A flood of companies such as HK Cyber.com (Holdings) Ltd, a financial news portal, are choosing to push ahead, scaling down planned share sales to ensure success. Four companies started trading on Hong Kong's Growth Enterprise Market last week, and at least eight more are planning share sales in coming weeks.
The GEM index, which tracks stocks on the eight-month-old market for technology start-ups, dropped 53 percent since it started on March 20. That performance, the worst among 501 major indexes around the world, isn't likely to be helped by the rush of share sales, or signs that consumers are reluctant to pay for the Internet services of GEM-listed companies.
"There's definitely a future for GEM: Down," said David Webb, an independent analyst in Hong Kong who has made something of a career forecasting doom for a market he helped create. Webb was a member of the committee that helped set up the GEM market.
A weaker GEM--coupled with increasingly wary investors--will make it harder for small companies to raise money in Hong Kong and could lead to a further shakeout for the information technology industry in a city that bills itself as a leader in the field.
There are signs revenues from online businesses have fallen short of expectations. SCMP.com Ltd, the Internet arm of Hong Kong's dominant English-language publisher, fired almost a fifth of its employees in June. Next Media Ltd cut more than 60 jobs at its Internet business this month to focus more on the print versions of its newspapers and magazines.
Shakeout
The gloom descending over the city's online pioneers is a far cry from the euphoria of February, when almost half a million people lined the streets to buy shares in Tom.com, tycoon Li Ka- shing's first Internet venture. Tom.com, an online portal aiming to guide Chinese consumers around the Internet, is down 23 percent since it listed March 1.
As revenues disappoint and bankers become more reluctant to lend to online ventures, the stock market is often the only option for fresh capital to fund their operations and grab market share.
AcrossAsia Multimedia Ltd, which runs broadband networks and provides content, said the HK$590 million (S$132 million) it raised through a GEM listing this month will be enough to fund its investment plans for 12 months. Neolink Cyber Technology (Holding) Ltd, which sells radio systems and plans to provide Internet solutions, said the HK$60.2 million (S$14 million) it wants to raise could finance its existing projects up to the end of next year.
Only option
Scrapping a share sale can be a costly proposition. Neolink said its public share sale fees, including underwriting, legal and printing costs may come to HK$8.3 million (S$1.9 million), 13.8 percent of the amount it plans to raise. AcrossAsia's costs came to HK$61 million (S$14 million), 10 percent of funds raised.
"As they have already put out the resources and obtained approval, they must go ahead," said Willis Ting, a director of Tai Fook Capital Ltd, a Hong Kong investment bank. "At most, they will adjust the price to a level the market will accept."
GEM's supporters say the index's declines reflect sliding global technology stocks, not problems with GEM. The Nasdaq Composite Index, considered a global benchmark for technology shares, fell 7.3 percent since March 20, as investors questioned the earnings potential of many technology companies.
Looking at the GEM index "is slightly unfair because it started at the highest point for the market," said Lo Ka-shui, chairman of the GEM listing committee. "The purpose of GEM is to raise capital. If anything, much better companies are coming to market now."
Lo said the GEM market raised US$1.15 billion in the first five months of the year almost as much as was raised by exchanges for start-ups in Kuala Lumpur, Taipei, Seoul, Singapore and Tokyo put together during that period.
Window of opportunity
For the moment, the GEM seems to have slowed in its decline. Tom.com surged 31 percent last Wednesday, boosting the GEM Index by 13 percent in a single day. The index is now hovering 7 percent above its all-time low of 438.39 points, set last Tuesday.
GEM listing candidates are taking advantage of the slowing decline to sell shares to investors while they can.
HK Cyber.com cut the price of its shares four times, most recently to as low as HK$0.60 (S$0.13), local newspapers said. Beijing Beida Jade Bird Universal Sci-Tech Co, an Internet software company owned by Peking University, cut its price 44 percent, reduced the amount it was set to raise to HK$264 million (S$59 million) from HK$475 million (S$106 million) and dropped its public sale entirely.
GEM listings this week had mixed fortunes. Henderson Cyber Ltd, the last Internet unit to be spun off by one of Hong Kong's four biggest developers, fell to HK$1.21 (S$0.27) from its first share sale price of HK$1.25 (S$0.28) Friday. The company, which offers consumers Internet access through their television sets, had initially targetted selling its shares for as much as HK$1.40 (S$0.31).
Greencool Technology Holdings Ltd, which distributes environmentally friendly coolants in China, fell to HK$1.72 (S$0.38) from its first share price of HK$2.18 (S$0.48) Thursday. Grandmass Enterprise Ltd, which tailors software to companies, fell to HK$0.345 (S$0.07), after selling shares for HK$0.50 (S$0.11) each on Friday.
Some newly listed companies rose. AcrossAsia and Digitel Group Ltd, which rents software to small businesses, are trading higher than their initial share price.
And more are on the way. Among companies that plan to make presentations to investors this week are: HK Cyber, Neolink, Epro Ltd., which rents software to companies, 36dotcom, a general news portal; and Ilink Flexsystem, a software company.
One reason for the flood of public shares sales may be that private investors have become more selective, said Brewer Stone, managing director of Prudential-Bache International Ltd, who helps match companies with venture capital.
"Back in February, there was a lot of market hoopla, and people were willing to put money in more or less anything," said Stone. "Now, it would be difficult to find private equity for low margin business-to-consumer e-commerce sites or on second or third tier Web portals."
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