Xin Net Corp.'s Risk Rating: V-2
By Douglas C. McGill
Xin Net Corp., a hot China Internet stock with offices in Hong Kong and Vancouver, B.C., is similar in structure to many joint venture companies common along the Hong Kong/Canada axis. These companies offer services and manufacturing in mainland China, are incorporated in Hong Kong, and rely on their Canadian headquarters for capital and long-term strategy.
It's worked like a charm in the garment, plush toy, watches, and consumer products industries -- why not the Internet? So far, it's doing just fine for Xin Net, a small Internet company with big ambitions.
Investors have been impressed with Xin Net's model so far, pushing the shares up more than 2000% in a year, to 12.75. That despite a loss of US$156,329 on sales of US$592,581 in the first nine months of 1999.
Most of the share price gain occurred in the last six months, during which the company took a series of steps to transform itself from a plain vanilla ISP and portal Web site into a business-to-business Internet platform.
The company has avid followers at the investor bulletin boards Raging Bull, Silicon Investor, and America Online. When the company signed a deal recently to offer Internet access to visitors at Sina.com, China's most popular Web site that gets 14 million page views a day, the chat room crowd audience roared and pushed Xin Net's stock up 10.4%.
Is the optimism justified?
Here's how Xin Net does on the Seven Questions test:
1. Can you reach the company easily by phone?
Absolutely. Their Vancouver is sometimes answered by Ernest Cheung, the company's 49-year-old Secretary and a 13.9% shareholder. When I asked to speak with Marc Hung, the company's president, I was doing so within of a minute. Today I spent a half hour speaking with both of them. (V-1)
2. How good are the company's main products?
It's existing products are average. The company's main Web site, at www.Xin Net.com.cn, is an ordinary portal -- although the company swears it is not aiming to be a portal site. Its got news, sports, and arts stories, as well as links to freeware and shareware sites. Any of the major portal sites such as Sina.com, Netease.com, or Sohu.com, offer plenty more of everything on Xin Net.com's site. As an ISP, the company has about 55,000 registered users, enough, the company says, to make it the fifth largest ISP in Beijing, and the third largest in Shanghai, Guangzhou, and Shenyang. The company also runs a domain name registry, ChinaDNS, that has 45,000 registered users. Last year the company started an E-bay like auction site, www.xinbid.com, that lies virtually unused because there is still no good way in China to buy and sell things online. The company's vaporware, by contrast, sounds much more exciting. Xin Net has given up on the idea of the online auctions and now plans to transform www.xinbid.com into a B-to-B (business to business) site offering companies fee-based distribution services including online catalogues, ordering, transaction, inventory and accounting. Two mainland China companies, Beijing San Jie Heng An Technology Company Ltd., and Guangdong Xin Na Te Electronics Company Ltd., have pledged to use Xin Net as their sole online platform and to pay a commission on sales. Bottom line: average real products, good dream products. That would rate them a V-3, except for the fact that it's run-of-the-mill in Internet land. (V-2)
3. Does the company talk big? Are its goals justified or nearly so?
It is most refreshing that Xin Net's press releases report on realistic if modest accomplishments, rather than overblown hype standing in for company goals. In 200 pages of SEC filings and news releases, I didn't once see the company claiming to become "an Internet powerhouse in China." Maybe this company won't be the AOL of China; maybe it'll just be the Mindspring. Certainly, give Xin Net credit for linking up with Xin Hai Technology Development Ltd., a Beijing-based ISP, as their joint venture partner. Xin Hai was a solid, mid-sized private ISP, with good market share in Beijing, Shanghai, Guanzhou and Shenyang, and licenses to operate in six other Chinese cities. In December the company was awarded a five-digit nationwide access number -- 95777 -- allowing subscribers to access the Internet through Xin Net from any city in China. That number offers true value to customers and is a strong selling point as long as Beijing limits the number of nationwide access codes it awards. (V-2)
4. Does the company claim to have "good guanxi," "superior contacts," "partners at high levels in the Chinese government?"
The company couldn't have achieved the items in #3 without all of the above. (V-1)
5. Does the company have good products in the pipeline?
Xin Net has signed Letters of Intent to buy two companies -- Future Computer Co. of Hainan, and Professional Software Co. of Hong Kong -- which will provide the software to power the B-to-B Web site described in #2. The former offers software designed to service retail industries, and the latter, banking and finance. Still: does the company have what it takes to make the dream products real ones? Or will it stay permanently behind the innovation curve, putting up an E-commerce site only in time to see another killer application become the "in thing" in Internet sites? Chances of the latter are good. (V-2)
6. Is the management team up to the task?
The company's structure makes that hard to determine without a visit to the Xin Hai Technology offices in Beijing, where Xin Wei, a 1991 computer science graduate of Beijing Industry University, runs the show. Marc Hung, the company's 54-year-old President, comes to Xin Net from Hydro-Quebec, a major Canadian utility, where he served as director of a high-tech research division of the company. That may not sound like the best preparation for an Internet start-up job, but on the other hand, the way the company is structured, Hung's basic job is to raise money. The company has $4 million in the bank, Hung reports, which will largely be used to finance acquisitions. The company is also planning for warrants on the company stock to be exercised in March 2001 and March 2002, for a windfall of around $40 million -- as long as the share price holds that long. (The strike price is $4.) To me, that's counting your chickens before they hatch. Overall, there's just not the level of Internet brainpower you'd like to see at such a company, whose development so far has been workmanlike if uninspiring. (V-2)
7. Does the company have a strong overseas operating presence that would give it either technological or financial expertise?
The Canada-based management offers Xin Net a more stable financial base than it could get in mainland China or Hong Kong, but not a technological base. The latter is a notable flaw, because in the Internet world, innovation is a requirement of survival. Which brings us to the downside of the Hong Kong-China-Canada model: it was designed for low margin manufacturing businesses, not knowledge-worker trades. And that could hurt Xin Net in the long run. (V-2)
V-1 2
V-2 5
Overall: V-2
To see the Virtual China 30 Hot Internet Stocks click here.
To reach Douglas C. McGill: dmcgill@virtualchina.com
