Intermost's VC-30 Risk Rating: V3

By Douglas C. McGill

Intermost Corporation (ticker: IMOT) is a Shenzhen-based company which claims to be "a leading internet service provider in China." Its main product is a "business-to-business" Web portal that says it offers "high-quality, cost-effective, useful business information, products, and services" to support domestic and international trade in China.

The stock, now at 4.50, has increased 23 percent in the past year, although the shares have been volatile, trading between 1.37 and 10 during the period. Investors in the stock have been much impressed with the company's prospects for grabbing a major part of the exploding market for online commerce in China, especially for Web sites offering businesses in China and the U.S. an online platform on which commerce can occur through matching buyers and sellers, Web storefront retail sales, etc.

This is the first "V-Rating" to be assigned to companies listed on the Virtual China 30 Index of China Internet stocks.

For the complete list of Virtual China 30 stocks, click here.

Stocks rated in this system receive one of four ratings -- V1, V2, V3, and NVMS, which stand for "Very Risky," "Very, Very Risky," "Very, Very, Very Risky," and "No Visible Means of Support," respectively.

An NVMS rating would indicate the absence of any reason to invest in a stock aside from investor euphoria, and would lead to the stock's removal from the Virtual China 30 Index.

I'm not a professional stock analyst, I'm a journalist. On a scale that stretches from Morgan Stanley's stock jocks on one side to the average Joe (or the average Zhou) on the other, I stand a lot closer to Joe and Zhou. I'll call up a company and ask an impertinent question long before I take a serious look at a stock's beta.

That's why every V-rating will be based on the answers to seven questions, impertinent if necessary. For ease of comparison among the VC-30 stocks, the questions will remain largely the same from company to company. A V-rating will be assigned to the answer of each of the seven questions. The final V-rating will be calculated from the average of those seven ratings.

On to Intermost:

1. Can you reach the company easily by phone?

No. You can call Steve Smith, a very agreeable PR guy at Buchanan Consulting, at the phone number given at the bottom of Intermost's press releases. Unfortunately, Steve doesn't know much about what's going on at the company these days because the Buchanan contract with Intermost expired on December 31. It's been a bad time for IMOT to be without PR. The company was delisted from the NASD-run Bulletin Board electronic trading system in mid-January after failing to respond in time to SEC queries about its recent 10-SB filing. (The 10-SB contains a full company report including an audited balance sheet and operating statement). Since then the company has been trading on the all-paper, and harder-to-use, "Pink Sheet" system. The online trading chat rooms have been filled with frustrated and angry investors, many of whom report sending e-mails to the company's headquarters in Shenzhen and getting empty form-letter replies. Meanwhile, instead of explaining the problem fully and adequately on the company's corporate Web site, an "Investor FAQ" contains a section called "Why doesn't Intermost release more information to the investment community?" Answer: Keeping investors up-to-date on the company's news is "of secondary importance" to Intermost's other important activities. (V3)

2. How good is the company's main product -- in this case, a Web site?

The company's "B-to-B" portal is called ChinaE.com . It is functional but a far cry from what it should be, considering the company has 95 employees and that the site was launched in July of 1998. The difference between what is described in the company's SEC filing and what is on the site is vast. For example, the company's 10-SB speaks of "our staff of researchers, writers, editors, and online producers [who] compile useful information" for readers. On the site itself, there is little evidence of all the work being done. The research categories for individual businesses contain little more than an address and a phone number. That is in itself valuable in China, and a certain amount of overreaching in a company's brochureware is forgivable. But again, it's been a year and a half. More to the point, competitor sites like Alibaba.com and Asiansources.com, both privately held, are already far richer in content, easier-to-use, and appealingly designed. These two competitors are also far better armed for business combat. Alibaba.com in January raised $20 million from the Internet holding company Softbank, and Asiansources.com, which is the online version of a previously highly successful trade magazine venture, appears to be thriving. In 1999, Intermost reported a loss of US$229,000 on sales of US$388,000. Most of those sales apparently come from Web site design for corporations. (V3)

3. Does the company talk big? Are its competitive claims and lofty goals justified, or nearly so?

Yes and no. The only real business the company has at the moment appears to be Web site consulting and design. There are now hundreds if not thousands of Web site design shops in China. Yet Intermost claims to be "one of the leading providers of Internet service in China," and another time to have the "current leading market position" among Chinese business information sites. Where is the evidence? ChinaE.com does not appear on the Chinese government's recent list of the 66 most frequently-visited Web sites in China, dozens of which, such as Sina.com, 163.com, Sohu.com, and China.com, all provide business information. Much of the problem seems to be lack of focus: is Intermost a business info provider, a B-to-B services provider, a consulting company, or what? It claims to be all of these things. By the evidence it's master of none. (V3)

4. Does the company claim to have "good guanxi," "superior contacts," and "partners at high levels in the Chinese government?"

To it's credit, Intermost stays clear of these claims which pepper so many of the China Internet company press releases these days. They are the easiest claims to make and the hardest to verify. Even when they are true -- such as when a company has a former high-level ministry official as an "independent advisor" -- guanxi (having a full Rolodex) isn't what it used to be in China. This is a super-competitive market and there are lots of companies now with great guanxi. On the other hand, it may be the reason the company isn't crowing about its guanxi is because it truly has none. (V2)

5. Does the company have good products in the pipeline?

Last June, the company formed a joint venture subsidiary to develop a "cyber-cash payment system" that would allow for credit card payments on foreign banks and debit card payments on Chinese banks. Credit cards are rare in China, while more than 100 million Chinese use bank debit cards. A nationwide system allowing for online debit card purchases is now being sought by nearly all e-commerce companies in China. However, a nationwide system, similar to the ATM system in the U.S., is generally considered to be five or more years away. In the meantime, a very few online debit card systems have been developed locally, allowing, say, Internet users in Shanghai to make a purchase against their bank in Shanghai. Intermost says it is collaborating with a local bank in Shenzhen to do the same. However, government approval for the system could take up to a year and a half, by Intermost's own admission in its SEC filings.

Last April, the company announced an agreement with Yiwen Book Import & Export Company, a state-owned enterprise, to create "one of the world's largest online bookstores of Chinese titles." Yiwen had 120,000 Chinese-language titles in its inventory. Intermost recently announced it had scrapped the plan "to concentrate on other market opportunities" and to "intensify its market focus." But on what business in particular? The 10-SB lists a host of them -- business info, B-to-B services, Web design, etc. (V3)

6. Okay, so the company is ambitious. Is the management team up to the task?

The company president is 37-year-old Jun Liang, a 1986 graduate of Stanford University with a masters degree in chemical engineering. From 1994 to 1998 he was president of China Business Resources, a Hong Kong company (privately held) that did $500,000 a year in sales of directories and other business information in print and CD-ROMs. The executive vice president is 52-year-old Andy Lin, who also came from China Business Resources. The company's most trumpeted hire was 38-year-old Mark Williamson, who worked in marketing and finance for EDS, the information services company, and Compaq. He joined Intermost last November as VP for business development. Prior to joining Intermost, his main international experience was working as Managing Director of Williams, Fournier & Company in Budapest. If Intermost succeeds at what it says it will have to become a marketing powerhouse, a technological wonder -- and do US$25 million in sales in ten years. If past is prologue, I just don't see it. (V3)

7. Does the company have a strong U.S. operating presence and at least one strong U.S. strategic partner who could add technological or financial expertise?

No. There is no Softbank-like sugar daddy in sight, nor does the company have good strategic partnerships, nor seeming prospects for any, with any company that could give it strengths in key areas. No Microsoft partnership in software; no Yahoo partnership in content; no eBay partnership for auctions. Other Web companies in China these days are busy sewing up these kinds of deals to gain all-important technology transfer. During slow periods caused by China's stop-and-start reform process and possible Internet content crackdowns, a strong U.S. or foreign partner would allow the company a financial cushion and the chance to keep developing in an "R&D" mode until things warmed up in China again. As things stand, it appears Intermost wouldn't survive the chill of a real slowdown. (V3)

Summary:

V3's: 6
V2's: 1

Overall: V3

To reach Douglas C. McGill: dmcgill@virtualchina.com