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					Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg




            QUARTERLY REVIEW
                                                                                                14 February 2000, Quarter 1
                                                                                                          By Dr David Lee


The Father, the Son and the Hollywood Spirit
The Making of a Blockbuster
Silicon Valley has more in common with Hollywood than it does with Detroit. The
venture capitalists are the studios. The managers are the directors. The ordinary
engineers are the writers. And the entrepreneurs are the stars. What happened in
Silicon Valley is a lot like what happened in Hollywood once the studios lost their
clout. The stars seized the power. And once they'd seized power, they raised their
price and demanded the right to direct their own pictures. And very great stars like
Jim Clark cut deals worthy of Marlon Brando. They showed up on the set for a few
days then strolled away with half the budget.
                                                                                                      Michael Lewis (1999)
Getting an Internet related firm listed and creating a following is like making a
blockbuster. You need a good scriptwriter, you need a producer, you need the studio, you
need the directors, and you need a Demi Moore and a Robert Redford. But an Internet
company need not be "An Indecent Proposal' as it may not cost as much as a million
dollars to start with. You just need the concept and then sell to the public. No one knows
if the movie will be a blockbuster and many will probably end up not being one. The
investors will certainly hope that what they have is a "Star Wars" movie. More
importantly, they hope that there will be movie products that can be sold year after year
turning it into a profitable click-and-mortar business.

1.         Is there a US Internet Bubble?
We have stated previously that one can only know that there is a bubble after it has burst.
Before that, it is only an irrational exuberance. We should worry less about a bubble or
irrational exuberance, and worry more about capital flows. While portfolio managers are
used to talking about business cycles and whether the economies are at the peak, trough
or elsewhere, we can no longer rely on business cycle theory for portfolio and risk
management. Instead, we should spend more time understanding the liquidity cycle in
order to have a feel of the risk/return tradeoffs of the investment. Liquidity and the
direction of capital flows, at this instance in history, are important determinants of risk-

Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is accepted
whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte Ltd and its
directors, employees and associates may from time to time have positions in, and may effect transactions. This research report is
prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and the particular needs
of any specific person to receive this report. This document is not to be constructed as an offer or a solicitation of an offer to buy or
sell any financial instruments".
                                                                   1
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg

return tradeoffs. To understand liquidity and capital flows, we have to understand
leverage and the Internet. Leverage affects liquidity and the Internet affects the speed of
information flow. They in turn determine the speed and direction of capital flows. With
the crisis fresh in their mind, investors in Asia understand the power of leverage and the
speed of capital flows, as well as the damage that they can cause.

Even before the crisis, we have seen a few bubbles in Asia. We have been through the
political-linked privatisation bubble in Malaysia, the Value-linked Indonesia bubble in
Singapore, and later the Red-Chip bubble in Hong Kong. From 1993 to 2000 in
Malaysia, we have seen penny stocks, political-linked stocks of the Main Board, and the
speculative stocks of the Second Board rise from a few cents to over a hundred dollars
during the boom and back to a few cents during the bust. We have seen Indonesian take-
over play of Singapore companies. It started with the take-over of a company whose
name began with V, then another with A, then L, then U. We all knew that before it
reached E to complete the word VALUE, the cycle was over. The stocks concerned fell
to less than 10% of its peak. We have witnessed the Red-Chip bubble in Hong Kong and
China involving China-linked stocks with similar stories. Finally, the Asian crisis struck
in July 1997. But none of these bubbles lasted as long as the Internet Mania.

2.         When it All Started and
           Why it Should Go On and On
The 9th of August is a special day for the world to remember. It may be the National Day
of Singapore, but it is the day that Netscape was offered to the public and the start of the
online era. If you had heard of Internet prior to the listing of Jim Clark's company in
1995, chances were that you were a researcher, an academic or a venture capitalist. The
Internet began as a US Department of Defense experiment to demonstrate the feasibility
of interconnecting computing devices in 1968. The Netscape IPO provided the turning
point. It started the Internet Mania because the share price of USD 14 traded to as high as
USD 87 on the day of listing after market. The message of the market to the investors
then was clear: there is great potential of the Internet and it is a potential gold mine. The
gold was in the Silicon Valley, but few anticipated that it was going to be a gold rush that
lasted so many years and is still going!

We are into the 5th year of the Internet play. As Mr Alan Greenspan mentioned in 1997,
there may or may not be an irrational exuberance in the US markets. Those who believe
in the new economy, the new rules and the new paradigm will believe that it is not a
bubble and not an irrational exuberance. The long boomers (Schwartz and Leyden 1997)
advocate that "this is the beginning of a global economic boom on a scale never
experienced before that will double the world's economy every dozen years. The Boom
would include a fully protected natural environment, an ascendant Asia, and a recovered
Russia. All this will be largely driven by five waves of technology: personal computers,
telecommunications, biotechnology, nanotechnology, and alternative energy." In short,
the US economy will grow and grow and the market will go up and up!

Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is accepted
whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte Ltd and its
directors, employees and associates may from time to time have positions in, and may effect transactions. This research report is
prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and the particular needs
of any specific person to receive this report. This document is not to be constructed as an offer or a solicitation of an offer to buy or
sell any financial instruments".

                                                                   2
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg


3.         And Why it May Not
Unrealistic growth expectations of revenue
Perkins and Perkins (1999), however argue otherwise. They say that it is an Internet
Bubble. They have 133 public-traded Internet companies in their portfolio with equity-
market capitalisations greater than USD 100 million as at June 11, 1999. Their argument
was that given the market capitalisation then, the market was pricing in average 80%
growth per year in revenue for the next five years. Microsoft achieved 53% and Dell
66% growth in revenue per year for the first five years after their IPOs. If the Internet
stocks were growing at 65% instead, the Internet bubble was USD 130 billion with a
market capitalisation of USD 410 billion. We are not even talking about profits here. The
calculation was done using numbers more than eight months ago when NASDAQ was at
2500, compared to the high of 4485 on 10 February 2000.

Doubts are beginning to form about Internet stocks as soon as the announcement of AOL
acquisition of Time Warner. Investors were wondering how Amazon could possibly
make money in year 2000 when consumer spending was expected to slow down, and
when it did not make money in a strong Christmas sales season.

The faithful is losing faith
One simply cannot contradict oneself by taking profit while professing a belief in future
prospects of the company. The Internet stock investors’ mantra is that most dot-com and
dot-net companies have meagre revenues and steep losses, but their gravity-defying share
prices are justified because they are blue-chips to be, even if it takes 5 to 10 years
(Buckman 2000). The average holding period for issues on the NASDAQ stock market
has fallen from 730 days to 150 days compared to a decade ago. Up to early December
last year, Hauppauge Digital’s turnover was 28.2 times with an average holding period of
12.9 days. The turnover for CMGI was 16.2 times and average holding period was 22.5
days.

Buffett buys Utilities
Few fund managers can be as consistent as Mr Warren Buffett in his devotion to old-
fashioned investment principles of Graham and Dobb outlined in their classic "Security
Analysis". The current market has lost it characteristics as a place where companies are
invested according to their track records in terms of financial, management, business and
market tenets. Earnings are for old men, finished and out. Now, the whole market
behaves like a venture capital fund. Investors have become venture capitalists, gently
speculative market participants have become day traders, pension and provident funds
are high technology stockholders. Investing is US national pastime and Americans have
more of their money in the stock market than ever before, according to figures from
Federal Reserve. Everybody has taken on a higher level of risks, knowingly or not!

Mr Warren Buffett's Berkshire Hathaway shares price finished the year down 19.86%
while the S&P returned 21%, underperforming the market by over 40%! The second
richest man in the world, for the first time since 1980, underperformed the S&P 500
Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is accepted
whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte Ltd and its
directors, employees and associates may from time to time have positions in, and may effect transactions. This research report is
prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and the particular needs
of any specific person to receive this report. This document is not to be constructed as an offer or a solicitation of an offer to buy or
sell any financial instruments".

                                                                   3
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg

index as measured by Berkshire's book value. Sequoia Fund, which has USD 4.32 billion
of shareholdings and has been closed to investors since 1982, is down 19%,
underperforming the S&P by 35%. The worst year prior to 1999 for Sequoia was 1973,
when it lost 32.8%, but it then only underperformed S&P by 18%. Berkshire Hathaway
Inc. A share accounted for 30% of the fund’s holdings.

The Year 1999 may be a sub-par year for Mr Buffett but few would like to bet against
him. Warren Buffett, Bill Gates and buyout firm Kohlberg, Kravis Roberts & Co have
started to invest in low risk bargains such as power companies, while investors are still
focused on the go-go tech funds and go-tech stocks.

Unless one is willing to permanently eliminate traditional valuation methods, earnings
must matter sooner or later. If earnings matter, then interest rates matter and Mr Buffett
knows. Is this time different? Is it a new era and a new economy? Buffett and Gates's
actions reveal that this may not be the case.

Because Greenspan finally says so
Mr Alan Greenspan noted last year, "History tells us that sharp reversals in confidence
happen abruptly, most often with little advance notice.... Claims on far-distance futures
values are discounted to insignificance. What is so intriguing is that this type of
behaviour has characterised human interaction with little appreciable difference over the
generations. Whether Dutch tulip bulbs or Russian equities, the market price patterns
remain much the same." So, this time is not different. The new paradigm has the same
old pattern and just as the last time, the movie will end. We just do not know when!

4. Will it be a Repeat of the Asia Crisis?
From the Asian experience and perspective, the problems facing Alan Greenspan are
familiar but with no easy solutions. The market greeted his renomination with a New
Year rally. It stopped worrying about the reversal in the tightening of monetary policy
after the millennium bug scare turned out to be a non-event. But the problems are serious
and they are no different from the problems that Asia was facing prior to 1999.

Internet Mania is about financing long-term projects with short-term capital. It is about
over-leveraging in the private sector, which is close to 150% of GNP. It is about
excessive margin financing (six times for broker-dealer). More importantly, it is about
generating value-added from the inefficient use of injected capital and labour with
minute increase in productivity. US corporations spent USD 1 trillion on computer
hardware from 1990-1996 with a mere productivity growth of 0.8% per annum. We now
know where the growth comes from. The problems were similar, but there is not a lot the
FED can do about it at least for now.

5. But Stay Invested in Asia - the Show Has Just Begun
For the next few years, Japan will decide the fate of the rest of Asia. Japan may be
slipping back into recession, but its Home-PC sales rose 78.8% by volume and 56.1% by
Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is accepted
whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte Ltd and its
directors, employees and associates may from time to time have positions in, and may effect transactions. This research report is
prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and the particular needs
of any specific person to receive this report. This document is not to be constructed as an offer or a solicitation of an offer to buy or
sell any financial instruments".

                                                                   4
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg

value compared to a year earlier in week ended Jan 23, 2000. This was reported in
technology weekly Nikkei Market Access. Sales of desktops rose 93.8% and 59.5% by
volume and value respectively, while those for notebooks rose 64.1% and 53.2%.

There is now a dichotomy in the Asian economies, similar to the US. The new economy
will continue to grow very fast while the old economy will be left way behind. The
Nikkei index reached a peak of 39,000 in 1990 and collapsed all the way to 13,000 in
Sep 1998. A decade later, it is back to 20,000, and it is still a long way off its peak. It is
still the beginning of the Internet era for Asia, with the play extending to Hong Kong,
Singapore, then Malaysia in the coming months, or perhaps weeks.

The IMF prescriptions did not seem to work during and after the Asia crisis, neither did
standard Keynesian aggregate demand policy, which yielded minimum results. Corporate
re-structuring was slow, bank mergers were slow, there was no inflation as predicted,
and there were few fire sales of assets as forecasted. Capital controls is not a bad word
anymore, if it is effective in slowing down capital flows from the periphery to the centre.
It is not the old economy that we are talking about. What will make the difference is the
new cyber economy - the part of the economy that is driven by liquidity. What matters to
the market and the economy is capital flows, especially short-term capital flows. It is
pumping in the money and making a movie. One would have to keep a close watch on
capital flows to see which movie will be the best bet. It is about the Father, the Son and
the Hollywood Spirit....

5.1     The Father
According to Bloomberg reports, Mr Li Ka-Shing, with his Midas touch, took only 106
days to earn USD 7 billion. His latest windfall came two days prior to the start of the
Year of the Dragon, courtesy of Vodafone Airtouch Plc's record USD 203.8 billion
purchase of Mannesmann AG. Mr Li, through Hutchison Whampoa Limited, took a USD
10.9 billion stake in Mannesmann on Oct 21 when it sold Orange Plc, the 3rd largest UK
cellular operator, to Germany's largest wireless company.

Mr Li's Cheung Kong's group of companies is also in joint ventures in Internet
businesses. iBusinessCorporation.com is a USD 385 million joint venture with HSBC
assisting companies to trade goods and services over the Internet. Another Internet
venture tom.com carries a very distinct theme of "Bring China to the world and bring the
world to China" and intends to spend USD 129 million in the first year on content.

Hutchison has also partnered with NTT Mobile Telecommunication Network Inc.,
Japan's largest company by market capitalisation, to offer i-mode mobile Internet access
services in Hong Kong. It has also linked with US Internet auction site Priceline.com to
offer services in Asia. Property Enterprises, a company controlled by Mr Li, was
reported to be buying Cairnhill Court for USD 187.5 million, the highest price paid for a
collective sale to date.


Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is accepted
whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte Ltd and its
directors, employees and associates may from time to time have positions in, and may effect transactions. This research report is
prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and the particular needs
of any specific person to receive this report. This document is not to be constructed as an offer or a solicitation of an offer to buy or
sell any financial instruments".

                                                                   5
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg

Mr Li Ka-Shing, CBE, JP, of Hong Kong, has many awards to his name including 7
Honorary Doctorates from various universities including the University of Cambridge.
He has contributed more than HKD 3 billion towards a variety of projects and initiatives
that have benefited education and medical care in Hong Kong, and HKD 1.2 billion to
Shantou University in his hometown. His latest contribution was HKD 40 million to
Open University of Hong Kong a few days before the Chinese New Year.

5.2     The Son
Mr Richard Li is the chairman of Pacific Century Cyberworks Ltd (PCCW), the largest
Internet company in Asia outside Japan by market value. The company officially
changed its name in August 1999 from Tricom Holdings Ltd. It is to be listed in
NASDAQ this year. Nonetheless, it has been traded over the counter in US since Aug 2,
1999. The company aims to provide high-speed Internet connectivity via satellite,
potentially reaching 10 million cable television households across Asia. It has yet to
offer the service and China Online (Bermuda) Ltd has decided to gradually sell all its
2.9% stake amounting to HKD 3.8 billion at HKD 19 per share, citing that there was a
divergence in the business of strategy of CyberWorks since the shares were originally
acquired by the company.

Mr Richard Li, according to a report from South China Morning Post, spent USD 2.57
million entertaining 3000 guests at a millennium party featuring Whitney Houston and
other top stars. There is much cause for celebration as Mr Li created a company with
HKD 200 billion market capitalisation at HKD 22 a share. Cyberworks lost HKD 62
million in 1998 with a sales of HKD 283.58 million. Li said that the Internet company
will earn a profit in five years. A year ago, the share was worth only HKD .10. It is also
likely that Cheung Kong (Holdings) Ltd and Hutchison Whampoa Ltd will team up with
PCCW to develop Internet businesses.

PCCW has interest in many other companies including MediaRing, the first pure Internet
stock in the Singapore Exchange listed in 1999, and Horizon.com, a profitable company
distributing content through high-speed Internet networks. Li bought a 5% stake for USD
3.1 million at SGD 1.88. He has an option to purchase another 10%. PCCW also owns
25% of SilkRoute Holdings Pte Ltd, another Singapore Internet company preparing for
listing.

5.3     Movies in the Making
The market is buying into the future as the number of Internet users in Asia ex-Japan is
projected to grow by 34% a year from now till 2004. Internet Data Corp. estimates that
there will be 95 million Internet users by then, compared to 21.9 million in 1999.
Clearly, with the expected rise in interest rates, the old economy consisting of asset and
banking plays may be secondary to the Internet play. Telecommunications and
technology stocks are immune to interest rates. That is how the logic goes and that is
where the money goes.


Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is accepted
whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte Ltd and its
directors, employees and associates may from time to time have positions in, and may effect transactions. This research report is
prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and the particular needs
of any specific person to receive this report. This document is not to be constructed as an offer or a solicitation of an offer to buy or
sell any financial instruments".

                                                                   6
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg

The Father and the Son
The father-and-son team will build a global telecommunication and Internet business
with the base in Asia, and extending their network beyond Europe, Hong Kong,
Singapore, and Malaysia. Besides the Internet deals such as those of HSBC-Cheung
Kong, NTT-Hutchison, Priceline-Hutchison, CWHKT-SingTel (or CWHKT-Hutchison-
PCCW?), we also have CMGI Inc., a US venture capital company, teaming up with
PCCW to invest in Asia's online market. Many Asia technology funds are being set up to
invest in companies that are transforming themselves into Internet players and those
focusing on mobile Internet access.

Japan
The Other Son: Softbank
Japan’s largest Internet company Softbank, which has made the President of the
company Masayoshi Son the richest person in Asia with a net worth of at least USD 38
billion, leads the Japanese. Softbank has a USD 33 billion portfolio of listed investment
in 200 companies worldwide and a USD 462 million fund for investment in Japan and a
USD 100 million fund for Korea. In Hong Kong, it has a USD 20 million stake in
Alibaba.com providing B2B online trading services, and a USD 26.7 million stake in
Cheung Wah, an unprofitable garment maker, and a USD 20 million stake in
Techpacific.com. Cheung Wah will probably be Softbank's HQ for investment activities
in Asia, especially China. Investors in Alibaba.com include the Transpac Capital,
Technology Development Fund of Singapore, Goldman Sachs, Fidelity Capital and
Investor AB of Sweden. While raising funds from Hong Kong has its advantages,
Softbank could be subject to a combined tax rate of 60% from US and Japan if it sells its
stakes in Yahoo! Inc and E*Trade Group Inc.. Softbank and Worldbank are joining
hands in funding Internet startups in emerging markets.

Hikari Tsushin Inc. and Others
Japan’s second largest Internet company Hikari Tsushin Inc. has invested in a loss-
making HK electronics company Golden Power International Holding Ltd. Monex
Securities Inc., a joint venture of Oki Matsumoto, Sony, Soros Fund Management LLC.
and John Meriwether's JWM Partners Investments, is set to broaden its business in
underwriting besides expanding its online brokerage business with a fresh injection of 3
billion Yen. Monex is already among the top five online brokers in Japan. Sony,
Goldman, and Morgan Stanley are all setting up funds to finance Internet related firms.

Repeating the Formula
The US Association of Securities Dealers (NASD), which owns NASDAQ, is bringing
NASDAQ to Japan. The NASD-Softbank-Osaka Exchange backed NASDAQ Japan is to
start trading in June 2000. The setting up of the exchange will spur further investment in
Internet related companies and there will likely be a rush of IPOs. Two companies were
listed last year in Tokyo Mothers (Market of High-growth and Emerging Stocks) with
the most lenient listing requirements of all Japanese markets. Similar exchanges such as
GEM in HK and MESDAQ in Malaysia have also been listing new start-ups. But the
results have so far been disappointing as trading volumes continue to be low. NASDAQ
Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is accepted
whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte Ltd and its
directors, employees and associates may from time to time have positions in, and may effect transactions. This research report is
prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and the particular needs
of any specific person to receive this report. This document is not to be constructed as an offer or a solicitation of an offer to buy or
sell any financial instruments".

                                                                   7
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg

Japan looks the most promising if some Softbank companies de-list from other
exchanges and move over. There would likely be 50-100 NASDAQ stocks trading on the
NASDAQ Japan.

And Beyond
In Korea, Mirae Corp, Medison Co., Daum Communications Corp, and five other
Korean companies set up a new investment fund to invest in Internet, software and
networking startups. The target fund size is USD 890 million. Malaysia's MSC
Times.com and Investors Xchange are jointly launching a real-time MSC IT Index on
Feb 18 comprising of 18 KLSE counters available through the Internet. The Li family
had also expressed interest on subsidiaries of Time Engineering, according to Bloomberg
reports.

6.         The First Phase of an Internet Boom in Asia
6.1     The Asian Obsession: Ownership of Assets
In this first phase of Internet boom in Asia, transformation is taking place. The attitude
towards asset ownership is changing rapidly. A large part of Asia is in the Old Economy
with strong preference of ownership in the form of assets. A large part of this ownership
is in real estate. While residential and office properties could be in favour again, a large
percentage of the industrial properties may never see the high prices that were traded in
the mid-90's for a long time to come, especially those in the remote industrial areas. This
is especially true in the changing structure of the old production-based economy to a
knowledge and high-tech economy brought about by the Internet revolution.

To developers, inflated property valuation and prices mean higher profits. In effect, high
prices and higher rentals are equivalent to booking-in many years of the forward profits
of the tenants/buyers. The earnings of the manufacturing firms, and the income of the
individual buyers are locked in years ahead. This is especially true in cities with limited
supply of land, and property prices are sensitive to demand. Most of the time, having
bought and rented the properties at the peak, it was up to the tenants and new owners to
sweat it out and to maintain the margin and profit of the enterprises for the cash flow in
the years ahead. To get rich, it was obvious that one had to be a land or property owner.

Prior to 1997, industrialists would spend an equivalent of 10 years of profits on building
a factory and owning it for a limited number of years usually 30 or shorter. With asset
prices rising, it had never occurred to anyone that if the business was doing well, one
could not sell the property and if the business were not doing well, there would likely be
no buyers for the property. The industrialists just wanted to own their buildings. The
1997 crisis changed all that. As everyone, i.e., the individual, the developer, the
industrialist, even the land and property owner, leveraged to own more real estates, the
market collapsed. Interest rates trended up, and many could ill-afford the squeeze. Cash
was then King but one could hardly raise cash in a down and thin market.

Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is accepted
whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte Ltd and its
directors, employees and associates may from time to time have positions in, and may effect transactions. This research report is
prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and the particular needs
of any specific person to receive this report. This document is not to be constructed as an offer or a solicitation of an offer to buy or
sell any financial instruments".

                                                                   8
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg

The old money, consisting mostly land and properties, are wealth dependent on the
valuation of assets. Owning illiquid, immovable properties was not ideal when you
needed cash. Even wealth in the form of shares of public listed companies, which were
supposed to be more liquid, was not spared. Liquidity shrank with the sinking market.
Hedging via put options and/or short-selling were not concepts acceptable to the old
money. Ownership of assets other than cash was painful. There was no simple and cheap
hedging instruments, let alone other hedge funds techniques of market neutral and
relative value, which would have worked extremely well in 1997.

6.2      Click or be Damned
The transformation in Asia is most obvious in Hong Kong for three main reasons. First,
there is less money to be made in property these days. Second, geographical
diversification by building properties in countries other than their own always ended in
failure. Third, the property magnates who made most of their money from properties and
trading, now believe that there is more money to be made in e-commerce. With
liberalised telecommunication regulations, Hong Kong has moved a lot faster in creating
a critical mass of Internet and telecom businesses. Furthermore, funds are in abundance
especially from the Japanese and the US. The e-ventures are spearheaded not only by the
first generation tycoons, but also the second who are investing their inherited wealth in
Internet start-ups. The "me-too" device to boost stock prices will eventually lead to the
development of real businesses. One may start with just a concept and a shell company,
but once real business is injected into the shell, it becomes a real business. The movies
have become a business!

As noted by Rahul Jacob (2000), there are three approaches to transforming the low
value-added, low margin business of property development into a high value-added, high
margin business. First, by creating Internet ready buildings. Sun Hung Kai Properties has
been successful in its recent launch of such “intelligent” properties. Second, to exchange
property rights for Internet startups in the form of free rentals. Third, to play the role of
venture capitalists. Sino Land is raising HKD 2 billion for technology ventures, in
additional to its own HKD 1 billion.

7.         The Screenplay: Investment Strategy
On the first day of trading in the Year of the Dragon, China Online (Bermuda) Ltd
announced that it would sell its holdings in Pacific Century CyberWorks Ltd., Asia's
largest Internet company outside Japan, because PCCW changed its business strategy.
The 200 million shares comprising under 3% of the shares outstanding were worth a total
of HKD 3 million at a market price of HKD 19. One would have sold the stocks for
whatever reason, especially if you had bought the shares at a fraction of their current
market price. But many investors would hang on to their investment, if they believed in
the boom of the Internet and knowledge-based economy.



Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is accepted
whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte Ltd and its
directors, employees and associates may from time to time have positions in, and may effect transactions. This research report is
prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and the particular needs
of any specific person to receive this report. This document is not to be constructed as an offer or a solicitation of an offer to buy or
sell any financial instruments".

                                                                   9
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg

The Internet movie is on and the old money has to click or be out of action. Eventually,
the brick-and-mortar business will still be the business to own. AOL’s acquisition of
Time Warner is a good example of the beginning of the end of the pure Internet play.
The investors are losing patience and earnings have to come. Every dog has its day.
Those who stick with their brick-and-mortar businesses will be rewarded.

But staying the course like what Mr Buffett has done requires the kind of discipline and
conviction found in Camelite Nuns. The incredible upward movement of the Internet
stocks around the world dazzles us all and everyday, it gathers momentum. The Internet
mania will embrace the new believers warmly and dish out the rewards. Meantime, many
fund managers are wondering and guessing when this luxurious embrace would turn into
a nightmare and claim its innocent victims.

A crash or a sharp correction is anticipated. In the event of a major correction of 20-30%,
Japan could be the saviour as it is flush with liquidity and new found wealth. The likely
scenario will be a gradual shift of capital from US to Japan, then to Asia. It is already
happening.

We are not about to throw away 500 years of belief and invest a 100% in high
technology. We are in search of Internet businesses that erode the profits and margins of
existing business in the industry, while at the same time expanding the client and
customer base.

8.         Where do we put our money?
While the brick-and-mortar will be the main driver of the economy in the second stage of
the Internet mania, “e-business, technology and telecommunications” remain the
blockbusters in this first stage. Being a puritan and a firm believer in business with
earnings and growth, 80% of the investment has to be in "non-performing" brick-and-
mortar businesses. At this stage in Asia recovery, there are still many undervalued stocks
with single-digit PE, triple-digits growth, and the characteristics of the four tenets of
Warren Buffett. Of course, a major US correction will ensure that these stocks are of
even better value and less risky as prices fall sharply.

For this quarter, overweighting Japan and Hong Kong remains the strategy, as fund flows
from the US continue. Malaysia and Taiwan are looking increasingly interesting with the
gradual switch in the mind set towards Internet business in Malaysia and banking in
Taiwan, as well as their MSCI reweighting. Ironically, these two less liberalised markets
will be the best shelters in time of crashes because of their controls and intervention in
the markets. At best, it is a neutral position in Singapore given its lack of flexible
regulation and business drive. Despite the fact that the Singapore market is wide open for
competition and has almost perfect mobility of labour, the system is not responding fast
enough to changes because of the lack of business acumen in the public and private
sectors. In short, the system does not produce many stars such as Demi Moore or Robert
Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is accepted
whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte Ltd and its
directors, employees and associates may from time to time have positions in, and may effect transactions. This research report is
prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and the particular needs
of any specific person to receive this report. This document is not to be constructed as an offer or a solicitation of an offer to buy or
sell any financial instruments".

                                                                  10
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg

Redford. Thus, Hong Kong, Taiwan and Malaysia look a lot better when compared to
Singapore when it comes to "movie first-earnings later" Internet plays. We are still
expecting the STI Index to trend towards 3000 before the year-end but most funds are
overweighted in Singapore in the short term. Thailand and the Philippines remain the
least favoured markets for Internet play. Indonesian President's policy, political will,
strength and support will determine the direction of the Indonesian market. It remains a
market with high risk-reward ratio.

Finally, while fundamentals matter more than a quarter ago, they are still not important
enough to stop the up-trend. Capital flows to Asia will continue until investors
understand what Internet is all about. When the markets in Asia have priced that in, we
will all be a lot more leveraged again.

There is still some way to go.




References
Books

Lewis, Michael (1999). The New New Thing. Hodder & Stoughton.
Meeker, Mary and Chris DePuy (1996). The Internet Report. Morgan Stanley,
HarperCollinsPublishers.
Perkins, Anthony B. and Michael C. Perkins (1999). The Internet Bubble.
HarperCollinsPublishers.
Schwartz, Peter and Peter Leyden (1997). The Long Boom: A History of the Future,
1980-2020. Wired.

Others
Bloomberg, various news and articles, 1999/2000.
Rebecca Buckman (2000). Some Investors Contradict Themselves. Asia Wall Street
Journal.
Rahul Jacob (2000). From Mortar to e-Business. The Financial Times.


Acknowledgement: I thank Prof Leong Siew Meng and Vincent Yew for their
comments.




Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is accepted
whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte Ltd and its
directors, employees and associates may from time to time have positions in, and may effect transactions. This research report is
prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and the particular needs
of any specific person to receive this report. This document is not to be constructed as an offer or a solicitation of an offer to buy or
sell any financial instruments".

                                                                  11
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg




Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is accepted
whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte Ltd and its
directors, employees and associates may from time to time have positions in, and may effect transactions. This research report is
prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and the particular needs
of any specific person to receive this report. This document is not to be constructed as an offer or a solicitation of an offer to buy or
sell any financial instruments".

                                                                  12

				
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