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China

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

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China

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  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 Q&A

  3. 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 China.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 (2:1) • 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. Clients Three Business Units World Wide Web Content and Commerce Chinese users globally English language users interested the Greater China Market Multinational Corporations Asia’s Leading Corporations Small to medium Sized business Enterprises Asian Governments Portal Network Content-Community-Commerce China.com,Hongkong.com,Taiwan.com Ad Network Web Solutions Pan-Asia Network China.com Portals 24/7 media partnership Strategy Design Maintenance Enhancement Yahoo! Netscape, 24/7 Media Xinhua News Agency, AOL, Agency France, Intel Strategic Alliances and Shareholders 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 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

  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 ISP’s 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

  24. 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%

  25. 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%

  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

  30. 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. Q&A

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