The Great Stock Split Hits Asia

As Net issues rocket, the rest languish

Michael J. Green spent sleepless nights agonizing over the decision. A group of investors had approached him about taking over his publicly listed Hong Kong plumbing-supply company, Arnhold Holdings, and using it as a shell for making Internet investments. For Green, 60, selling would mean surrendering control of a company his family had run for half a century. But Arnhold's stock price, hammered by the Asia crisis, had languished as investors flocked to sexier technology companies, and Green felt he had to accept. While he's delighted that the value of his stake has jumped, Green regrets that Old Economy companies like his are out of favor. "The market isn't interested," he laments. "They are not listening."

Right now, Asian investors hear one word: technology. From Hong Kong to South Korea to India, companies with Internet and software angles are in big demand. They are gaining at the expense of banks, utilities, and property developers, which are less exciting because they seem anchored to Asia's old growth formula. But while Net frenzy is speeding up Asia's economic transition, many fear it may be setting the region's markets up for another nasty tumble.

Nothing better illustrates the trend than two recent events in Hong Kong. In late February, investors stampeded to snap up the initial pubic offering of Net portal, owned by Hong Kong billionaire Li Ka-shing. Even though the company consists of little more than big plans and a rudimentary Web site, its stock soared fourfold on Mar. 1, the first day of trading, giving it a market capitalization of $2.8 billion.

One day earlier, his son Richard Li succeeded in a $38 billion bid for Cable & Wireless HKT, one of Hong Kong's corporate jewels. Most of his offer consists of stock in his Internet holding company Pacific Century CyberWorks Ltd., which has a $26 billion market cap even though it has neither operating revenue nor profits.

Net fever is epidemic across Asia. In Korea, the tech-heavy Kosdaq index is soaring to record heights, grabbing trade away from the struggling main board. Valuations of Indian technology stocks are zooming to several hundred times earnings. One company, software services provider Infosys Technologies Ltd., has revenues of $202 million and profits of $68 million. Yet the market value of its stock, which is listed on both Nasdaq and in India, is an astounding $35 billion. It alone accounts for 22% of the benchmark BSE Index.

"HIJACKED." The result is a new divide in Asia's corporate landscape, one that is even more dramatic than the divergent fortunes of the Dow Jones industrial average and tech-heavy Nasdaq in the U.S. While investors can't get enough of Asian companies with a New Economy flavor, those in conventional industries are being ignored by the markets. In Hong Kong, for example, trading in blue chips such as developers and banks has dwindled from about two-thirds of total volume a year ago to just a quarter today. Chris Lobello, head of quantitative research at Nomura International in Hong Kong, notes that the Hang Seng Index is up 28% since August. But take out four companies whose stocks have risen due to Net strategies--C&W HKT, China Telecom, Cheung Kong, and Hutchison Whampoa--and the index is down by 10%. In India, where the BSE Index has soared, nontech companies have fallen by 30% since December. The divide is similar in Korea and Thailand.

The market shift partly reflects healthy changes under way since the region's financial crisis. Prior to 1997, Asian tycoons and small investors alike shunned high-tech startups. They preferred parking their cash in property and financial companies, while export-oriented manufacturing industries often hogged credit from state-directed banks. Now, software, multimedia, and e-commerce pioneers can get all the money they need to push Asia into the Information Age. "People are moving resources and investment focus away from low-growth, inflation-linked businesses and toward higher-growth businesses like technology and telecom," says Singapore-based portfolio strategist Ana G. Chapman of Goldman, Sachs & Co.

But for a region that's still trying to recover from its last burst of speculative excess, hazards loom. Unlike the U.S., many Asian economies still depend heavily on such manufacturing industries as steel, chemicals, toys, and garments. The region's banks, holding billions in bad debt, are reluctant to resume big lending. If Net plays absorb all the capital available in equity markets, old-line industries might not be able to modernize or expand.

Moreover, companies that took strides to make themselves more competitive aren't getting rewarded. Says Gary Greenberg, Asia emerging-markets portfolio manager for Goldman Sachs: "The Asia restructuring story is getting hijacked by the tech story." Economist Geoffrey Barker of Dresdner Kleinwort Benson argues that the trend isn't sustainable: "We can't justify valuations of the New Economy unless you believe that the Old Economy will click along."

AMATEUR HOUR. Tech mania also may signal the return of asset bubbles. Since the currency crisis of 1997-98, strong exports have enabled several Asian countries to pile up current-account surpluses equal to 5% of gross domestic product or more. Governments such as Malaysia and Korea seem to be deliberately keeping currencies weak and interest rates low. For now, the excess liquidity is flowing to technology.

There's also concern that small investors heading for a fall. In Korea, some 90% of the Kosdaq exchange's average $3.8 billion in daily turnover comes from retail investors. Often, analysis is flimsy. And fraud is common. Regulators have kicked about 40 companies off Kosdaq this year for price manipulation. The Korean Securities Dealers Assn. is asking the government to probe six more.

Punters also are learning they can get singed on tech stocks. Asian Information Resources jumped 28% the first day it listed on Hong Kong's new Growth Enterprise Market (GEM) in December. Now the Chinese Net content provider is trading below its IPO price. Once-hot I-Cable Communications, the Net and cable-TV spin-off of Hong Kong conglomerate Wharf Holdings, is down 23% this year. More painful jolts are surely in store.

Eventually, analysts predict, investors will recognize the bargains lurking in conventional blue chips. Since August, for example, utilities such as Hongkong & China Gas and Korea Electric Power have seen double-digit drops that are way out of line with the overall market. But they may not rebound until the tech craze runs its course. And if the correction is deep, slower consumer spending could hobble recovery. Memories should still be fresh enough for Asian investors to know what can happen when bubbles burst. But for now, they just want to enjoy the ride.

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