With the mainland set to become the world’s largest internet market in the next year or so, analysts are forecasting a thriving environment for new services in the online retail, gaming and advertising sectors.

05 February 2008
Published by South China Morning Post

“The mainland will soon overtake the United States as the biggest internet market in the world in terms of number of users,” said Dick Wei, China internet analyst at JP Morgan.
 
Still, the experts disagree on when exactly this will occur. IDC claims the mainland already has the title as the No1 internet nation. It said the mainland’s internet population would grow from 234 million last year to 275 million this year, while the US would increase from 230 million last year to 247 million this year.

The more conservative China Internet Network Information Centre, a government-backed research institution, estimates the internet population was 210 million at the end of last year.

JP Morgan forecasts that it will probably take two more years for the country to surpass the US. China’s internet population would be 238 million by 2010, compared with 227 million in the US, it said.

However, most agreed that growth would accelerate as bigger and bigger networks appear across the world’s most populous nation.

“Growth in the Chinese internet sector will accelerate as roughly 20 per cent of the country’s population is now online,” said Richard Ji, a Morgan Stanley executive director.

As more people discover that many of their friends, relatives, colleagues or schoolmates are also online, use of the network will increase, says Jacky Huang, the senior analyst for digital marketplace research at IDC China.

Mr Wei said the internet population previously had been concentrated in key cities but this was changing. “As the government pushes for broader internet adoption and as the costs of personal computers and internet access continue to drop, more people from second-tier cities and the countryside will go online.”

Mr Ji said online communities, or applications such as YouTube, Facebook and MySpace, which stressed interaction between users, would surge on the mainland.

Mr Huang said overinvestment by venture capitalists in online communities and the Web 2.0 sector (websites that encourage user interaction) had created bubbles.

“But there are tremendous opportunities in the Web 2.0 sector, as people really like these services,” he said, adding traffic on online community sites was high and growing faster than traditional portals. “Once they figure out how to monetise such traffic, the sector will finally take off.”

Another sector poised for growth, but which has been lagging behind, is online shopping. Joyo and Dangdang were some of the earliest companies in the mainland internet sector but none have achieved enough scale and profitability for a public listing.

That contrasts with online portals, such as Sina and Sohu as well as online game company Shanda, which have been listed for several years.

Analysts believe the time has come for online retailers. “Users are getting mature and willing to shop online,” Mr Huang said.

Moreover, the infrastructure of e-commerce, which has been holding back online shops’ development, has improved. Online payment, such as Alipay from Alibaba, is becoming more popular and delivery services are in place.
 

Alibaba Group’s management shake-up involving four top executives taking sabbatical study leave, will pave the way for international expansion, industry watchers say.

29 January 2008
Published by South China Morning Post

At the end of last year, the parent of Alibaba.com, the country’s largest business-to-business internet marketplace, revealed a series of changes in its senior management. Chief operating officer Li Qi, chief technology officer John Wu Jiong, senior vice-president Lu Xuhui and president of its online auction site Taobao, Toto Sun, would leave the group at some point this year.
 
The move fuelled a wave of speculation in the market - including talk of a potential spin-off of Alibaba Group’s subsidiaries.

However, analysts said this could be part of Alibaba’s plan to go global.

“Alibaba wants to build its international operations. They need someone who can develop business in the US and Europe,” said Jacky Huang, senior analyst at IDC China, a digital marketplace research firm.

“As hiring someone with overseas experience can be very expensive, they decided to train their own staff. The group on sabbatical leave will be the future management team for Alibaba’s international business.

“Although [the training] could take a few years, [founder] Jack Ma has that kind of patience. Also, the local team has been with Jack for a long time; they are loyal to him.”

In Alibaba’s earlier announcement, the four executives will further their studies in overseas business schools. Other Alibaba executives are scheduled to follow them.

Just before Alibaba.com was listed on the Hong Kong stock exchange, it had attempted to recruit talent to develop its international operations.

A source said he was approached by a head hunter for the position of regional marketing director for international business at Alibaba.com, but turned it down on remuneration grounds.

“For a position of such responsibility, the average pay would be about HK$1.5 million to HK$2 million a year. But Alibaba was only offering about HK$1 million to HK$1.25 million. That is not attractive for an expatriate,” the source said.

Although the offer came with share options, they were priced at “300 times earnings, and were basically useless”, he added. Other people contacted for the same position also turned down the offer, he said.

Alibaba does not believe a low remuneration package is behind the company’s failure to attract foreign executives.

“Since day one, we have been a global company and have attracted senior managers from around the world,” said Porter Erisman, the company’s vice-president for corporate affairs.

“Our compensation is globally competitive and is a combination of base salary plus year-end bonus plus stock options. Throughout the years, our overall compensation has well exceeded the market rates when performance rewards are factored in and we’re confident this trend will continue,” he said.

“We’ve never looked for people who simply want to ‘cash in’. We want people who are truly committed to the company with a long-term view and prefer to have their compensation based on performance and results,” he said.
 

Some of the oldest brands in venture capitalism, including Intel Capital and the 3i Group, have seen their mainland turnover shrink in recent years as key personnel traipse out the door.

21 January 2008
Published by South China Morning Post

“We have seen huge turnover of talent in this industry which is supposed to have much longer tenures than investment banking and other fee-income businesses,” said Vincent Chan, who headed the North Asia division of Jafco for seven years. Japan-based Jafco is a venture capital investor active on the mainland.
 
Mr Chan said that in the mainland market, most venture capital specialists left after two or three years with a firm. Few stay with the same company for 10 years.

“That is extremely unhealthy,” he said.

High turnover of key staff has resulted in the loss of good investment opportunities for some major venture capital firms. One industry source said Goldman Sachs did not invest in the third round of Alibaba Group due to the departure of a manager responsible for the project and instead sold its stake cheaply. Apparently, the manager’s replacement did not feel comfortable handling Alibaba. Another venture capital source said: “It could have easily made more than 50 times [the money it invested] if it had kept its stake.”

As key people leave, even corporate venture capital firms backed by major industrial or financial groups - such as Intel Capital of chipmaker Intel - have problems raising funds.

EPlanet Ventures, a Silicon Valley-based venture capital firm had problems raising funds after investors realised all its key employees, including two in charge of its mainland operations, had left.

EPlanet raised US$650 million in 1999. It invested in some of the best deals in the technology sector, including Skype, Baidu and Focus Media. Its 1999 fund had grown to US$3 billion as of March last year. It has an annual rate of return of 35 to 39 per cent and is one of the best performers in the industry. Still, the company could not raise US$100 million in funding, the source said.

Some of the most talented investment managers have set up their own funds in recent years, allowing them to make much more money.

“If you set up your own fund, you can take the ‘carry’, which is about 20 per cent of the profit of the fund. If you stay with a corporate, such as Intel Capital or 3i, the company takes the carry and you are only paid a bonus,” the source said.

Besides the monetary rewards, establishing their own fund also gives investment managers the freedom to pursue their own strategies, rather than sticking to a company’s rules, he said.

Setting up your own shop is not difficult. Armed with a track record of reasonable returns, experienced investment managers “don’t need recognised brand names to raise new funds”, he said.

Former Jafco employee Mr Chan is a case in point, having just set up Spring Capital Asia. So far, he has raised US$100 million and plans to raise a further US$200 million in the first quarter of this year.

But can the new venture offer better investment returns to investors? Mr Chan believes so, arguing that those who manage their own fund tend to work harder to bring in more returns.

Moreover, the advantage of major corporate venture capital firms providing regional coverage is disappearing. Most venture capital firms will have to be located in the country they are investing in as “local knowledge is key to getting a better deal”, Mr Chan said.
 

Online games maker Kingsoft Corp’s development team, which has lost several members to rivals, might become even more fragile after its chief executive resigned over differences with the chairman, sources said.

15 January 2008
Published by South China Morning Post

While the Beijing-based software developer publicly attributed chief executive Lei Jun’s departure to health issues, others pinned the reason on cracks at the top.
 
“Lei Jun and the company chairman, Kau Pak-kwan, have not been totally in agreement for years,” one source said. “After the company got listed, Lei Jun was finally able to cash out and do something else.”

The resignation comes two months after Kingsoft went public in Hong Kong on October 9, raising about HK$768 million.

Mr Lei, Kingsoft’s third-largest shareholder after Mr Kau and Government of Singapore Investment Corp, owned about 158.2 million shares or 14.9 per cent at the time of the listing.

Based on yesterday’s closing price of HK$3.65, his stake is valued at about HK$577.43 million.

Mr Kau founded Kingsoft to develop Chinese-language software. With its word processing software widely popular, it was once considered the mainland’s equivalent of Microsoft.

However, piracy hurt sales badly and the company had to find a new direction. That came in the form of online games, which accounted for 74 per cent of Kingsoft revenue in the third quarter of last year.

Mr Lei joined Kingsoft in 1992 and was its chief executive from 1998. He was also the chief technology officer, in charge of the online games division.

“Kingsoft is a solid game developer,” said Dick Wei, JP Morgan’s mainland internet analyst. “Although it has produced no blockbuster yet, it has the most diversified game portfolio in China.”

Kingsoft’s 700-strong development team, scattered in six cities, has not been stable. In 2005, a group of software experts left for NetEase, the country’s second-largest online game company by revenue. In October 2006, Wang Fung, second in command at the online games division, left to set up his own game company, Linekong.

“Mr Lei’s resignation will make Kingsoft’s game development team even more unstable,” an analyst said.

Chief financial officer Kelvin Wang Donghui disagreed.

“I think those analysts are very irresponsible in saying such things. They don’t understand what Kingsoft has been through in the last two years,” Mr Wang said.

“Making the transition from a software package company to internet and entertainment services was not easy at all. Kingsoft almost went bankrupt.

“Now Kingsoft has finally listed in Hong Kong, fulfilling a long-term dream. I think it is the right time for [Mr Lei] to step down and take a rest.”

Mr Wang noted that Mr Lei “has not left Kingsoft completely”. As a board member, “he can lead the company from a higher perspective”.

He will remain an executive director and vice-chairman of the board.

Kingsoft’s revenue increased from 112 million yuan in 2004 to 215.2 million yuan in 2005 and 316.4 million yuan in 2006, representing annual growth rate of 68.1 per cent.
 

The mainland’s technology and alternative energy sectors are likely to be the source of more initial public offerings this year, but not on last year’s giant scale, analysts predict.

14 January 2008
Published by South China Morning Post

The US$1.5 billion listing last year of mainland e-commerce group Alibaba.com was the largest internet share sale since Google, and Giant Interactive’s US$1 billion offering in New York was the city’s biggest from a Chinese company last year.
 
More deals may come from mainland technology and energy plays but not on this scale, said analysts.

“While there are a lot of high-growth companies waiting to be listed, I do not see any as large as Alibaba or Giant in the sectors I cover,” said JP Morgan internet analyst Dick Wei.

Alternative energy is another mainland sector that is yielding hotly sought offerings, though the deals range from US$200 million to US$500 million, rather than in billions of dollars.

Solargiga Energy Holdings, a solar panel component maker, is raising US$300 million in Hong Kong. The offering will be launched on January 21 and trading is expected to start on February 1.

Other mainland offerings in the pipeline include CTV Goldenbridge International Advertising’s US$200 million deal, and an online gaming company, Shenzhen Domain Network, that plans to raise US$300 million in New York, sources say.

Time Share Advertising & Communications, a Beijing outdoor media firm partly owned by US private equity fund Carlyle Group, plans to raise up to US$150 million in the United States, and Beijing Novel-Tongfang Information Engineer, a digital television device maker partly held by Tsinghua University, plans to raise as much as US$400 million in an offering on the New York Stock Exchange.

Jiangsu Shunda Group and rival Asia Silicon, two mainland suppliers of silicon for solar energy equipment makers, plan to raise between US$200 million and US$300 million in Hong Kong or New York.

SouFun Holding, a property website, seeks to raise about US$500 million and Taiwan’s fabless chipmaker MStar Semiconductor targets US$500 million.

Baidu.com, the mainland’s biggest internet search engine, may seek a Hong Kong listing as it steps up competition with Alibaba Group in the online auction market.

Meanwhile, Alibaba’s recent management revamp was seen by analysts as a sign of possible new spin-offs, either as separate listings or asset injections into Alibaba.com, the Hong Kong-listed unit, said Mr Wei.

The US market historically drew most of the Chinese high-profile technology firms for listing.

“If you have a sexy story to sell, such as high growth and high margins, you would go for the US market,” said Mr Wei.

Last year, mainland companies raised US$4.93 billion from 18 offerings on the NYSE and US$1.89 billion from 11 deals on the Nasdaq for a total of US$6.82 billion, a sixfold leap from the US$1.08 billion raised in 2006, Dealogic said. Most were technology or media-related offerings. Not all have delivered sterling returns to investors. Shares of online game provider Giant are now 19 per cent off their listing price on the NYSE.

“Giant’s margins are seen as high in its industry. Investors are worried it will have more downside risk than upside potential,” said Mr Wei.

The outperformers include market debutants such as LDK Solar, which makes solar wafers. The firm raised US$486 million in May last year, the second-largest China deal for the year. Its shares have since leapt 62 per cent.

But the newcomers have also not been without scandal.

On the Nasdaq, last year’s largest deal came from Xinhua Finance, which raised US$300 million in March. Its shares have since dropped 58 per cent since and shareholder Israel Bollag sued the company in May, saying it had failed to disclose that one of its executives worked for one of the brokers arranging the sale.

Merrill Lynch climbed atop the league table for China offerings on either the NYSE or Nasdaq last year, with US$1.59 billion raised in 10 deals, followed by UBS with US$1.41 billion from seven deals and Morgan Stanley with US$880 million from six, Dealogic said.

Better valuations were one reason for the preference for a US listing. “Valuations can be achieved in the US market for Chinese firms that are at a premium to global comparables given the right growth sectors,” said Jason Cox, co-head of Asia Equity Capital Markets at Merrill Lynch.

With the help of good analyst coverage, investors in the US can understand and appreciate the value of high-growth mainland firms.

“Recent deals highlight the ability of a sophisticated US investor base to understand and evaluate companies with specific industry expertise or direct US comparables, even in the current markets,” Mr Cox said.

“In return, investors gain exposure to a US-listed entity that offers both a play on China’s phenomenal growth and on the growth of specific sectors, be it technology, consumer spending or lifestyle changes.”

US funds, meanwhile, are paying more attention to China as growth in their domestic market shrivels.

“Demand from US domestic funds has grown significantly” noted Mr Cox. “Recent transactions have generated multibillion dollars in demand, of which about two-thirds in some cases are in the US market, indicating US funds are seeking access to the China growth story.”

Mr Cox said the US listing option would continue to lure select mainland firms with a growing, increasingly liquid institutional market that would support further equity issues from proven firms.

But with Alibaba.com’s listing last year, Hong Kong as another option for listing-bound mainland technology plays has become more appealing. “Many US investors have set up offices in Hong Kong. There were many new hires to provide the analyst coverage. The valuation gap is diminishing,” said Mr Wei.

Moreover, compliance with the Sarbanes-Oxley Act could be expensive for a small mainland firm listed in the US, and there was less of a language barrier in Hong Kong, he said.

Mainland online game companies Kingsoft Corp and NetDragon Websoft also listed in Hong Kong last year, raising HK$768 million and HK$1.42 billion, respectively.

Mr Cox notes that the relative importance of Europe has diminished.

“Issuers and arrangers are able to harness important new pools of demand such as the Middle East as well, and accordingly the historic importance of the European investor to emerging market issues and to China has moderated,” he said.
 

Following breakneck growth over the past two years, the mainland’s online gaming industry is expected to slow this year because of a glut of free games and as attention turns to the Beijing Olympic Games, analysts said.

08 January 2008
Published South China Morning Post

As a result, investors should expect few initial public offerings this year from domestic online game developers, they said.
 
“There was no new star game last year,” said Bryan Yuan, an analyst at market research firm International Data Corp (IDC).

Mainland online game companies, which have actively developed original products, have relied heavily on releasing free software - particularly massively multiplayer online role-playing games (MMORPGs) - to attract new consumers and enlarge the domestic online gaming population.

“That is why we have witnessed extraordinary growth in the last two years,” Mr Yuan said. “The first major free game, ZT Online, was launched in 2005. Nowadays, almost every new game is free.”

Industry estimates show the mainland now has about 40 million online gamers, about 40 per cent of whom are paying customers.

Dick Wei, China internet sector analyst at JP Morgan, said the impact of free games would start to wane this year.

According to JP Morgan, the domestic MMORPG segment is projected to grow 37 per cent this year to US$1.54 billion, slower than the 54 per cent growth achieved last year.

The casual gaming segment is expected to increase 43 per cent to US$293 million, down from last year’s 56 per cent growth.

“Overall, [industry] growth will be driven by the usual factors, such as internet user growth, broadband penetration, economic growth and inflation,” Mr Wei said.

He also predicted that the Olympic Games could serve as a distraction for the domestic online gaming community.

“During the [football] World Cup, users spent less time on games,” he said by way of example.

Four mainland online game makers listed shares last year, raising a total of about US$1.3 billion from investors: Beijing Perfect World, which listed on the Nasdaq in New York, Kingsoft Corp on Hong Kong’s main board, Giant Interactive on the New York Stock Exchange, and NetDragon on Hong Kong’s Growth Enterprise Market.

Nineyou, the mainland’s biggest casual games provider, is widely expected to try for an initial public offering this year after resolving differences with South Korean developer T3 and distributor Yedang. Their previous disagreements concerning the game Audition scuttled its share offer drive last year.

It was also reported that Shenzhen Domain Network, which launched the game Huaxie Online last year, would go public this year, seeking to raise about US$200 million.

Other potential initial public offering candidates from the mainland’s online game sector include Shanghai Post and Telecommunications Technology’s Tiancity.com, which operates the popular game Popcart, and T2CN, which provides the game Freestyle.

In 2004, online game companies Shanda Interactive Entertainment and The9 listed shares on the Nasdaq, raising a total of US$250 million.

Mr Wei said sport-based games were expected to be a new trend in the mainland gaming sector. Leading the way is The9, which will launch Fifa Online this year on the mainland, in partnership with United States-based video game giant Electronic Arts.

Movie-related games are also seen as a growth trend. Perfect World’s Chi Bi and NetDragon’s Tou Ming Zhuang Online are based on movies of the same names.

“The movies help promote the games. However, they might have a shorter life cycle as the popularity of the movies fade,” said Mr Wei. “Perfect World has the best system in place for game development. It took them only half a year to launch a new game.”

In-game advertising is also expected to pick up this year. Shanda has established a separate division for selling advertisements within online games.

New titles that are expected to be popular on the mainland this year include Audition 2 and Fantastic Melody Online from The9, Chinese Paladin Online from Nineyou, JX 3 from Kingsoft, Giant Online from Giant Interactive, and Zhuxian, Wulian 2 and Chi Bi from Perfect World.

For investors interested in the online game sector, but unsure which company to invest in, Mr Wei suggested Sohu, the mainland’s second-largest online portal.

“As game companies raised a lot of money from their initial public offerings last year, they will be willing to spend huge amounts marketing their games this year,” said Mr Wei. “Sohu will benefit as it owns the most popular game portal, 17173.com. Also, the success of Sohu’s self-developed game TLBB is beyond industry expectations.”

Despite the subprime mortgage crisis in the United States, private equity groups in the Asia-Pacific region excluding Japan are still riding a boom.

19 November 2007
Published by South China Morning Post

“Private equity firms in the region have no problem attracting capital. Pension funds still are willing to invest,” said David Nott, regional leader for KPMG’s Private Equity Group in the Asia-Pacific.
 
The global credit crunch that started in August has curtailed private equity activity in the United States and Europe. Failed buyout attempts made headlines as the market ran out of cheap loans. Blackstone Group, a leading US private equity firm, announced disappointing third-quarter results.

But Mr Nott has seen no impact so far on peers in the region. Firms with good track records can still raise new funds easily. Affinity, for example, was able to raise US$2.8 billion in four months this year, Mr Nott said. Three years ago, it raised just US$700 million over nine months.

Last year, private equity firms in the region raised US$32.9 billion in new capital, up 39 per cent from 2005 and five times the total four years ago.

“There was a fundamental shift in investor interest to China and Asia as investment destinations,” Mr Nott said. A survey by Asian Venture Capital Journal found 94 per cent of investors named strong economic growth as a key reason for investing in the region.

Less reliance on debt financing also makes Asian private equities less prone to the recent credit crunch. The debt-equity ratio is usually conservative and covenants or conditions for loans were stricter in Asia, Mr Nott said.

While high-profile billion-dollar takeovers dominated headlines, most of the region’s funds were actually growth capital, interested in much smaller deals, he said.

Only 10 per cent of investors polled by the survey described their funds as buyout, that is borrowing money to acquire other businesses. Those describing themselves as generalists interested in all stages of a business’s development totalled 44 per cent.

Another trend is the growing importance of sovereign funds in the region. An estimated US$864 billion is earmarked by governments for investment in the region including Singapore, the mainland and Australia. “Their sheer size means they will be significant players in the global market,” Mr Nott said.

China Investment Company set up recently by Beijing has capital of US$200 billion. “With US$200 billion, you can buy any company in the world,” Mr Nott said.

Noting that sovereign funds could be investing for political and strategic reasons and not just financial gains, he said: “Their brief or mandate for investment would be the most interesting to see.”

In the first nine months of this year, private equity houses invested new capital of US$53.3 billion in the region, compared with US$61.8 billion for the full year last year. This led Mr Nott to say that a new record high would be set for the full year.

However, he admitted that “no one knows yet” if the subprime problem would dampen US demand for mainland goods and check the latter’s growth.

So far, it is still boom time for Asia-Pacific private equity houses.

Last year, total private equity funds under management in the region rose almost 30 per cent to US$158.5 billion from a year earlier. By June this year, it rose further to US$171 billion. The mainland dominated the investment profile with 61 per cent, followed by India with 37 per cent and 29 per cent in Australia.

In the next five years, while 74 per cent of investments will still favour the mainland as a prime destination, India will become more popular, drawing 63 per cent of investments and Taiwan capturing 38 per cent.

In the next five years, investors will favour the consumer, retail and services sectors, with 25 per cent expressing interest, followed by 19 per cent in industries touting environmental protection.

Regulators had approved the takeover of computer distributor and information technology services company Digital China by its management and a group of venture capital firms, said Andy Yan, the managing director of SAIF Partners, one of the venture capitalists involved in the deal.

01 November 2007
Published by South China Morning Post

Mr Yan said the State-owned Assets Supervision and Administration Commission of the State Council had given its go-ahead for the deal, the largest management buyout in the mainland IT sector.
 
Digital China chief executive Guo Wei, together with SAIF Partners, Hony Capital and IDG, took 42.94 per cent of the company from Legend Holdings and General Atlantic Partners, a US venture capital firm.

The selling price was HK$3.50 per share, taking the total consideration to HK$1.318 billion.

The deal was initiated on August 1. With the deal’s completion, Mr Guo controls about 10.19 per cent of Digital China. SAIF Partners, a venture capital arm of Japan’s Softbank, is the largest shareholder with 20.15 per cent. The second-largest is Legend, which holds 17.83 per cent.

Digital China’s shares closed at HK$5.08 yesterday, giving Mr Guo and his partners a more than 45 per cent gain. The shares have gained 100 per cent this year, outperforming a 57 per cent rise in the Hang Seng Index.

Legend, controlled by the Chinese Academy of Sciences, requires government approval for its asset sales. Management buyouts are rarely approved in the mainland.

The latest endorsement cleared the final obstacle to the deal, signalling a change of government attitude.

“At the end of last year, the Chinese government made several changes that were highly beneficial to management buyouts of Chinese companies,” said David Eich, a lawyer with Kirkland & Ellis.

“One of them is a policy decision - state-owned enterprises are encouraged to ‘equitise’ their management, so that their interests are aligned with shareholders,” said Mr Eich.

“Another is that the limit on foreign exchange held by individuals has more than doubled - making it easier for management to access cross-border investment.”

Legend has many subsidiaries, including venture capital firms Hony Capital and Legend Capital, and property development arm Raycom Real Estate.

“It is common for a subsidiary in a large corporate structure to feel like an orphan. If it can go independent, it might have more resources to grow,” said Mr Eich.

Digital China’s management said in July it planned to increase investment in IT services. The company is competing against other mainland firms, big international rivals and major Hong Kong companies. It expects a 10 to 15 per cent profit growth in the IT services sector next year.
 

Giant Interactive, which aims to raise up to US$800 million in an initial public offering on the New York Stock Exchange, has surpassed Shanghai-based The9 to become the third-largest online game company on the mainland.

23 October 2007
Published by South China Morning Post

Giant’s first-half revenue surged to 687 million yuan, more than eight times its 82 million yuan in sales a year earlier. Profit in the first six months jumped more than 11 times to 512 million yuan.
 
The company’s turnover gain took it past The9’s first-half sales of 540 million yuan. Both trail Shanda Interactive Entertainment, which had revenue of 1.1 billion yuan and NetEase.com with 1.07 billion yuan.

Giant, founded by legendary entrepreneur Shi Yuzhu, is selling 20 per cent of its equity or 57 million shares at an indicated range of US$12 to US$14. Standard Chartered Private Equity has committed to invest US$25 million in Giant at the IPO price.

Mr Shi, who graduated from Zhejiang University in 1984 with a bachelor degree in mathematics, first made his fortune producing Chinese software in the late 1980s and early ’90s. His company almost collapsed in 1997 under mounting debt when he tried to erect the mainland’s tallest building in Zhuhai.

He made a comeback three years later by selling health-booster drinks for the elderly under the Nau-bai-jin or brain platinum brand. A television advertising campaign and blanket sales force that reached every corner of the country worked wonders and soon Mr Shi was back on the country’s rich list.

He started developing online games in 2004 with former Shanda designers. Their ZT Online game, also known as Zhengtu, was commercially launched in January 2006 and by year-end it was ranked the country’s most popular, according to a report by researcher IDC. “The game is not exceptional in terms of technology - it’s a 2D game, not as fancy as the 3D World of Warcraft. However, it just grabbed people’s interest, with its game play and marketing effort,” an industry analyst said.

As he did with his health drinks, Mr Zhi organised a sales force to blanket every city in the country, reaching even fifth- and sixth-tier urban centres, the analyst said.

The game is easy to play and free, with income derived from the sale of weaponry. “If you don’t buy weapons to equip yourself, you will soon be killed by other players. So, instead of free-to-play, I would call it ‘free-to-be-prey’,” said Frank Yu, who works as a producer of casual games at Microsoft’s Beijing research and development centre.

The game also has many innovations aimed at raising income from the gamers. One of ZT Online’s new ideas is to sell insurance policies to the players, so that even if they are killed, they will not be robbed of their weapons and equipment by other players, said Mr Yu.

As a result, the supposedly free-to-play game had 1.2 million people paying an average 98 yuan a month in the second quarter. The average that Shanda took from its paying customers was 58 yuan a month in the same period. ZT Online had an average of 515,000 concurrent users and 1.07 peak concurrent users in the second quarter.

Since August, Giant has released a pay-to-play version of its game, ZT Online PTP, which is also becoming popular. “About 30 per cent of users play the new PTP version and 70 per cent the original free-to-play one,” said the industry analyst. The company’s new 2.5D game, Giant Online, is also likely to be a hit. “It ranks pretty high in our recent research,” said the analyst.

Even so, the volatile nature of game players’ tastes makes success in this industry difficult to predict. NetEase, after two blockbusters - Westward Journey 2 and Fantasy Westward Journey - has failed to come up with another hit for more than two years.

“We may not sustain our recent growth rate or profitability,” Giant said in its IPO prospectus.
 

Alibaba.com, the mainland’s biggest portal, has raised the price range of its initial public offering by almost 13 per cent after receiving overwhelming orders from institutional investors.

23 October 2007
Published by South China Morning Post

The company would now market the shares at between HK$12 and HK$13.50 each, compared with the original range of HK$10 to HK12, market sources said.
 
The deal will raise up to HK$11.6 billion and value Alibaba at HK$68.6 billion, or 54 times estimated profit for next year before stock-based compensation.

Nasdaq-listed Global Sources, Alibaba’s closest rival, trades at about 33 times estimated earnings.

Despite Alibaba’s higher valuation, investors are keen on the shares, and sources said the institutional tranche had been 50 times covered.

“The stock is very hot,” said a fund manager who subscribed to the offer. “Investing in China internet companies, you have to have imagination.”

Alibaba’s chief executive David Wei said the price to earnings ratio was reasonable because investors were upbeat on the company’s profits for next year and 2009.

“In fact we can set the price even higher but we also think more investors should benefit from our strong growth,” Mr Wei said.

The listing document shows that profit is expected to be at least 622 million yuan this year, up from 219.9 million yuan last year.

“Alibaba has a solid user base, but it needs to develop more ways to charge its users,” said Jacky Huang, senior analyst at market research firm IDC China.

The company estimates net proceeds from the offering will range from HK$2.6 billion to HK$3 billion. It will use HK$1.57 billion to HK$1.77 billion for strategic acquisitions and business development initiatives to enhance its brand.

“We want to expand our business to international markets through this IPO and join the global e-commerce market,” said chairman Jack Ma.

Alibaba shares are scheduled to be priced on October 27 and begin trading on November 6.

Separately, Fuzhou-based online game company NetDragon, which is seeking a listing on the Growth Enterprise Market, has also raised the indicative price range of its initial public offering to between HK$11.18 and HK$13.18 from HK$10.24 to HK$12.11 a share, people familiar with the situation said.

“The order book was fully covered on the second day, giving sponsors and companies the confidence to raise the price range,” a source said.

Based on the top-end of the new range, NetDragon will raise HK$1.42 billion from the deal.

IDG Group will hold about 14.5 per cent of NetDragon after the listing.

IDG has previously invested in high flyers such as Baidu.com, the largest search engine in the mainland; Ctrip.com International, the largest online travel site; and Sohu.com, the second-largest internet portal.

NetDragon shares are expected to be priced on Friday and begin trading on the Hong Kong stock exchange on November 2.