NEW YORK (CNNfn) - Asia, with its large population, has long been considered a land of promise for companies and investors.|
Now, with a hot initial public offering expected Wednesday from China Unicom blazing the way, deals from Asia are once again garnering more than their share of attention, even as analysts warn that deals may not be the hot issues that they seem.
Since July 1999, 26 deals from Asia have gone public in the U.S. equity markets, according to CommScan, a New York-based investment banking research firm, averaging a gain of 63 percent. Computers and electronics continue to be the strongest sector, while telecommunications issued generally have performed the worst.
But typically, analysts find that Asia, which includes China, Japan, India, Korea, Malaysia, Taiwan, Philippines and Thailand, routinely produces IPOs that generate strong first-day pops, only to slide in the aftermarket.
"Some are doing pretty well but when you look at them individually you can see some problems," said CommScan analyst Janet Yee.
Huge growth potential, but will stock follow?
The enticement for investors is that Asia, and particularly the China market, is seen as a huge growth opportunity for companies, especially those that are Internet-based.
At the end of 1999, there were 47.8 million individuals online in the Asia/Pacific region. That is expected to grow to 65.1 million by the end of this year, and is projected to hit 138.8 million by the end of 2003, according to Jupiter Communications.
"IPOs from Asia do well because of the romantic view that there is so much growth potential out there," said analyst Steve Tuen, of IPO Value Monitor.
But even with strong growth expectations, many companies in Asia may be launching their IPOs too soon, analysts said. Businesses and investors often fail to consider how quickly the economies of emerging countries will grow before the average consumer can actually afford to buy devices such as personal computers or wireless telephones.
"It has to do more with the standard of living than anything else," said Corey Ostman, co-chief executive and chief technology officer of Alert-IPO.com. "As the standard of living keeps growing, more people can afford these services, but how fast they will grow in China is anyone's guess."
The Asia promise
As a result, buzz surrounding the region, particularly China, has helped propel many deals to strong first day gains, but has been unable to stop hot Asian IPOs from sliding in the aftermarket, analysts said.
"China is viewed and hyped in general as being the greatest and most gigantic market in the world because of demographics and population," said Irv DeGraw, research director at WorldFinanceNet.com and finance professor at Eckerd College in St. Petersburg, Fla.
Investors in the United States may not be prepared for China, said Ben Holmes, president ipoPros.com. The country must still deal with trade agreement issues as well as adapting to a capitalist market place.
"I don't know if the world is ready to trust China in terms of marketplace," he said. "These deals have not panned out like we have hoped."
Investors considering foreign deals also are often at a disadvantage because, unlike domestic firms, companies outside the United States are not required to file prospectuses with the Securities and Exchange Commission. But the lack of information fails to stop many investors.
"Retail investors are notorious for not getting paper filings because they are difficult to obtain," DeGraw said. "Most people buy something with no clue as to what they are buying."
The run up in the sector began with the Hong Kong-based Chinadotcom Corp., an Internet portal offering content, community and commerce targeting Chinese language audiences. Chinadotcom (CHINA: Research, Estimates) went public in July and hit a high of 78 on March 6, but has since dropped 73 percent to close Monday at 21 5/16.
Analysts singled out Tokyo-based Crayfish Co. Ltd. as the most notorious of the Asia-related offerings. In March, Crayfish (CRFH: Research, Estimates), a provider of email to small and medium-sized businesses in Japan, raised $106.58 million after pricing 4.35 million ADS at $24.50 each through underwriters led by Morgan Stanley Dean Witter.
On March 18, Crayfish hit a high of 166 and has since dropped 92 percent to close Monday at 13 in aftermarket trading.
"Crayfish was the last of the real loony offerings," DeGraw said. "There was a company that really had nothing behind it."
Steve Harmon, Chief Executive of Internet investment firm Zero Gravity Internet Group (www.e-harmon.com), said Crayfish's IPO was launched during the height of Internet euphoria, but the recent technology sell-off has forced investors to look for more conservative instruments.
"Crayfish is an example of early interest that died," Harmon said. "U.S. investors attention span tends to go back to stocks and bonds in a market like this. That's why Crayfish has gone down."
Wild first-day swings that level off in the aftermarket are typical of many Internet-related deals, not just Asia-related deals, said Tuen of IPO Value Monitor. However, the recent broad market tech sell-off has forced investors to recognize the risks involved with investing in Asia.
"The mindset has shifted from one of wild optimism to that of conservatism," Tuen said. "The party is over and people are starting to sober up."
If you build it, will they come?
All of this has analysts a bit wary about the latest China IPO churning in the buzz machine. Beijing-based China Unicom, China's No. 2 telecom provider due to hit the New York Stock Exchange Wednesday, is the largest IPO ever out of Asia.
China Unicom raised nearly $5 billion after pricing 234 million American depository receipts (ADRs) and 123 million common shares in Hong Kong. The ADRs, which each represent 10 ordinary shares, were priced at $19.99 each in a sale led by underwriter Morgan Stanley Dean Witter. The IPO will trade under "CHU."
"This is a wait-and-see for us," said DeGraw of the China Unicom deal. "We are not surprised by a positive first day but are most concerned with how it behaves after the first day."
China Unicom offers cellular, paging, long distance, data and Internet services. The company has 4.2 million cellular subscribers at the end of 1999, and is the second largest cellular provider in China after China Mobile葉he former China Telecom--that had 25.1 million cellular subscribers.
In fiscal 1999, the company reported net income of $101 million and revenue of $2.1 billion.
Analysts expect China Unicom to produce a moderate first day gain of 10 percent, but some think it is unfair to compare the deal to other IPOs from the region.
"China Unicom is a gorilla and the others are chimpanzees," said Harmon of Zero Gravity. "It's a rarity for a massive quasi-monopoly to go public but they do have the advantage of being large."
However, Holmes said the deal would probably remain flat in its debut. "We are not hearing any enthusiasm or anticipation of the deal," he said. "People are looking to get it off the books."
The burgeoning India market
While China loses its luster, deals from India are beginning to shine. On June 14, Rediff.com. India Ltd., an Internet portal focusing on India and Indians worldwide, climbed 61 percent in its market debut, closing at 19-5/16. Rediff.com raised $55.2 million after it priced 4.6 million shares at $12 each.
Rediff.com (REDF: Research, Estimates) has retained much of its value; on Tuesday it was down 2-1/16 at 19-11/16 in afternoon trading.
"India is very suddenly a hot theme in our market," Holmes said. "We've seen them explode quickly. But the problem is that they can cool off as fast as they heat up."
On Tuesday, Silverline Technologies Ltd., a provider of information technology services, continued the success of India IPOs by climbing 13 percent to 28 3/16 in afternoon trading.
Mumbai, India-based Silverline (SLT: Research, Estimates) raised $108.75 million after pricing 4.35 million shares at $25 each through underwriters led by Salomon Smith Barney.
Still, even the strongest Indian deals have experienced major aftermarket drops.
For example, Satyam Infoway Ltd. (SIFY: Research, Estimates), an Internet firm based in Bombay, raised $75.15 million last October. Satyam closed at $35.50 per share in its first day trading but hit its high of $113 in February. However, the company's shares have since experienced a significant drop, closing Monday at 24 7/8, a near 78 percent fall from its high.
Francis Gaskins, editor of Gaskins IPO Desktop in Los Angeles, said Satyam benefited from being one of the first Indian Internet firms to go public, but that luster quickly wore off.
"India is a big market and they were first companies in so they have first-mover advantage," he said.