By DOUGLAS C. MCGILL
(Virtual China News, June 13) Want to invest in the Internet in mainland China? Sanjeet Devgan, an Internet industry analyst for Prudential-Bache, has got two words for you: Hong Kong.
Speaking today at an investment conference called "Digital Gold Rush - Asian E-Commerce," Devgan summarized his 45-minute talk by singling out one idea: "Invest in Hong Kong as a gateway into the greater China market."
Hong Kong's tiny population of six million hardly makes it attractive based on its consumer market potential. Rather, Hong Kong's position as mainland China's main trading gateway gives it an unbeatable competitive edge.
Through Hong Kong
One of the best ways to capitalize on that advantage as an investor, Devgan said, was to find Internet companies offering services that match parties in the chain of producers, suppliers, distributors, shippers, and buyers moving the stream of manufactured goods from China through Hong Kong.
These business-to-business or "B2B" companies, either Hong Kong-based or China-based with a Hong Kong presence, will be among the most successful China Internet plays over the next decade Devgan said.
"Twenty percent of China's GDP (Gross Domestic Product) is export, and all of this is subject to B2B," Devgan said. Two companies with strong B2B business models who are expected to be among the first to raise money in public share offerings are MeetChina.com and Alibaba, he said. Devgan did not say when those companies might go public, however.
Number One
Hong Kong doesn't face a serious threat from Shanghai, also a major port city for mainland China anytime in the next fifteen years, Devgan said.
"Shanghai is the sixth largest container port in the world and Hong Kong is Number One," he said. "China requires more than one gateway, and Hong Kong is not going to lose that status given the financial and regulatory infrastructure in Hong Kong."
One of Devgan's Powerpoint slides offered the simple equation "150 years of colonial rule = dependable legislative framework." Hong Kong's stable and highly regarded legal system offers investors confidence that a level playing field with minimal government interference will be maintained.
Non-question
Three years after Hong Kong's handover to China, the issue of mainland meddling in Hong Kong's business affairs has become a non-question. Devgan didn't mention it, nor did it arise in fifteen minutes of question and answer. Rightly or wrongly, Hong Kong's independence in the commercial realm is now assumed.
Besides B2B, the other key Hong Kong-China Internet investment play is telecommunications companies with aggressive mobile telephone plans, Devgan said. Five companies in particular are competing for a government licence to be Hong Kong's main operator of next-generation "3G" mobile telephone communication. 3G is an anticipated form of wireless technology that promises mobile phone users high speed access to the Internet.
The competing companies are Hutchison-Whampoa, HKT Cable & Wireless, SmarTone, Sunday, and Peoples. In that group, Hutchison-Whampoa and HKT Cable & Wireless each already have 23 percent of Hong Kong's mobile telephone market.
Mobile phone companies based in Hong Kong are positioned to do extremly well as each of them is also competing in the mainland China market and especially in southern China, which already has one of the highest mobile telephone usage rates in the world.
Media Companies
Besides B2B and mobile telephones, the third e-industry best positioned to bring large returns in the long run in Hong Kong, Devgan said, were media companies that produce "locally flavored Internet content."
He cautioned, though, that pure Internet companies working only on the traditional advertising revenue model would have a hard time. Existing Hong Kong media companies going online with their offerings, and finding ways to generate B2B transactions on their sites, were the best positioned to succeed in this area, Devgan said.
"The online ad business is large but doesn't make for a standalone business," he said. "You have to leverage that into a transaction-oriented activity."
To reach Douglas McGill email: dmcgill@virtualchina.com
