Tom.com hits HK tech stocks

Fears are reverberating through Hong Kong's internet sector following the large second quarter loss posted by leading local portal Tom.com.

Internet shares on the Hong Kong Stock Exchange have fallen substantially in the wake of the Tom.com results.

The technology-heavy Growth Enterprise Market (GEM) index stood at 438.66 on 3 August, only slightly above its record low and more than 50% below its launch level in March.

The doubts surrounding the internet sector in China mirrors events elsewhere in the world, where tech stocks have fallen heavily in the past four months.

Many of China's larger internet ventures are not expected to break into profit until at least 2003.

Long road to profitability

But far from conserving their valuable cash, the top sites will be forced to lift sales and marketing spending in order to defend their market share, analysts say. This lengthens the already-long road to profitability.

Smaller firms with scarce financial resources will fail or be bought out at knockdown prices, analysts say. Many are predicting a wave of mergers and acquisitions in the next year.

Some of the larger local firms could also be vulnerable to takeover bids from major US portals or other international media companies, they say.

Internet stocks have fallen out of favour

Alan Pau, associate director, South China Securities

Tom.com, the Hong Kong-based information and entertainment portal, reported second quarter losses of HK$148.5m ($19m), a week after laying off 80 of its 500 employees to cut costs.

Its revenues for the second quarter were just HK$5.27m.

Share fall

Tom.com shares fell sharply following the results, standing at HK$5.00, almost HK$1.50 down on a week earlier and more than HK$10 below their peak since listing. However they remain above their float price.

"Internet or dot.com stocks have fallen out of favour. The market is again having doubts about the profitability of these companies," said Alan Pau, associate director at South China Securities.

The downbeat sentiment in the market is in marked contrast to the chaotic scenes in February when thousands of small investors rushed to banks to take part in Tom.com's initial public offering.

The share sale was estimated to be a record 2,000 times oversubscribed, leading the financial regulator to publicly criticise the portal and the sponsors of its IPO for their lack of readiness for such a response.

Now though, many of the 'lucky' ones who had their purchase applications accepted will be finding that their hopes of turning a quick profit have turned sour.

Despite the downturn in the business-to-consumer market, growth in internet usage in Asia remains strong.

US investment bank Lehman Brothers forecasts 230 million internet users in Asia, including Japan, by 2005, compared with an estimated 73 million by the end of this year.