Tech rides again

A slew of Nasdaq listings from China/Taiwan are slated in the SMS, handset and online gaming spheres.

Following in the wake of Ctrip's massively successful IPO via Merrill Lynch in December and JPMorgan's Nasdaq listing of Webzen, a slew of other Asian tech-related listings on Nasdaq are now slated for the first half.

Ctrip - an interview with its co-founder and CEO will be published Monday (19th) - is the travel booking portal that managed to list on Nasdaq in December and saw its share price jump 89% on debut. Webzen, on the other hand, is a Korean online gaming company (see related articles also) that initially traded down 10.5% but is now back up above its offer price again.

The deals that are slated for the first half of this year could raise as much as $1.5 billion which would signal that 2004 is the year that tech returns to Asia. The Nasdaq listings are for companies in the online gaming, SMS and handset spaces.

The last time Nasdaq was overwhelmed by so many Asian tech ADRs was in 2000 when the tech bubble was in full froth. The last round of Nasdaq listings was triggered by the success of Chinadotcom's listing, which having both 'China' and 'dotcom' in its name ensured it had a very hot reception. Who could have guessed at the time that it would trade down from a peak value of $73.43 to a 39th of that ($1.86) at its low? Indeed, in the ensuing years it wasn't tech that did well, but some of the oldest of old economy industries - for example, Thailand's Precious Shipping has appreciated in value 41 times from mid-2000.

The difference between then and this latest tech wave is defined by one word: "profits". The current crop of companies have track records of profitability and are only approaching the market having proven the viability of their business model.

And as was proven last year by Netease and Sohu, SMS messaging and the related services are very profitable in China.

Linktone, Tencents, and are all looking to take advantage of investor appetite for this sector. The SMS space is vast and growing and the companies that have pioneered the sector benefit from a revenue sharing agreement with the key mobile telecom operators, namely China Mobile and Unicom.

They have created SMS services as diverse as prize-winning trivia games to services where messages are sent that contain football results. China has 185 million mobile phone subscribers and practically everyone uses SMS.

In the case of Linktone it showed the power of the formula when it won a contract from McDonalds to promote the restaurant chain in China during the 2002 World Cup by sending football scores and giving users the chance to win free burgers. On that occasion it generated six million messages on McDonalds behalf.

Linktone, which looks likely to come first with a sole-listed Nasdaq IPO via CSFB, was founded in October 1999 and has a very well trained salesforce that has focused its attention on Southern China, where typically the most affluent users are. Shanghai-based with 95 employees, the company's CEO is Raymond Yang, who spent a long time in the US telecoms industry and is a former president of the Tsinghua University Alumni Association on the West Coast of the US. The CFO is Mark Begert, who was formerly at Merrill Lynch.

Apart from the normal SMS messaging services and the ubiquitous ringtone downloads, the company has sought to move up the technology curve via games (via a multiplayer game from Taiwan called Endless Battle System) and through a mobile pet game which Linktone's website now claims to be its "stickiest and most popular application". The pet game is conceptually the same as the Japanese Tamagochi, a craze that swept the world several years ago among children and a disturbing number of adults and involved keeping the electronic pet alive by feeding it at the appropriate times. Linktone's version lets you have an animal on your mobile phone.

As its website points out: "These pets do more than simply remind their owners to feed and bathe them: They deliver news and other information, offer helpful advice to their owners, play games, find jobs, and even fall in love and have babies. There are fifteen different pets to choose from-everything from koala bears to penguins to rhinoceroses to dinosaurs-and each has a distinct personality and physiology that determines what kind of care it requires."

The necessity of quoting from the website is due to the fact that the company itself cannot talk due to SEC regulations. But like all of these SMS businesses, Linktone is thought to be profitable and with the Ctrip precedent will look to list on a multiple of at least 24 times earnings.

What the 'e' is will be key. Bankers familiar with the space speculate that the company received an offer from one of the China portals to sell the entire business for $100 million under a complex earnout structure. However, it is reckoned to have earned around $12 million in 2003 and one estimate has it making $20 million this year. CSFB will presumably try and price off the latter, which at 25 times would value the company at $500 million and see 20% sold in a $100 million deal.

Regarded as having bigger traffic in the SMS space is Li Ka-shing's which has hired Citigroup to spin off its messaging business and may try to raise as much as $150 million.

Likewise, is looking to spin out the New Palm SMS business it bought - which may be the first case in history of a Hong Kong listed company owning a Nasdaq-listed company.

Bankers reckon that possibly the most interesting of the four forthcoming deals could be Tencent, which has created a strong brand name in China and dominates the instant-chat-by-mobile phone space. It is backed by South African venture capitalist, MIH and was founded by Pony Ma, who tends to keep a low profile. One banker speculated it could be making $10 million or more of annual profit, and will look to do a deal of a similar size to via Goldman Sachs. Its subscriber base is not public but estimates this publication heard ranged from 10 to 25 million.

Apart from those mentioned above, there is also speculation that java-based mobile gaming companies Mtone and BBMF could seek to come to market.

At the moment there are between 40-50 companies in the SMS space in China, with most just operating in only one province, dealing with local affiliates of the major telcos. The companies that manage to IPO first will thus have the cashpiles and stock necessary to go round and buy smaller players, bringing some consolidation to the sector, says Matt Burlage, CEO of boutique, IRG.

He adds that investors like the fact that these companies are profitable and the China story is once again strong.

But as another banker noted: "There aren't many fund managers out there who spend much time SMS-ing and playing games on phones, so explaining the story will be one of the challenges for the lead managers."

And the question that most fund managers will have is how vulnerable are these companies to the whim of the limited number of telcos who are their clients? What, for example, if China Mobile just decided to stop the revenue sharing agreement and launch its own SMS content services?

Burlage says that telecoms companies haven't proven very adept at content management when they have tried in the past, although he admits that could change. The bigger risk he sees is that the telcos simply squeeze them on the revenue sharing agreements, which will hurt the margins of these companies.

Most of the SMS companies will seek to raise $150 million or less. Somewhat bigger will be the Nasdaq listings of the broadband online games companies, Shanda and Soft-World. It is reckoned that both will be around $300 million, with Shanda already mandated to Goldman and Taiwan's Soft-World currently rumoured to be courted by Citigroup, JPMorgan and Merrill Lynch.

Shanda is the major broadband onlining gaming company in China and is the biggest in the world in this space. Although there are no independently verifiable numbers, Shanda is reckoned to have 600,000 to 700,000 concurrent users playing its games at peak times simultaneously. As is explained in the related article about Webzen (below) and its Mu game, these users pay subscriptions and tend to be sub-30 year old males. The games tend to be designed in Korea and are roleplaying games that mix action with strategy and are usually highly addictive.

China has 13.1 million online gamers, and since broadband is required to play, they mostly do so not from their homes but cafes and gamesrooms.

In China, Shanda has done an excellent job with its salesforce of building a national distribution network of internet cafes and mom and pop PC gamesrooms through which these games can be played. It has also chosen good games with Legend of Mir proving a very "sticky" game, earning the number one rank in China.

Shanda has started developing its own games to avoid being a one-hit wonder, but one of the biggest problems its IPO faces is the legal disputes it is in with the Korean creators of Legend of Mir, Actozsoft, which sued Shanda for non-payment of royalties.

Shanda will have to sort out these legal issues ahead of the IPO, which is the main thing clearly affecting the timing. Shanda is, however, quite cash rich and settling with Actozsoft will be easier as a result. Shanda is 20% owned by Japan's Softbank which paid $40 million for its stake, and Shanda is reckoned to make $4 million of profit per month.

Shanda's distributor business model is highly profitable and is slightly different from Korean online games leaders NCSoft and Webzen, which develop their own games (Lineage and Mu respectively). Indeed, it is a business model that is replicated by Taiwan's Soft-World which is also looking to list.

Soft-World has built a good subscriber base in Taiwan through licensing the Korean game, Ragnarok (among others). The Taiwanese online gaming market is in fact bigger than Korea's and Ragnarok gets peak-time concurrent users of 292,000 with a NT$299 ($8.9) monthly subscription. Ragnarok has 2.3 million registered users.

The company is already listed in Taiwan and currently has a market capitalization of $280 million and a stock price that went as high as NT$152 and currently trades around NT$121, which is a PE of 17.4 times. The company makes an operating margin of 23% and has a return on equity of 26.4 %.

Will it move into game development (or even buy a game developer)? What is its China growth strategy? These will probably be the key questions to emerge when it seeks a Nasdaq listing, probably in the second quarter.

Going offline into the world of hardware, but staying with the Taiwan-China-Nasdaq listings, Merrill Lynch is also believed to have won the mandate for a $100 million Nasdaq listing for DBTel.

DBTel is a Taiwan listed mobile phone handset maker which has moved from the manufacturing of phones for others (principally Motorola) to selling its own branded phones in China, Hong Kong and more recently India. In the former, it uses Cantopop star, Sammi Cheng to market the brand and in India it says it wants 20% of the market for new handsets by the end of 2004. It is introducing 11 models in India with cheapest priced at only $100.

DBTel expects to sell 8 million phones globally in 2004.

Its Nasdaq listing will help to fund its expansion strategy and is expected in the second quarter. While the company has a $760 million market cap, it currently does not rank in the top 10 of handset manufacturers.

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