Re: The New Economy

["ÁÎ×Ó¹â Henry C.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

This is a report from my cyberspace friend, David Webb, who runs a respected
web site: Webb-site.com, out of Hong Kong.  It gives an accurate picture of
the New Economy "contagion" fever spreading to Asia.
It appears that Hong Kong has entered the "Brave New Economy" where wealth
based on innovative technology is created before the new technolgy is even
identified.
It is sort of like the 17th century Tulip speculation in Holland occurring
before tulip seeds were imported from Turkry to Europe in 1554.
As Gates said with a cryptic smile in his new TV commericals: "The best is
yet to come."

Henry C.K. Liu

>From Webb-site.com:

                   Tom-foolery abounds as we walk you through the financial
wizardry which created a paper US$ billionaire who is not even on the board
of the company.
                   We also take a look at the business model of this company,
which we predict will burn the Tom-thumbs of investors.


 A Brief History of Tom          21st March 2000

                  With apologies to Stephen Hawking, we present for you a
Brief History of Tom  (which as you know does not have a long history). We'll
show you how the financial wizards behind upstart start-up Tom.com Ltd have
created over US$1bn of paper wealth for a lady with no net cash investment
who does not even sit on the board of the company. We also look at the
business model of Tom.com, part of which is founded on a concept which has
previously failed in the internet space.

                  ECLink Shenzhen

                  We start with a company called ECLink Electronic Network
Systems (Shenzhen) Co., Ltd (ECLink Shenzhen), incorporated in the PRC on
21-Jul-97. This company was held through an investment holding company called
Alexus Company Limited (Alexus). Together they are the only companies in the
group with a 2-year track record  in the accountants report that was required
for listing.   The next-oldest company in the group dates back to 26-May-99.
So this is the company on the basis of which the SEHK (Hong Kong Stock
Exchange) granted listing.

                     Despite this, ECLink Shenzhen gets a total of just 3
paragraphs in the prospectus and is described as a "strategic investment"
although Tom owns 100% of it. It says in part:

                        "ECLink Shenzhen has been primarily involved in the
development of Electronic Data Interchange (EDI) customs declaration software
to provide a secure electronic process for companies to issue their customs
declarations to Shenzhen Customs."

                  ECLink Shenzhen is still in start-up mode and had an
accumulated loss of  HK$26.05m by 31-Dec-99.

                  Webb-site.com can now reveal the original structuring of
this deal. Alexus, the holding company of ECLink Shenzhen, was set up as a
shelf company and incorporated on 16-Jul-96. It came off the shelf in Oct-96
and the initial two shares were transferred to Cranwood Company Limited
(Cranwood) and Ever Success Limited (both Liberian companies) on 11-Oct-96.
According to Tom's prospectus, Cranwood is now wholly owned by Ms Chau Hoi
Shuen (Ms Chau). Both shares in Alexus were transferred to Chopin
International Ltd (Chopin), a BVI company, on 10-Jan-97.

                  On 8-Jan-97 the real action began. The number of issued
shares of Alexus increased from 2 to 1,000. Of these, 588 shares were
allotted to Chopin, giving it a total of 599 shares (59%) in the form of 'A'
shares. Chopin paid only the par value of HK$5,880 (US$754) for these shares.
Meanwhile Good Century Limited, another BVI company, put up HK$61.84m (US$8m)
of capital in return for 400 'B' shares (or 40% of the company) and a third
company called Tonteec Limited subscribed HK$100 for 10 'C' shares equal to
1% of the company.

                  The 'A' and 'B' classes had 50% of the votes each, and the
'C' shares were non-voting. On 13-Sep-99, the 'C' shares were converted into
'B' shares, and on 30-Nov-99 the 'A' and 'B' shares became ordinary shares
with normal (60:40) voting weights.

                  According to a restructuring agreement dated 18-Jan-00 and
seen by Webb-site.com, Good Century Ltd was then a 100% subsidiary of
Hutchison International Port Holdings Limited, a BVI company wholly owned by
Hutchison Whampoa Ltd, and Chopin was a wholly-owned subsidiary of Cranwood
(Ms Chau's company). However, by this stage Ms Chau (through Chopin) held
only 40% of Alexus and 20% belonged to a wholly-owned subsidiary of Cheung
Kong (Holdings) Ltd. No word on what (if anything) Cheung Kong paid for that.

                  Chopin transferred its shares to two new BVI companies,
Handel International Limited (Handel) and Schumann International Limited
(Schumann) which are 90% owned by Cranwood. 5% of each company is owned by Ms
Debbie Chang Pui Vee (Ms Chang), and the other 5% is owned by Mr Feng Qi (Mr
Feng). Ms Chang and Mr Feng are both directors of Tom and were directors of
ECLink Shenzhen. Despite her substantial shareholding, Ms Chau was never a
director of ECLink Shenzhen and is not on the Tom board either.

                  The Strategic Investors

                  According to Tom's prospectus, Schumann and Handel are
engaged in the "provision of management consulting services". Schumann was
incorporated on 8-Dec-98 and Handel on 29-Sep-99. The 3 owners of the
companies (Ms Chau, Ms Chang and Mr Feng) are described as "a group of
consultants with extensive experience in the planning and development of
projects in China". The prospectus says they have been involved in the
development of many projects in China, although the only one mentioned is
Beijing Oriental Plaza, a US$2bn 6m sq ft property project in the centre of
Beijing.

                  That project was originally a joint venture between
Hutchison, Cheung Kong and Orient Overseas (International) Ltd (OOIL), the
shipping company controlled by the family of Hong Kong Chief Executive Mr
Tung Chee Hwa. After the Asian crash, OOIL's interest was reduced in Mar-98
from 23% to 8% and two 20%  shareholders, Bank of China Group Investment and
China Insurance Group Investment were introduced. Hutchison now has 18% and
Cheung Kong 33.4%.

                  The prime site was acquired in 1992, while Mr Chen Xitong
was Mayor of Beijing.  Chen was later convicted of corruption (although no
details of his alleged crimes were made public) and sentenced to 16 years'
jail in 1997.

                  Ms Chang is a Director of Orient Overseas Developments Ltd
(a 100% subsidiary of OOIL) and Beijing Orient Plaza Company Ltd. She is also
a member of the People's Consultative Party (Conference) of Beijing, Eastern
City District.

                  Ms Chau and Ms Chang each own 50% of Orient-Horizon Ltd
(Horizon), a HK company incorporated on 4-May-90 which is described as "a
management consultancy company primarily involved in business development in
the PRC".

                  Since 1994, Mr Feng has been the Project Director of
Horizon, and before that he worked at the China Customs Head Office where he
was involved with the development of the customs clearance computer network.
That was prior to his involvement with ECLink Shenzhen. He is also a 40%
shareholder of Beijing ECLink Science and Technology Development Company Ltd,
one of the content providers to Tom, while the other 60% is owned by Wang Qi,
an employee of Tom.

                  The beginning of Tom

                  Tom.com Ltd was incorporated in the Cayman Islands on
5-Oct-99 and until 16-Dec-99 was called "Super Channel Holdings Limited". The
name was changed after they bought the domain name Tom.com on 7-Dec-99.

                  The initial share capital of Tom on incorporation day was
just  2 shares of US$1 each, of which one was immediately transferred to
Schumann (Ms. Chau's company) and the other to a wholly-owned subsidiary of
Hutchison Whampoa Ltd.

                  6 days later, on 11-Oct-99, US$50,000 worth of shares were
allotted, resulting in Ms. Chau controlling 50%, Hutchison 40% and Cheung
Kong (Holdings) Ltd 10%.

                  4 days later, on 15-Oct-99, when Tom was just 10 days old,
Ms. Chau's company transferred 10% of Tom to Cheung Kong at a consideration
of HK$87m (US$11.2m), increasing Cheung Kong's stake to 20%. We don't know
how that consideration was arrived at given that the paid up capital was
still only US$50,000, but 10 days is obviously a long time in the internet
world.

                  On 18-Jan-00, 100% of Alexus was transferred to Tom in
exchange for shares in  Tom.com. Prior to this, Alexus was held in the same
proportions as Tom, so no money changed hands in the process.

                  The Metro Radio Deal

                  On 30-Dec-99, just prior to the year-end, Metro Broadcast
Corporation Ltd (Metro) agreed to transfer certain assets relating to the
Metro web-site to Tom's subsidiary in exchange for HK$310m (US$39.8m) in
cash. Note that they  did not transfer the radio stations, just the assets
associated with the web site. In fact, Tom will have to pay Metro on an
ongoing basis for the stream of radio programmes, broadcast material and
other information needed to run the web site. For the first year, the fee
payable by Tom will be HK$12m. Presumably the ad revenue from the broadcast
radio channels will continue to accrue to Metro, not Tom. You can hear the
channels using Windows Media Player (104FM Select, 997 Hit Radio).

                  Of the acquisition cost of HK$310m, approximately 99.9% of
it was goodwill. The tangible assets acquired, included a collection of PCs
and a server, were worth just HK$436,000 (US$56,000). 17 employees came
across with the site. Some of these had been working on event productions,
and that was used as part of a "pro forma" unofficial track record.

                  Apart from the initial capital of US$50,000, the initial
funding for Tom came from shareholders' loans from Cheung Kong and Hutchison
roughly in the proportion of their Tom shareholdings. As of 31-Dec-99, their
loans totaled HK$363m, most of which was the cost of the Metro web-site
(HK$310m) and the Tom.com domain name (HK$19.5m).

                  Metro is equally owned by Hutchison and Cheung Kong,
compared with the 2:1 ratio of the Hutchison:Cheung Kong holdings in Tom, so
on a see-through basis in the Metro deal, Cheung Kong put in 1/3 of the
HK$310m cost and got back 1/2 of HK$310m (net result, a surplus of $52m).

                  The shareholder loans were exchanged for new shares in Tom
on 1-Feb-00. At this stage, Cheung Kong had advanced HK$166m and Hutchison
HK$336m. You might be wondering how much Ms Chau's companies loaned to Tom -
surely they put in 40%  of the funding, in line with their shareholding,
right? Wrong! When the shareholders loans were capitalised, her companies
were allotted shares to maintain their stake in return for only HK$310,000
(US$39,900), while Hutchison and Cheung Kong were issued shares for a total
of HK$502m (US$64.5m) to repay their shareholder loans. A subsequent bonus
issue left Hutchison with 920m shares, Ms Chau's companies with 920m shares
and Cheung Kong with 460m shares.

                  Who Wants to be a Billionaire?

                  Let's see. Ms Chau's companies invested just US$754 in 1997
for 60% of Alexus, later reduced to 40% by selling 20% to Cheung Kong for
unknown consideration.
                  Then in Oct-99 they put US$25,000 into Tom. 10 days later
they got back US$11.2m for selling 10% of Tom to Cheung Kong. Then they
injected the 40% Alexus stake into Tom. They then put in US$39,900 when the
shareholder loans were capitalised. Add that all up, and Ms Chau's companies
get net cash of about US$11.1m. In other words, the net cost of her stake in
Tom was negative.
                  Ms Chau (via Cranwood) owns 90% of companies which own 920m
shares, so she effectively owns 828m shares. At today's closing price of
$10.50, that translates to $8.69bn (US$1.12bn).

                  Other deals

                  On 21-Jan-00, Tom subscribed US$4.2m for 15% of OneAsia.com
(Holdings) Ltd, an online retailer of Asian CDs and videos launched in
Nov-99. Pacific Rim International Ltd, a shareholder of OneAsia, was given
the right to subscribe for Tom shares equal to up to 5% of the IPO, at the
offer price, and it did so.
                  As a result, Pacific Rim subscribed 21.4m shares at
HK$1.78. The consideration was existing shares in OneAsia valued at HK$18 per
OneAsia share, equivalent to 15.98% of OneAsia, increasing Tom's stake to
30.98%. Those 21.4m Tom shares are now worth HK$224.7m (if they still hold
them).

                  On 21-Jan-00, a 55% subsidiary of Tom called Beijing Planet
Network Travel Information Technology Ltd agreed to buy some web-related
assets from China Travel Network Co., Ltd for US$1.7m.

                  On 9-Feb-00 fellow bubble company Pacific Century
Cyberworks subscribed 121m Tom shares at HK$1.07 per share for a total of
HK$129.47m. They are now sitting on a paper profit of HK$1.14bn (US$147m).

                  Tom.com is pursuing an "infotainment" technology which it
calls "Tomcast". This is an effort to "push" content to you using a
proprietary program which sits on your PC's desktop screen. We hate to point
this out, but Push Technology has already been tried, tested and failed by
Pointcast, which pioneered the idea 5 years ago. By a delicious irony, the
final Pointcast broadcast went out the day before Tom's prospectus was
published - click here for the full story.

                  Tom-Foolery

                  At the current market price of HK$10.50 per share, Tom is
valued at HK$30.9bn (US$3.97bn). That is quite ridiculous. Even after the
float, it has the skimpiest collection of web sites and net tangible assets
of around HK$1.42bn (US$182m), mostly in cash.

                  Perhaps investors are choosing to disregard what is in Tom
today for what might be there tomorrow. Don't hold your breath. Hutchison has
numerous other projects which are consumer related and so far none of them
has been given to Tom. For example, they recently announced a joint venture
with Priceline.com, the reverse auction site, a joint venture with DLJ
Direct, the online stockbroker, and various B2B ventures. Tom has not
participated in any of these projects and even if they are injected in the
future, there is no reason to think that they would get them cheap. You can't
value what you haven't paid
for.

                  By comparison with Tom, the market values Wharf (Holdings)
at a similar HK$31.8bn. We're no fan of Wharf, but for that price you at
least get 85% of i-Cable, 10m sq ft of prime property, 51% of port operator
MTL and various other trinkets like the Star Ferry and Trams.

                  The public shareholders of Hong Kong are going to get their
Tom-thumbs badly burnt by this stock when the bubble bursts. The founding
shareholders must be counting the days to when the 6-month lock up expires on
1-Sep-00 (they got a waiver, remember).

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related to companies or governments on which we comment.

"J. Barkley Rosser, Jr." wrote:

>       I think I posted this to pkt before.  But in case I didn't
> I recently read that only about 20% of companies listed on
> the NYSE now actually pay dividends.  So much for present
> value formuli.
> Barkley Rosser
> -----Original Message-----
> From: ??¡Á??? Henry C.K.Liu ?¨´¡èl?¨² <hliu@xxxxxxxxxxxxxx>
> To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
> Date: Thursday, April 06, 2000 7:45 PM
> Subject: The New Economy
>
> >In the 60s the notion: "income is all" was generally accepted by
> >economists.  Then the notion was replaced by "money matters."  For the
> >past decade, the market has been quietly adopted a new strategy based
> >solely on capital gain. Income, afterall, was not important.  Dvidend
> >return dropped from the norm of 5% to 1.5%.  Many blue chips even
> >suspended dividends in favor of higher share prices or stock splits.
> >The cost of money also seems irrelevant, as Greenspan, his red face
> >disguised by straight face, repeated issues profound statements to
> >explain why the Fed has become a side show as far as Wall Street is
> >concerned.
> >It seems now the only operative investment strategy is to shoot for
> >capital gain by buying into growth.  If the investor needs money, sell
> >some growth shares and be taxed at the lower capital gain rate.
> >Evrybody's pension is now tied to growth investment. Even widows and
> >orphans are advised by their trust fund finance planners to put their
> >money in growth funds and forget about fixed income or dividend income.
> >Better yet, borrowed against shares of rising value and hedge it so that
> >the worse that could happen is to forego anticipated appreciation but
> >still capture 100% gain for original investment.  The hedge is updated
> >every six months.
> >
> >As for entrprenneurs on startups, here is the standard formula that has
> >been operative for the past 4 years.  Start with a $300,000 intial
> >investment, either from angles or friends and relatives, each putting in
> >say $5,000 to $50,000. in exchange for a cummulative 10% of the share.
> >The company is then valued at $3 million.  Twenty year old college
> >dropouts are now Chairman and CEO of $3 million startups.
> >Three months later, executive a first round funding by  selling another
> >10% for $3 million to a venture capital source. The company then has a
> >market capitalization value of $30 million.  Second round fund fund a
> >year later brings in $30 million for another 10%.  The company now has a
> >market cpaitalization valued at $300 million.  IPO a year later, selling
> >another 5% for 150 million, with a capitalizaed value of $3 billion.
> >Meanwhile the companied had a ccumulative negative cash flow of $100
> >million in less than two years.
> >35% of the company is now in public hands, with 50% distributed to
> >founders and early management and employees.  Another 15% is held as a
> >strategic war chest worth $450 million at IPO and possible seveeral
> >billions dollars with a bit of luck and much hype, enough to buy a brand
> >name in the old economy.  Meanwhile, the founders and early investors
> >will hedge part of their holdings with their friendly bankers at second
> >round valuation.
> >
> >The general message of the White House Conference on the New Economy
> >yesterday was that this is only the beginning.  The joy ride will go on
> >forever.
> >
> >Henry C.K. Liu
> >
> >