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Linux software developer XTeam will list on Hong Kong's Growth Enterprise Market (GEM) today.

The company plans to use the HK$21 million in proceeds to expand product development, open a sales office in Shanghai and set up a training and certification programme.

Corporate servers would be the main emphasis for Beijing-based XTeam following the company's debut on the GEM, chairman Gary Ma said.

Although XTeam began several years ago by targeting desktop personal computers on the mainland, the Linux operating system (OS) developer has since shifted emphasis.

While use of Linux continues to grow steadily in the mainland among corporates, consumers prefer Microsoft's Windows for running desktops and the country's computer manufacturers are also moving to Microsoft.

Four of China's biggest PC producers - Legend Holdings, TCL Computer Technology, Great Wall Corp and Tsinghua Tongfeng - last week said they would pre-install Windows XP on all PCs leaving their factories.

Even though Linux is not popular in the desktop market, it was expected to become a popular OS for running other types of computers in China. Because Linux is open-source, its Unix-based code is free and can be altered by anyone who follows the terms of the open-source licence.

Analysts, programmers and systems administrators believed the system might offer more stability than Microsoft's proprietary software.

In the China market, Linux has received official backing from several government agencies and research institutions.

Observers attributed support of Linux to its low cost and transparency of its source code.

Mr Ma said XTeam's 99 million shares would be placed at the high-end of the target 32 HK cents to 38 HK cents range and the funds would be used for aggressive expansion beyond the company's Beijing base.

'In order to sell these products, we need support, we need geographic coverage,' he said.

'A customer will not buy a product in Shanghai unless there are people on the ground to support in Shanghai.'

Beyond expanding its offices, XTeam probably will continue partnering with systems integrators and operators of data centres, which are often in a position to recommend software to clients. Although XTeam is the first such company to list its shares in Hong Kong, it is not the only one betting the free operating system will find a market in China.

Several other firms have also released Chinese-language versions of the Linux OS, including Donovan, Bluepoint, TurboLinux and Red Flag.

Mr Ma estimated that Linux was installed on only a tiny percentage of the 260,000 servers sold in China last year and that Red Flag, TurboLinux and XTeam distributions together accounted for at least 70 per cent of the mainland's Linux market.

'The Linux market share should increase significantly and the server market will grow at a fast pace as well,' he said.

Overseas rivals, including industry leader Red Hat, claimed to have made inroads in the China market. A year ago, Red Hat claimed to have a 55 per cent share of the mainland market.

XTeam and its competitors had developed embedded versions of their OS, for use in set-top boxes and personal digital assistants, although Mr Ma said income from that market was not the emphasis for XTeam.

For the two months to May 31, the latest period covered by the company's prospectus, XTeam sold software to the value of HK$34,000 to the PC market, while sales for the server market were HK$1.4 million and embedded markets HK$5.6 million.

From the company's incorporation in November 1999 to March 31 last year sales to the PC market were HK$2.6 million, thanks largely to contracts with Legend, China's biggest computer manufacturer.

For the same period, XTeam sold HK$11.5 million in server software, HK$4.2 million in embedded software and nearly HK$3.4 million in services.

XTeam's biggest investors include a unit of Japan's Mitsubishi Corp and Mr Ma. The listing gave XTeam a market capitalisation of HK$204 million.



Proceeds will bank-roll China expansion programme for Linux solutions