China.com February 24, 2000 BA 491 Emerging Markets
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 Asias Leading Corporations Small to medium Sized business Enterprises Asian Governments Content and Commerce Portal Network Chinese users globally
Content-Community-Commerce China.com,Hongkong.com,Taiwan.com Web Solutions Strategy Design Maintenance Enhancement World Wide Web English language users interested the Greater China Market 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 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
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 ISPs 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)
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 Wont 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 (CONT) Capex - significantly drop over the years Assume average $2 million each year for fixed assets acquisition Targeted debt Ratio - 15% Stable growth (2005 - 2009) - 60% Perpetuity growth rate - 9% DCF - SENSITIVITY ANALYSIS Perpetuity Growth Rate Cost of Capital #REF! 30% 28% 26% 24%
55.27 11% 58.34 17% 61.64 24% [email protected]$ 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
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
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