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Chinese
Portal Stocks - Taming the Remaining Dragons
The land
of the Red Dragon got a very interesting new Yankee visitor
earlier this week in the form of America Online. Which
means -
Good news
for Chinese consumers.
Great news
for AOL Time Warner investors.
Really bad
news if you have to compete with this multimedia monster.
While the
announcement of a $200M deal between AOL Time Warner and Asian
computer maker Legend Holdings may soon mean, "you've
got mail!" for millions of Chinese consumers, this news also
equals - "you've got serious competition!" for existing
Chinese portals.
In other
words, brace yourselves for some serious speed rounds of
consolidation among public and privately held Chinese portal
firms.
The game
of musical chairs has begun.
While most
Chinese Net entrepreneurs don't want to hear it, the fact
remains that even though China now has over 30 million Net
users, the entire Chinese online ad pie amounts to only $40
million annually.
Today's
Chinese Internet market simply doesn't have room for a half
dozen independent players.
Thus, I
thought I'd use this week's report to dig through the hype and
analyze Chinadotcom Corporation, Sohu.com, and
Sina.com, three of the most well known Chinese portal
players traded here in the U.S.
After
kicking the tires, let's see what I found out.
Sina.com [SINA]
Hong Kong
based portal player Sina.com definitely looks like it is
primping itself up for an eventual sale. Less then two
weeks ago, the new media firm announced the sudden resignation
of "independently-minded" company CEO Wang
Zhidong. According to published reports in The Wall
St. Journal, Sina.com board members - all eager to sell the
company- forcefully ousted Zhidong. A day before Zhidong
hit the road, the 600-employee Sina.com also announced that it
would slice 15% of its global staff.
Even with
these cost cutting maneuvers in place, Sina.com still seems to
be stuck with a non-functioning business model. While
sales rose 66% to $6.1 million in the most recent quarter,
Sina still reported a pro forma loss of $5.6 million for the
period. More importantly, sales declined 20% for the
quarter. In addition, the company expects to see an additional
sequential decline in sales of 10% or so for the current
quarter. Clearly, with shrinking sales, all of the cost
cutting in the world isn't likely to lead to eventual
breakeven results.
At this
point, Sina's greatest assets may be its base of 22.6 million
registered users and its healthy cash hoard. While Sina
currently sports a valuation of roughly $84 million, the firm
ended last quarter with $116 million still left in the
bank. Normally, a stock trading at less than its cash
value would at least half way peak my interest. In this
case, though, I'm skeptical that Sina will receive much -if
any- sort of premium in a buyout. This is a strange time
to be an independent portal- especially an unprofitable one in
an emerging market. Steer clear.
Sohu.com [SOHU]
If you
thought that Sina.com looked like a shaky bet, then wait until
you get a good glimpse of Sohu.com. Based in Beijing, Sohu has
been battling frantically in recent months to keep its share
price above $1 and stave off being de-listed from
NASDAQ. At a recent price of $1.60 per share, Sohu has
so far succeeded, although the company did trade for 19
straight days under a dollar earlier this year. Even at
these depressed levels, Sohu insiders Dow Jones [DJ]
and Intel [INTC] have decided to entirely dump their
remaining SINA positions. Ouch!
However,
not everyone appears to have stopped believing in Sina's
investment potential. I n a  surprising move, Beijing University JB
Group, a software firm controlled by Beijing University,
took a 9% stake in Sohu back in April. In addition, existing
Sohu backer Maxtech Enterprises has continued to scoop
up additional Sohu shares in recent months at around $1 per
share. While this is an interesting development, the
fact remains that Sohu's fundamentals as a business still
remain largely a mess. Let institutions play with this
one.
While
Sohu's operating expenses fell 11% in the most recent quarter,
the company still reported a loss of $5.3 million on sales of
only $2.5 million. The company isn't forecasting profitability
until sometime in 2003, and even that seems like an optimistic
projection. Much like Sina, Sohu is sitting on a healthy
cash position ($58 million) and is trading for little more
than its cash value. Again, like Sina, Sohu's greatest
assets are its users (18.7 million) and trusty treasure
chest. Unfortunately, tons of eyeballs aren't worth
nearly what they once were.
Chinadotcom Corporation [CHINA]
Even
Chinadotcom, the strongest player by far in the Chinese portal
market, has watched its share price melt along with Sina and
Sohu over the past six months. No one has escaped the harsh
haircut. At a recent price of $2.50 per share,
Chinadotcom is now down 90% from its 52-week high. A
wilting share price, though, hasn't stopped the firm from
continuing to scoop up new Net related businesses across
Asia. CHINA is currently believed to be in a bidding war
with i-Cable Communications and another unnamed suitor
for lagging rival NetEase [NTES].
All
bidding wars aside, the recent deal between America Online and
Legend Holdings has clearly been a blow to the Chinadotcom
camp. After all, back in 1999, it was Chinadotcom that
AOL decided to partner with to jointly manage its AOL Hong
Kong business. Quite un-coincidentally it seems, the two
companies then decided to terminate this relationship at
around the same time the AOL-Legend deal was formed. On
the plus side, the apparent end of Chinadotcom's dealings with
AOL does potentially open the door for deals with other media
giants.
Financially, Chinadotcom is feeling the pain like
everyone else, but holding steady. Pro forma revenue
rose over 30% to $22 million in the most recent quarter, while
cash losses decreased 4% sequentially to $16.6 million.
While far from being cash flow positive, Chinadotcom is flush
with cash, ending last quarter with a whopping $433 million
still in its coffers. That's pure deal making fuel!
Throw into the mix that the firm recently initiated deep job
cuts, and trades for almost half of cash, and I like what I
see. Risky for sure- but worth nibbling at
now.
p.s. Free
is good, right? Well, then take the next thirty seconds
or so to visit the website for Lessons From the
eFront and enter to win a FREE PalmVIIx
at:
http://www.lessonsefront.com
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