It's got a great name, a lot of hype, a really high price and a warning list 14 pages long. Should you invest in it?
On the surface, buying stock in China.com is a no-brainer. Hey, you're surfing two of Wall Street's favorite waves: the Internet and China. What's not to like? When you look closely, quite a bit. Like, for instance, a high price. China.com, which is going public on the U.S. Nasdaq market rather than in Hong Kong or China, where it does business, is likely to have a stock market value of well over $1 billion shortly after the stock is issued.
Which poses the following question for investors: Other than a marvelous stock symbol, CHINA, and the imprimatur of recent investor America Online, what do you get by investing in China.com, whose allure is its Internet portals in China, Hong Kong and Taiwan? The first -- and to me, most distasteful -- thing you get is Xinhua, the Chinese government's propaganda arm, as a partner. Xinhua is one of the founders and big stockholders of China.com, which began operating in China and later expanded to Hong Kong and Taiwan. Xinhua censors -- excuse me, edits -- the content on the company's China Web site. Yes, objecting to Xinhua may be a little prissy. But would you invest with that nice Mr. Milosevic in www.serbia.com?
Second, China.com is based in the Cayman Islands, which the company says probably puts it out of reach of the U.S. legal system. Third, the marketing of the stock is so much better than the product the company sells that it would give anyone pause.
Let's take a look at www.china.com, the company's big selling point. One day last week the top story was "Tanzania Follows Closely With China's Reform Process." The "highlights" section consisted of pictures of coast guardsmen running through drills. What excitement! Could this be why the site registers fewer than 100,000 hits a day, by industry estimates? That's less than 5 percent of the 2.1 million hits recorded by China's hottest site, jazzy, U.S.-style sina.com.
Where am I getting my information? A reasonable question. No one in the deal would talk to me, because China.com, which may get its sale done as early as this week, is in the Securities and Exchange Commission's so-called quiet period. So I've based this article on my reading of China.com filings, some background interviews and reporting from Hong Kong by my Newsweek colleague Mahlon Meyer.
Read China.com's SEC filings and snoop around an Asian Web site or two, and you get a real bad feeling. No fewer than 14 pages of the SEC filing outline some of the risks you run buying this stuff. I've got no room for even the highlights. The filings indicate a sale of 4.2 million shares at about $15 each, though the issue will probably end up larger and the price higher. The $15 price is what insiders have been paying since April. That includes a deal in May in which Xinhua sold about half its stock to a Hong Kong construction company, apparently to make the offering more acceptable to Western investors, and a June deal in which AOL paid $25.48 million for its 10 percent stake and the right to buy an additional 8.5 percent at the offering price. AOL says that Xinhua has no special rights at China.com, and that AOL's investment is designed to support the upcoming launch of AOL in Hong Kong and shows "our strong commitment" to the region.
At $15, China.com would have about 30 million shares outstanding (including options and AOL's purchase rights), and would thus be valued at $450 million. But because there will be only a few shares available for trading, you can see this baby going to $50 or more, if only briefly. At $50, the company would be valued at $1.5 billion. What are you getting for your money? A lot of sizzle, not much steak. China.com's major business consists of helping companies set up and administer Web sites. Not exactly high-margin stuff. The company had $3.45 million of revenue last year, and a loss of $8.54 million. So you're buying not an actual business but the company's potential, its political influence with the Chinese government, its salesmanship and the AOL connection, whatever that may turn out to be. China.com's track record, though, isn't particularly inspiring -- deals with the likes of Bay Networks, PointCast and Netscape have fizzled.
The bottom line: Yes, China's 1.2 billion people make it a great potential Internet market. But foreigners frequently make the mistake of imposing their own world views on investments in big, complicated places such as China, Japan or the United States. A reason they frequently come to grief. This offering has more red flags flying than Tiananmen Square on National Day. Ignore them at your peril.
Sloan is Newsweek's Wall Street editor. His e-mail address is firstname.lastname@example.org.