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Tough Start for Hong Kong's Tech-Heavy Stock Market

Asia: Second-tier GEM has not yet recovered from spring's 'dot-com' plunge. But some say it is well-placed to capitalize on region's growth.


HONG KONG — The future of Hong Kong's new second-tier stock market looks impressive.

It caters to small, smart high-tech companies looking for cash in a city busy reinventing itself as Asia's Silicon Valley. Hong Kong's treasure chest of investment capital and business savvy also seems a ready-made resource for a Chinese mainland economy rich in new ideas but short on money to develop them.

"Our future is bright," said Lawrence Fok, chief executive of the Hong Kong Stock Exchange, which operates the fledgling Growth Enterprise Market, or GEM.

But first it must survive the present. Since GEM was launched in November amid considerable fanfare, it has had a rough run.

Damage from the global crash of high-technology stocks that hit only a few months after GEM opened still lingers. Since then, the new market has experienced a series of disappointing initial public offerings, watched its index lose more than half its initial value and struggled to overcome investor wariness and liquidity problems that have dogged all but the top few listings.

Although Nasdaq, the world's largest secondary market, has recovered nearly 20% since the global high-tech sell-off last spring, the GEM index has sagged an additional 4%.

A major problem on the new exchange, observers say, has been the quality of its listings.

Among GEM's 46 listed companies, some are either unknown or unconvincing to skittish investors reluctant to risk high-tech stocks in the current uncertain climate. Other listings, which generated an initial flurry of buyers because of their links to Hong Kong's rich business empires, have fallen short of expectations.

When, an Internet site linked to powerful businessman Li Ka-shing, went public in February, Hong Kong residents lined up for hours at local banks to get a piece of the action, convinced that Li's backing made the venture a sure thing. Last month, shares in the start-up, which bills itself as a platform for information on China, sank after it fired 15% of its staff and reported first-half losses of $24 million on sales of only $675,000.

Those who follow the GEM market here also say it is too narrowly based on Internet companies at a time when even strong-sounding "dot-com" ventures draw a tepid investor response.

Richard Margolis, vice president for strategy and planning in Merrill Lynch's Asia Pacific division and a member of the working group that created the GEM market, says it would be wrong to write it off prematurely, stating it must get through its initial start-up phase before investors can fairly judge the region's newest secondary market.

"It's going to take time for people to take [GEM] seriously," Margolis said. "Liquidity is low, but it usually is in the early stages of these kinds of markets. Is there anything fundamentally wrong? No, I don't think so. Still, not all the listed stocks are the kind your Aunt Agatha would want to invest in."

In a paper issued last month titled "What Ails the Growth Enterprise Market," Morgan Stanley Dean Witter strategist Narendra Singh maintained that its stocks remain overpriced compared with their counterparts in the United States. But he predicted that investors refueling the recovery on Hong Kong's main board with what they see as safer bets would eventually move into GEM.

"By the end of the year, we expect liquidity conditions to improve," Singh said. But he stressed that boosting investor confidence in the new market--mainly by improving the listings quality--is vital.

Fok noted GEM has begun promoting itself more aggressively, even setting up a U.S. marketing arm last month as part of a broader effort to attract new, good-quality companies.

One California-based company, Syscan Technology of Santa Clara, which produces portable scanners in mainland China, is listed on GEM.

To make itself more attractive to prospective companies, GEM this year began letting some management shareholders sell their shares within six months of an initial public offering, instead of two years. It also softened the requirement for a so-called company track record from 24 months to 12.

Fok said that these steps don't constitute a lowering of standards but were taken to bring GEM requirements in line with other secondary markets, including Nasdaq.

Investor disillusionment with Internet start-ups has also helped dilute GEM's dot-com concentration, as start-ups from other sectors, including systems development and information technology, seek listings on the exchange.

"I think the tide is going to change," Fok said.

Despite its rocky start, GEM still outperforms other Asian secondary markets in Tokyo, Seoul, Singapore and Taiwan in its ability to raise capital, bringing in more than $1.3 billion during the first half of 2000.

And with China on the verge of entering the World Trade Organization, industry analysts estimate that anywhere from 1,000 to 2,000 mainland companies may seek a stock market listing.

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