invest in potential partners and create a representative office and research facility in Guangzhou.
Hong Kong-based Digitel will sell 100 million shares for between HK$0.95 and HK$1.10 each. The company presented to investors in Hong Kong last Thursday and this week is doing the same in Singapore. William Wu, head of corporate finance at lead manager e2-Capital, says the book was already covered in Hong Kong. "Now it's just a question of how many times it's oversubscribed," he says. The company will price the issue on 5 July and trading is scheduled to start 12 July.
Digitel's move comes as an increasing number of companies return to the public markets after taking fright following the global decline over the past two months in technology shares. Daum Communications of Korea, iAsiaWorks of Hong Kong, India's Mahanagar Telephone Nigam and telecommunications company Davnet of Australia are all planning listings either in Hong Kong or the US within the next couple of months.
In the last two weeks, four companies have listed on GEM: Computech Holdings, a developer of banking computer software; Excel Technology International, a software solutions provider; Phoenix Satellite Television, a producer of Chinese language programmes; and Intcera High Tech Group, a maker of components for fibre-optic connectors. Others, such as Rediff.com and Silverline Technologies of India and telephone company China Unicom, have listed in the US.
"Companies that originally wanted to go for market capitalization of $2 billion are now coming to realize they're going to have to be satisfied with $500 million," says K.S. Lo, chairman of GEM's listing committee. "We're seeing more companies coming back to the market at more realistic prices." Lo says 77 companies have applied to list on GEM, of which 21 have been approved. Normally there are 10 to 12 approved companies in the pipeline. The backlog is now beginning to move through, he says.
Digitel's business comprises systems integration, applications solutions and internet service. Right now the biggest part of the business is systems integration, which accounted for 87% of the company's revenue in 1999. The division engineers and integrates broadband multimedia communications networks for power companies in China and Hong Kong.
Now the company plans to beef up its broadband internet access and application services businesses. The applications, or ASP division, called corp2net.com, aims to provide outsourced internet services such as web hosting, virtual desktops and e-mail for small to medium-sized businesses. The ISP unit, called igreatlink, aims to provide private data networks, broadband internet access and other services.
The expansion is timely. According to International Data Corporation (IDC), an independent research company, the Asian ASP market will grow to $70 million by 2004 from just $2 million in 1999. Globally, the ASP market is expected to grow to $27 billion by 2003, according to Forrester Research. ASPs make money by offering to host, manage and rent access to applications from a central data centre, which means individual companies do not have to invest in their own information technology infrastructure.
IDC estimates the total IT outsourcing market in Asia will grow to about $10 billion in 2004 from $4.8 billion in 1999. Existing Asian ASPs include: Acer and Computer Associates - which created a joint venture to provide business software applications to small and medium-sized companies; Peakhour.com.au - an Australian ASP currently expanding into Asia; iAsiaWorks - which is planning to list its shares soon on Nasdaq; and Asia Online - currently privately held.
"We believe that in the longer term, many companies will progressively turn to specialists to help them maintain, install, and upgrade their technologies," say Goldman Sachs' analysts in a recent report. "The primary beneficiaries of this trend will be ASPs."
Digitel posted a net profit of HK$8.7 million ($1.1 million) in 1999, up from HK$5.5 million in 1998. Revenue rose to HK$42.7 million in 1999 from HK$34.1 million in 1998. On 30 April 2000, the company had borrowings of about HK$24.5 million, of which bank overdrafts represent HK$400,000, receipt loans represent about HK$12.8 million and instalment loans about HK$11.2 million. It has obligations under finance leases of about HK$100,000. Of the total borrowings, about HK$15.1 million in due within one year, about HK$2 million is due between one and two years and about HK$7.4 million is due between three and five years.
The company hopes to combine its expertise in network integration with new partners in the applications and internet services businesses to create a one-stop shop for businesses looking to put their operations online.
"When you talk about internet companies it's just like the goldmining rush," says Wu. "The ones who make the money are the ones who make the goldmining tools. Digitel is an infrastructure company that provides system integration and the other tools companies need to get online."
After the placing of shares, Lit Ceong, a group of power development and telecommunications companies, will hold 64.9% of the company. Other initial management shareholders will hold 10.3% and the public will hold 24.8%. Lee Chuen Bit, chairman of the Digitel, is a director and co-founder of Lit Cheong. Hung Hin Cheong, the group's vice chairman is also director and co-founder of Lit Cheong. Lit Cheong is Digitel's single biggest customer.
The Digitel sale is being manged by e2-Capital, First Shanghai Capital Corporation and Kingsway SW Securities.