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[Nettime-bold] THE RAGAS REPORT - Chinese Portal Stocks - Taming the Remaining Dragons

Knowledge Capital For Next Economy Architects
Editor: Matt Ragas
"Now read by over 25,000 next economy leaders"

In This Issue  
  Commentary: Chinese Portal Stocks - Taming the Remaining Dragons
More Knowledge Capital: Nokia, ExciteAtHome, Nortel, Corning, JDSU
Quote of the Week: AOL Says Talks with Microsoft are "Overstated"

This Week's Commentary

Editor's Note:

Before I begin the report this week, I'm proud to announce that my first book - Lessons From the eFront has been published and is now available online and in bookstores nationwide.

The book is jam packed with secrets, tips and advice that I compiled through literally dozens of interviews with many of the tech industry's most successful Next Economy leaders.  To download the free Introduction PDF to the book and enter to win a FREE PalmVIIx visit:


Read the book that Garage.com CEO and Rules for Revolutionaries author Guy Kawasaki called: "A great book for people in the trenches!"

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:

Buy It Here!
More Knowledge Capital


THE GOLDEN CHILD OF WIRELESS GETS SPANKED: Up until this week, wireless giant Nokia [NOK] had largely been able to skate above the collapse in valuations seen by rivals like Motorola [MOT] and Ericsson [ERICY].  Nokia appeared to be the golden child of wireless - virtually untouchable amidst the growing turmoil in the sector.  After all, as rivals faltered last year and over the past six months, Nokia simply continued to gain new handset market share.  This was a rock solid performer.  After announcing a surprise earnings warning on Tuesday, though, those days may now be behind the Finnish firm.

In issuing the warning, Nokia told investors that it now expects second quarter earnings to be in the range of 13 to 14 cents (previous guidance was 17 cents).  In addition, the firm now expects to report quarterly sales growth of "under 10 percent" instead of the 20 percent that it had forecast previously.  Finally, Nokia added that it now expects to see "only very modest growth this year compared to 2000."  Updated earnings estimates aren't expected to be released for the second half of 2001 for the firm until July 19th.  I'd wait and see if NOK shares dip further into the mid-to-high teens before considering buying ahead of this news.


ATHOME STRIKES DEAL WITH THE DEVIL: Well, we already knew that broadband cable provider ExciteAtHome was on the ropes and needed to raise $75 million in fresh capital to continue operations.  What we didn't know is just how poor an opinion existing AtHome investors and the private capital community must now have of the company.  After all, while AtHome was able to raise $100 million earlier this week, it had to do so through the issuance of convertible secured notes to Promethean Capital Group.  For those not familiar with these notes, they are commonly known among investors as "death spiral converts."

In essence, they are a last resort financing option for firms that can't raise money through traditional borrowing or issuing of additional common stock.  Promethean has entered into similar arrangements with scandal ridden software firm MicroStrategy [MSTR] and the now defunct dot com disaster eToys.  While this financing deal may end up working just fine for AtHome, the terms for the repayment of these notes often lead to massive dilution. More importantly, not having major AtHome investor AT&T [T] step to the plate with more cash, speaks volumes about the future of this company.  Stay far away from this one.

Buy It Here!

NETWORKER STOCKS STILL STUCK OUT IN THE BLIZZARD: As the NASDAQ careens back down to the 2000 level, networking stocks continue to look like weary explorers lost in a brutal snowstorm.  The group desperately wants to convince investors that the worst is behind it, when the reality is that these companies are having trouble even looking three steps ahead of themselves right now.  They simply don't know when this mess is going to end.  Calling the bottom on this group would be nice, but with earnings estimates still falling through the floor, loading up now looks very dicey.

After all, here are the latest dreary tidbits on this battered group.  Last Friday, networking star Juniper [JNPR] surprised the Street by warning of an earnings shortfall.  This news was then followed early this week by S&P's decision to cut Lucent's [LU] debt rating to junk status.  Then Corning [GLW] shares were pummeled Thursday after Merrill Lynch issued a negative report, while JDS Uniphase [JDSU] shares fell after again downward revising its numbers.  Finally, to top it all off, Nortel [NT] not only announced another earnings warning this morning, but also plans to fire an additional 10,000 workers.

Quote of the Week

"We are confident our brand is fine. If we have a deal, great.  If not, fine.  We don't use the desktop to sell AOL.''

-- Comments made this week by AOL president Barry Schuler regarding the current partnership talks between AOL and Microsoft over including AOL's software in the new Windows XP operating system.

June 15, 2001














































































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About Matthew W. Ragas: Ragas is President and Chief Analyst of Matthew Ragas & Associates, an Orlando, FL based strategic advisory and venture development firm. He was previously the founding editor of Raging Bull and is the author of the new e-business book Lessons From the E-Front from Prima Publishing.

The RagasReport and Matthew Ragas and Associates, are not a registered Investment Adviser or a Broker/Dealer. Readers are advised that the report is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy. The opinions and analyses included herein are based from sources believed to be reliable and written in good faith, but no representation or warranty, expressed or implied is made as to their accuracy, completeness or correctness. Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report should be independently verified with the companies mentioned. In addition, we receive no compensation of any kind from any companies that we mention in this report.

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