China.com

1
China.com

• February 24, 2000
• BA 491 Emerging Markets
• Summer Xia, Patcharin Deprasertwong, Charlie Q.
  Lin, Dohee Kwon, Susan Mlodozeniec

2
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 QA

3
China.Com

• First Pan-Asian Integrated Internet Company
• Portal Service
• On-line Advertising
• Web Solutions

• Addresses
• www.china.com
• www.taiwan.com
• www.hongkong.com
• www.cww.com

4
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

5
China.Com Stock Splits (21)

• December 14, 1999
• Prior to split, closing price of 159.87
• Closing on day of split 98.125

6
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

7
CHINA.COM Performance
8
Business Model
9
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

10
COMPANY RISKS

• Limited track record
• Increasing competition
• Reliance on partners, content-alliances
• Execution risk
• Network infrastructure and Telecom carriers
• Geographic risks

11
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

12
INTERNET INDUSTRY IN CHINA (OPPORTUNITY)
Growth Catalysts for China Market

• Prioritization of Internet development, says
  Govt
• - 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

13
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)

14
RISKS AND CONCERNS

• Economic Risks
• Country Risks
• Company Risks

15
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
16
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 ISPs licensing
requirements

• Currency risks

- Future restriction on currency exchange,
restriction on convertibility of Renminbi
17
COMPANY RISKS

• Limited track record
• Increasing competition
• Reliance on partners, content-alliances
• Execution risk
• Network infrastructure and Telecom carriers
• Geographic risks

18
AGENDA

• Management Forecast and Earning Projections
• Valuation - DCF model
• Main Assumptions

19
MANAGEMENT FORECAST

• 100 CAGR from 1998 through 2001
• Key drivers for its revenue in the future
• Portal Network
• Web Solutions
• Advertising Sales

20
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

21
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

22
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

23
VALUATION-DCF
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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
• Wont break even till the end of 2001
• EBIT is expected to 20 in 2003 from current
  negative 257
• SGA will decline and stay stable at 30
• Staff will drop slightly from 25 to 20
• RD will see significant increase, up to 15 from
  7

25
DCF - MAIN ASSUMPTION (CONT)

• 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

26
DCF - SENSITIVITY ANALYSIS
27
DCF VALUATION COST OF CAPITAL

• Tradiational Approach CAPM Model
  

28
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

29
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

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DCF VALUATION COST OF CAPITAL
International cost of Capital and Risk Calculator

• Step 3 Weighted Cost of Capital

31
VALUATION BASED ON MULTIPLES

• We Use Price/Sales multiples

32
VALUATION BASED ON MULTIPLES

• How to price the Chinadotcom?

33
QA