Transcript China.com February 24, 2000 BA 491 Emerging Markets Summer Xia, Patcharin Deprasertwong, Charlie Q.

China.com
February 24, 2000
BA 491 Emerging Markets
Summer Xia, Patcharin Deprasertwong, Charlie Q. Lin,
Dohee Kwon, Susan Mlodozeniec
Agenda
• Company
– Background, IPOs, Business Model and
Strategies, Positives and Risks
• Internet Industry in Asia
• Risks and Concerns
• Valuations
– DCF, Multiple Analysis, Cost of Capital
• Conclusions and Q&A
China.Com
First Pan-Asian Integrated
Internet Company
• Addresses:
– www.china.com
– www.taiwan.com
• Portal Service
– www.hongkong.com
• On-line Advertising
– www.cww.com
• Web Solutions
First IPO
•
•
•
•
July 12, 1999 on NASDAQ
4.3 million shares at $20/share
Closing price of $67.10/share
$96.6 million in proceeds
China.Com Stock Splits (2:1)
• December 14, 1999
• Prior to split, closing
price of $159.87
• Closing on day of split:
$98.125
Split-Adjusted China.com Stock Price
100
80
60
40
20
0
7/13/99
8/13/99
9/13/99
10/13/99
11/13/99
12/13/99
Secondary IPO
• January 21, 2000
• No earnings: $4.4 million loss on $5.2 million
in revenue for the three months ended Sept.
30, 1999
• Nearly 5 million shares sold with offering price
of $85/share
• Closed at $92.438
CHINA.COM Performance
Business Model
Clients
Three Business Units
Multinational
Corporations
Asia’s Leading
Corporations
Small to medium
Sized business
Enterprises
Asian Governments
World Wide Web
Content and
Commerce
Portal Network
Chinese users globally
Content-Community-Commerce
China.com,Hongkong.com,Taiwan.com
English language users
interested the Greater China
Market
Web Solutions
Strategy
Design
Maintenance
Enhancement
Ad Network
Pan-Asia Network
China.com Portals
24/7 media partnership
Yahoo! Netscape, 24/7 Media
Xinhua News Agency, AOL, Agency France, Intel
Strategic Alliances and Shareholders
COMPANY POSITIVES
• Low Internet and PC penetration
• Rapid growth in client base, page views, revenues
• Strong market positions, early mover advantage
• Integrated business model
• Expansion across Asia - organic & acquisition
• Fragmented industry
• Strong shareholders, potential strategic partners
COMPANY RISKS
• Limited track record
• Increasing competition
• Reliance on partners, content-alliances
• Execution risk
• Network infrastructure and Telecom carriers
• Geographic risks
INTERNET INDUSTRY IN ASIA (OPPORTUNITY)
IDC forecasted “number of internet users in Asia would grow
by 33.4% and surpass growth of U.S users by the year 2003”
• China
- Large population, government commitment on internet
• Hong Kong, Taiwan
- Technologically sophisticated population, high penetration rate
• Asia
- With a projected Internet user growth rate of over 30%,
online opportunities will develop significantly in Asia
INTERNET INDUSTRY IN CHINA (OPPORTUNITY)
Growth Catalysts for China Market
•
Prioritization of Internet development, says Gov’t
- maintain global competitiveness, efficient processing of public sector
• Technology leapfrogging
- TV-internet access, TV-based internet products
• Prioritization of Infrastructure Development
- Growth in telephone infrastructure, 19M wireline subscriber/yr, wireline
population penetration increase from 1.4% in 1993 to 8.7% in 1998
INTERNET INDUSTRY IN CHINA (THREATS)
Constraints of Internet Growth in China
• Lack of competition in the provision of telephony service
• Poor last-mile networks
• Long waiting lists for leased-line provision from China
Telecom
• Lack of credit card availability and usage in China
constrains e-commerce
• Small number of ISDN(integrated service digital network)
RISKS AND CONCERNS
•
Economic Risks
•
Country Risks
•
Company Risks
ECONOMIC RISKS
• Volatile Asian Economic Climate
- Reduce advertising in Asian market
- Reduce web solution business
- Liquidity problem
• Economic climate in Greater China
- PRC: Slow domestic demand and inflation
- Hong Kong: Deflation, Uncertainty in currency Peg
- Taiwan : Recession, Volatility and depreciation of NT dollar
COUNTRY RISKS
• Uncertainty in Internet laws & regulations
- Government authorities can force ISPs to block a web site
if believed to be socially destabilizing
- Imposing strict ISP’s licensing requirements
• Currency risks
- Future restriction on currency exchange, restriction on
convertibility of Renminbi
COMPANY RISKS
• Limited track record
• Increasing competition
• Reliance on partners, content-alliances
• Execution risk
• Network infrastructure and Telecom carriers
• Geographic risks
AGENDA
• Management Forecast and Earning
Projections
• Valuation - DCF model
• Main Assumptions
MANAGEMENT FORECAST
• 100% CAGR from 1998 through 2001
• Key drivers for its revenue in the future
– Portal Network
– Web Solutions
– Advertising Sales
PORTAL NETWORK
• Generate increased traffic through greater
numbers of internet users
– Enhancement of content
– Establishment of co-branded portals and vertically
integrate into own portals
• Increase from current 3% of total revenue
to 5% in a long run
WEB SOLUTIONS
• Primary revenue stream - 78% in 1998
– Web site design & maintenance services
– Strategic consulting
– Technical integration
• Web solutions service revenue is driven by
– Number of paying clients
– Annual average yield per account
• Overall growth will be over 100% through
2001
ADVERTISING SALES
• Comprehensive ad solutions & targeted ad
– 175 affiliated web sites throughout Asia, Australia and
US.
– Share 30% -50% of the advertising revenues
• Ad revenue will grow to 60% of the total
revenue
– Steady growth in the total number of affiliated web
sites
– Aggregated daily page views
VALUATION-DCF
Discounted Cashflow
Revenue
Cost of Revenue
EBIT
EBIAT
+ Depreciation
- Working Capital Needs
- Capital Expenditure
FCF
1999
13.81
27.62
(13.81)
(13.81)
0.75
(0.16)
(6.72)
(19.93)
Discount Factor
PV FCF
Terminal Value
PV TV
2000
30.38
45.57
(15.19)
(15.19)
2.73
(0.61)
(5.34)
(18.41)
2001
60.76
69.87
(9.11)
(9.11)
3.04
(1.30)
(10.51)
(17.88)
2002
115.43
103.89
11.54
11.54
5.77
(4.70)
(6.62)
6.00
2003
207.78
166.23
41.56
41.56
5.19
(5.22)
(10.93)
30.59
2004
353.23
247.26
105.97
105.97
7.06
(8.50)
(8.71)
95.82
2005
2006
2007
2008
153.32
245.31
392.50
628.00
0.79
-14.50
0.62
-11.08
0.49
2.93
0.38
11.76
0.30
29.00
0.24
36.54
0.19
46.04
0.15
58.00
0.12
73.07
6,501.61
595.64
Total Firm Value
919.44
# of shares outstanding (pre split)
21.59
Price Per Share
$ 42.59
Tax Rate
Growth rate (2005-2009)
Perpetuity growth of FCF
WACC
15%
60%
10.0%
27%
of
Capital
24%
22%
20%
16%
48.30
60.44
76.89
133.10
50.26
63.30
81.18
144.23
52.45
66.54
86.14
157.83
53.65
68.33
88.91
165.83
54.92
70.24
91.92
174.82
DCF - MAIN ASSUMPTION
 Revenue - will grow at over 100% till 2001, and
80% till 2004
 The percentage of revenue from on-line advertising will
surpass that from web solutions
 Won’t break even till the end of 2001
– EBIT is expected to 20% in 2003 from current negative
257%
– SG&A will decline and stay stable at 30%
– Staff will drop slightly from 25% to 20%
– R&D will see significant increase, up to 15% from 7%
DCF - MAIN ASSUMPTION
(CON’T)
• Capex - significantly drop over the years
• Assume average $2 million each year for fixed
assets acquisition
• Targeted debt Ratio - 15%
• Stable growth (2005 - 2009) - 60%
• Perpetuity growth rate - 9%
DCF - SENSITIVITY ANALYSIS
Perpetuity Growth Rate
Cost
of
Capital
#REF!
30%
28%
26%
24%
22%
20%
18%
16%
5.0%
26.48
32.03
39.11
48.30
60.44
76.89
99.83
133.10
6.0%
27.21
33.03
40.50
50.26
63.30
81.18
106.55
144.23
7.0%
28.01
34.12
42.03
52.45
66.54
86.14
114.50
157.83
Cost
of
Capital
51.20
30%
28%
26%
24%
22%
20%
18%
16%
5%
26.48
32.03
39.11
48.30
60.44
76.89
99.83
133.10
6%
27.21
33.03
40.50
50.26
63.30
81.18
106.55
144.23
7%
28.01
34.12
42.03
52.45
66.54
86.14
114.50
157.83
7.5%
28.43
34.70
42.85
53.65
68.33
88.91
119.04
165.83
8.0%
28.87
35.32
43.73
54.92
70.24
91.92
124.04
174.82
8.5%
29.34
35.97
44.65
56.28
72.30
95.19
129.56
185.02
9.0%
29.82
36.65
45.63
57.72
74.51
98.75
135.70
196.68
9.5%
30.33
37.36
46.66
59.26
76.90
102.66
142.56
210.13
9%
29.34
35.97
44.65
56.28
72.30
95.19
129.56
185.02
9%
29.82
36.65
45.63
57.72
74.51
98.75
135.70
196.68
10%
30.33
37.36
46.66
59.26
76.90
102.66
142.56
210.13
Perpetuity Growth Rate
HK$@US$
9.8
9.3
8.8
8.3
7.8
7.3
6.8
6.3
5.8
Pri ce
% of Change
29.39
-41%
33.66
-32%
38.40
-23%
43.72
-12%
49.72
0%
56.55
14%
64.37
29%
73.44
48%
84.07
69%
NT$@US$
34.7
33.7
32.7
31.7
30.7
29.7
28.7
27.7
26.7
8%
28.43
34.70
42.85
53.65
68.33
88.91
119.04
165.83
8%
28.87
35.32
43.73
54.92
70.24
91.92
124.04
174.82
Pri ce
% of Change
40.56
-18%
42.64
-14%
44.86
-10%
47.21
-5%
49.72
0%
52.40
5%
55.27
11%
58.34
17%
61.64
24%
RMB@US$
12.28
11.28
10.28
9.28
8.28
7.28
6.28
5.28
4.28
Pri ce
43.34
44.51
45.91
47.61
49.72
52.42
55.97
60.86
68.05
DCF VALUATION : COST OF CAPITAL
• Tradiational Approach: CAPM Model
Emg. Mkt. companies in US: Betas and returns
50
40
30
20
10
0
-1
-0.5
-10
0
0.5
1
1.5
2
2.5
3
DCF VALUATION : COST OF CAPITAL
International cost of Capital and Risk Calculator
• Step1: calculate country risk:
• China:
19.9%
• Hong Kong:
18.5%
• Taiwan:
14.8%
• Hybrid rate:
18.0%
DCF VALUATION: COST OF CAPITAL
International cost of Capital and Risk Calculator
• Step 2: identify the Beta adjustment:
Regression against Credit Lyonais Greater China Index
Beta Adjustm ent for China.com
1.2
1
0.8
0.6
0.4
0.2
0
-0.15
-0.1
-0.05
-0.2 0
-0.4
0.05
0.1
DCF VALUATION : COST OF CAPITAL
International cost of Capital and Risk Calculator
• Step 3: : Weighted Cost of Capital:
Tax Rate
Cost of Debt
D/V ratio
15.0%
12.0%
15.0%
Cost of equity
E/V ratio
WACC
29.7%
85.0%
26.8%
VALUATION BASED ON MULTIPLES
• We Use Price/Sales multiples:
Symbol
CNET
Company Name
CNET, Inc.
Mkt Cap. 52-W Hi
52 Low
EPS Rev/Share Price Sales 00'P/S 00'
4,615
80
27.50
0.84
1.26
61
145
31.8
302
89
25.38
(3.78)
3.19
31
50
6.0
21,136
145
9.05
(0.78)
1.42
121
437
48.4
605
130
13.44
(5.58)
1.51
21
81
7.5
7,340
94
28.56
(1.00)
2.02
73
300
24.5
MKTW MarketWatch.com
584
107
26.13
(4.68)
1.80
43
38
15.4
MMXI
Media Metrix, Inc.
718
74
31.00
(1.34)
1.04
36
33
22.1
STRM
StarMedia Network
3,187
70
24.00
(1.91)
0.34
56
38
79.7
TFSM
24/7 Media, Inc.
1,052
70
21.75
(1.51)
2.81
45
128
8.2
85,915
250
55.00
0.10
1.12
162
756
113.6
2,303
56
32
123
18.8
230,303
29
25
5,531
41.4
Avearge:
34.8
EWBX EarthWeb Inc.
EXDS
Exodus Comm.
IVIL
iVillage Inc.
LCOS
Lycos, Inc.
YHOO Yahoo! Inc.
ZDZ
ZDNet Group
1186HK Pacific Century Cyber
13.44 NA
0.10
(0.14)
NC
0.61
VALUATION BASED ON MULTIPLES
• How to price the Chinadotcom?
Com parbles
Comparbles average
Lycos, Inc.
Yahoo! Inc.
StarMedia Netw ork, Inc.
P/S
35
24
114
80
Pricing China.com
49.00
34.25
159.10
112.00
Q&A