Dotcoms rise from the ashes

They are back and in familiar style registering massive share increases. But is HK willing to take the risk this time?

They said it would never happen, but it has. Much-derided dotcom stocks are riding high once again on Wall Street and Chinese portals are turning up for the retro party of rampant speculation and excessive valuations.

Sina, Sohu and Netease shares have jumped by at least 100 per cent in the past two months. Besides having the tailwind of an Internet renaissance in the United States, the trio are being seen as beneficiaries of the Sars crisis as panicked consumers turn to online shopping. Even Hong Kong's Internet-related stocks are joining the new economy revivalists with Hongkong.com rising more than 190 per cent since mid-March, following the purchase of mobile application provider Newpalm.

Other Growth Enterprise Market-listed technology firms have also been doing well in recent weeks. IDD service provider e-Kong increased in value by more than 60 per cent since late April, before dipping slightly to close at 12 HK cents last Friday.

Li Ka-shing's Tom.com jumped 25 per cent during the same period to HK$2.

Phillip Securities research director Louis Wong Wai-kit said the home-grown dotcoms were experiencing a resurgence of their own and were 'not just mirroring the rally in the US. They have their own story to tell'.

The spark for the Internet comeback was thought to have been lit by a genuine upturn in the broader technology sector, analysts said.

The arrival of wireless laptops, thanks to Intel's new Centrino chip, the growing popularity of wi-fi connections and the rebuilding of run-down inventories helped turn sentiment around on the depressed sector, said Vijay Harjani, director of Asian technology sales at Credit Suisse First Boston.

The optimism spilled over into Internet stocks as bulls looked to cash in on the momentum.

A handful of US dotcom successes, such as Yahoo, eBay and Amazon, have been shooting up again as investors return in droves. Online retailer Amazon's share price has soared more than 60 per cent this year, while auction house eBay's jumped more than 40 per cent. EBay is trading on 63.75 times this year's expected earnings, according to figures compiled by Bloomberg.

Last week, US media tycoon Barry Diller gave markets further evidence of the new economy's second coming by purchasing online loans company LendingTree for US$720 million.

Now some commentators expect Hong Kong to warm to the retro party. This time around, the market's approach may be more mature than the pre-millennial version of the party, when stocks went through the roof based on the number of mouse clicks and how many eyeballs viewed a Web site.

Tom.com was an empty portal when it staged its initial public offering in February 2000. Thousands queued up to buy shares that soared to HK$14 within days. Now you can buy the stock for $2 and the company has a host of old media assets under its belt and last year narrowed its losses to $410 million from $636 million in 2001.

ICEA analyst Lauren Wong forecasts Tom.com will inch into the black this year and make a $29 million profit.

Tom.com is trading on 234.92 times this year's expected earnings.

'Internet companies have had to become much more focused to achieve scale,' said Bernard Pouliot, chairman of financial Web site Quamnet. He said he was convinced Hong Kong dotcom stocks could build on the beginnings of their US-style renaissance.

'It's not there now [in Hong Kong] but it's all converging towards that,' he said. When the market was convinced the industry consolidation process had been completed, investor capital would return, he added. He expressed confidence it would happen this year.

However, Mr Pouliot said a hindrance was the gloomy overall perspective for Asia's economies, adding the backdrop had to improve before investors took serious interest in dotcoms again.

What is clear is that there are very few pure Web site plays left. Such models have simply proven unsustainable. Many have branched into telecoms, with e-Kong offering IDD services, while short messaging services (SMS) make up a sizeable amount of the business of Hongkong.com and Tom.com, with the latter also focusing on magazines, outdoor advertising and sports sponsorship.

SMS applications make up the primary focus of China-based Nasdaq-listed portals like Sina, Sohu, and NetEase; all three were doing well before the Sars crisis, but the stay-home mentality that has swept China since the outbreak began has been manna from heaven to their market value.

Other regional portals have also been doing well. Last week, Nasdaq-listed China.com reported a first-quarter profit of US$1.3 million. This followed a $1.17 million profit in the previous quarter, and is in sharp contrast to the $8 million loss that the portal-turned-Internet services firm recorded last year.

China.com's 81 per cent owned subsidiary, Hongkong.com, experienced a 157 per cent jump in profit in the first quarter, and posted a profit of HK$8.04 million from $3.12 million last year.

However, Mr Wong doubted there was enough money splashing around the Hong Kong market to generate the kind of recovery dotcoms have experienced in the US.

As a result he said he was maintaining a wait-and-see attitude concerning Internet firms, although if anything, it was the companies that include both on- and off line revenue that stood the best chance of success.

Tung Tai securities associate director Kenny Tang Sing-hing said Tom.com represented a 'buy for the long term' and it was likely investors would take an increasing interest in the company this year.

However, he said the earnings of Hongkong.com still relied too much on interest income.

He expressed less confidence in its prospects as its earnings model was weak.