The steep share price losses of mainland Internet portals Sohu .com and Netease.com are choking off the initial public offering (IPO) route for other mainland Internet plays and forcing a reassessment of the market. Even though investors may demand more from the mainland's Internet stocks in the months ahead, they will not close the door on every entrepreneur. 'The Internet market is not dead in mainland,' said Peter Hitchen, regional Internet analyst at Salomon Smith Barney in Singapore. 'What we are seeing is not just specific to mainland.' A major factor in the mainland's cloudy Internet picture is Nasdaq. Last month looked uncomfortably like April when technology shares on the United States market took a sharp blow. Renewed worries over US interest rates adds to the uncertainty, and investors are running for cover. 'We are in the fear phase of the cycle,' said David Cui, Internet analyst at Merrill Lynch in Hong Kong, referring to the saying that the stock market runs on fear and greed. The market for IPOs may not be dead, but it is among the walking wounded. DangDang.com, an online bookseller, postponed a planned offering. Executives said the decision was made at the request of backers International Data Group (IDG) and Softbank China Venture Investments amid concerns the market was too unstable. Other mainland Internet firms investing their hopes in an IPO are probably making similar adjustments. Officials at e-commerce company 8848.net say there is no decision yet on the firm's public issue but a month ago hinted an IPO was close. The mainland's leading portal Sina.com has held above its IPO level despite Nasdaq's woes. It stood at US$22.125 yesterday up from its offering price of US$17. The company's shares are well below their peak of more than US$50 in April. Sina.com was the biggest money-loser among the mainland's three listed portals during the second quarter, posting a deficit of US$6.9 million. But it also had the most revenues, which reached US$5.75 million. Sohu .com and Netease.com shares have taken a beating. Sohu fell to US$6.50 from its $13 offer price while Netease stood at US$5.875 against an offer price of US$15.50. Both firms reported second-quarter losses but the figures were hardly surprising. 'For a very slight disappointment investors will dump your shares,' said Mr Cui of Merrill Lynch, which took Netease public. Netease reported a second-quarter loss of US$3.3 million while revenues reached US$1.7 million, more than double the first-quarter level. Sohu posted a US$6.5 million loss, including the effect of conversions of preference stock into common shares. Its revenues, largely from advertising, reached US$1.3 million, up more than 200 per cent from the previous quarter. Commenting on the performance of Sohu's stock, company founder and Internet guru Charles Zhang said: 'I am not gloomy at all. The IPO happened against the background of a market correction. The point is the performance should be viewed in the long run.' Sina.com has been slightly insulated from the problems of its rivals because 35 per cent of its revenues are from operations outside the mainland. But it is benefiting from the market's winner-take-all attitude. Mr Cui says the huge disparity in the market perception of Netease and Sina is unjustified and Sina's market lead is one of only a few months. Moreover, the second and third companies in the sector will still have a future. 'If you look at the US, Yahoo! takes the lion's share but it still leaves some space for the others,' he said. But gives little comfort to the also-rans which eye an IPO. It could mean some run out of cash - such as Hong Kong's Chinese Books Cyberstore, an online bookseller which threw in the virtual towel this week. The company, once billed as Hong Kong's answer to Amazon.com, went into voluntary liquidation. The mainland's most recent Internet survey sent a mixed message to the market. China National Network Information Centre (CNNIC) data showed Sina remained the top portal, followed by Sohu and Netease. The number of mainland Internet users surged to nearly 17 million by June's end from 8.9 million at the end of last year. But e-commerce remained disappointing. CNNIC said more than 83 per cent of Internet users it surveyed had no experience with online shopping and more than 90 per cent had not bought anything online. The mainland's cyber surfers are ready to browse and join chat rooms but online shopping is more of a promise than a reality. 'E-commerce infrastructure is not ready,' said Mr Cui. 'It will take time.' Analysts frequently cite a host of problems from an immature credit card market to security concerns and old habits. James Liang, chief executive officer of online travel site Ctrip.com, said his company was trying to circumvent the e-payment problem. Ctrip, which offers discounts to its customers on hotels and other travel-related spending, has customers make payments to hotels or airlines. The company takes a fee based on transaction volume. Mr Liang is also among the entrepreneurs who does not expect the IPO market to recover soon. Instead, he believes many Internet start-ups will turn to private placements and focus on building up their business to prepare for a market turnaround. 'You have to try to build up revenues - make acquisitions offline and try to integrate them,' he said. Ctrip.com, with backing from Orchid Asia, Softbank, IDG and Shanghai Industrial Technology Ventures, is in talks for a third round of financing. No details were given. 'Travel is a very attractive model,' said Mr Liang. 'Whoever is the No. 1 player and has a viable business model will get a good reception. But only the category leaders will go to the US.' Hong Kong may be more forgiving. Some analysts see the SAR stock market benefiting as Nasdaq shies away from new offerings with less than a solid pedigree. In two to three years, mainland Internet companies might also make the first such listing on one of the mainland's stock markets. In the meantime, where does that leave investors? 'We still like [Web] infrastructure plays,' said Mr Cui. Chinadotcom makes most of its money from Web consulting and its advertising units. It also has more than US$500 million in cash, and says some mainland firms are already knocking on its door. If there are other opportunities, they will look a lot more like 'old economy' companies, analysts said. 'Investors are coming to the realisation the Internet is here to stay and their expectations are coming more in line with traditional business,' said Mr Hitchen of Salomon Smith Barney. 'Yahoo! takes the lion's share but it still leaves space for the others'
