The New York Times



The New York Times

July 3, 2000, Monday

Nasdaq Debut of Chinese Stock Dampens Internet Fever

By CRAIG S. SMITH

The poor debut on Friday of the Chinese Internet company on the Nasdaq market has sent shudders through China's young Internet entrepreneurs, many of whom see an overseas listing as their only hope of survival.

Opening at $15.50, the American depository receipts of Netease floated modestly higher before dropping and eventually closing at $12.125, a drop of nearly 22 percent. "Nasdaq isn't all golden as people had expected," said Jennifer Lu, vice president of , which operates an online stock trading service in China.

Droves of young Chinese have moved into online start-ups, hoping that they will be able to list their companies on Nasdaq, the market whose vast liquidity bolstered the development of the Internet in the United States. And hundreds of millions of dollars in foreign venture capital have poured into the country on the strength of that same dream. But the dream may be over.

"The days when you can take a Chinese Internet concept and sell it on Nasdaq are gone, gone, gone," said Michael Brownrigg, who follows the Internet market in this country for Chinavest, a venture capital firm based in San Francisco.

Ms. Lu said China's Internet entrepreneurs were worried that their companies' stocks, which had seemed to hold some value even amid sour market periods for technology shares abroad, were being scrutinized more closely. If so, many investors may not like what they see.

The message from Netease's offering is that United States investors are not fooled by the smoke and mirrors that Chinese Internet companies must use to sell their stock to foreigners. Netease was forced to strip out its principal asset to win Chinese government approval to list their shares abroad.

Buyers of the Nasdaq A.D.R.'s own a stake in a Cayman Islands shell company with few assets beyond a handful of licensing agreements with the Netease Web site, which offers e-commerce and information services and is popular in China. The Web site itself is owned by private investors, including Ding Lei, Netease's founder, who recently resigned from the company.

Ms. Lu said Chinese entrepreneurs were increasingly angry with government regulators, who have hobbled the young start-ups with such byzantine rules meant to prevent foreigners from owning stakes in Chinese Internet content providers. The rules have slowed efforts to list abroad.

Several companies were ready to list on Nasdaq months ago, when investors' appetite for Internet stocks was still strong, but the authorities in Beijing would not allow the companies to do so.

"When the market opportunity was there, the policy wasn't," Ms. Lu said.

In the meantime, China's strict listing rules do not yet allow profitless companies to sell shares on domestic stock markets, and few private companies are granted approval to do so in any case. That leaves China's fledgling Internet companies with few places to raise capital.

Netease's poor performance will most likely chill the already cooling ardor among young, educated Chinese for the Internet industry. Many companies have begun losing people who sense that the future is not now. "We see a lot of people beginning to worry about the whole Internet world," Ms. Lu said. "It's not easy to attract people anymore from the traditional market."

Even before spinning off its chief asset, Netease lost $6.3 million last year on $2 million in revenue. By the end of March, it had accumulated a loss of about $9.2 million, according to its prospectus. One of the losers in Netease's initial offering is Rupert Murdoch, whose News Corporation bought a 10 percent stake in the company soon before the offering.

Netease's stock-price drop complicates the proposed offering of a rival, , which raised the target price range of its initial public offering to a range of $16 to $19 a share from an earlier range of $13 to $16. Like Netease, Sohu is incorporated outside the country and has spun off its China-based assets to comply with the rules effectively barring foreign investment in the Internet content providers.

Investment bankers in Hong Kong say that by raising its price range, may be bluffing, hoping to give the impression of strong investor demand and to create a buzz in the market.

"That's a dangerous gamble," said an Asian venture capitalist, who suggested that with the initial experience of Netease, Sohu would have to withdraw its offering or at least lower the price range.        

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