BUSINESSWEEK ONLINE : AUGUST 30, 1999 ISSUE
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INTERNATIONAL -- ASIAN BUSINESS

Hong Kong: A Bourse of Their Own (int'l edition)
Hong Kong's GEM may give Asia's cash-hungry startups a big lift

Action Electronics, a small maker of computer monitors in Taiwan, has a size problem. It wants to expand its two factories in China, but Taiwan has strict limits on how much local companies can invest on the mainland. The company's solution: Head for Hong Kong's Growth Enterprise Market (GEM), a soon-to-open second board aimed at small and midsize high-tech companies. Action hopes to raise $13 million next year by listing its Hong Kong subsidiary, which can then invest the proceeds on the mainland, free of Taiwan's restrictions. Says Action Vice-President Chao Teng-peng: ''The new Hong Kong market should be a good opportunity for us.''

And for other companies as well in the Greater China region, where the buzz over the new bourse gets louder by the day. When the Stock Exchange of Hong Kong launches GEM this autumn, the Nasdaq-style market promises to alter life as young Asian technology companies know it. Whether they are based in Taiwan, Hong Kong, or China, Asia's high-tech entrepreneurs have often been long on ideas and short on capital. The new bourse, designed specifically for companies without proven track records, will enable them to finance growth and offer venture capitalists an exit route when it's time to cash out.

GOOD TIMING. While GEM's launch will consist of a single listing, don't worry about size. Judging from interest around the region, the board expects to have up to 50 listed companies within its first year. Dozens of Taiwan companies are said to be in line. And in China, interest among mainland companies is so high that five seminars to explain the new exchange have each drawn 500 visitors.

GEM's timing seems impeccable. While the Internet investment craze may be abating on Wall Street, it is just beginning to swell in Asia. As an exchange for technology companies, the all-electronic bourse should boost Hong Kong's chances of fending off competition from other regional financial centers such as Singapore and Shanghai.

For China, new sources of capital will be crucial as the country's economy is increasingly driven by private companies, rather than lumbering state enterprises. ''These companies are reaching the stage where they need money to expand,'' says K.S. Lo, a property magnate appointed by the Stock Exchange of Hong Kong to set up GEM. ''If Chinese enterprise reform is successful, we will be the biggest gold mine in the world.''

GEM faces challenges. For one, some Asian tech companies dream of Nasdaq listings, not going public on GEM. Also, policing a market with lots of zippy startups will test regulators, given Hong Kong's taste for speculation. Aware of past scandals involving Chinese companies that listed on Hong Kong's main board, GEM admits there is potential for funny business. In publicity material, it bills itself as the ''Buyers-Beware Market for Informed Investors.''

So GEM's disclosure rules require swift publication of financial statements, and companies must report how closely they are following business plans. That's more than the Stock Exchange of Hong Kong asks. But GEM won't make companies show they are profitable prior to listing. That opens the door to flimsy mainland ventures that have no business offering stock.

Questions aside, the anticipation is palpable as GEM's launch draws near. Neither GEM nor the local merchant banking community is saying who will be the first to list. But the money now is on Sina.com, a portal with headquarters in Sunnyvale, Calif., and roots in Taiwan and China. Sina.com could do GEM proud. It runs China's most popular Web site. Although it is preparing for an initial public offering on Nasdaq, it could list on GEM at the same time.

Whoever goes first, GEM aims for a dozen listings by yearend. About 40% of those thinking of listing are from Taiwan, GEM officials say. The rest are from Hong Kong and China. For Charles Zhang, CEO of Sohu Inc., a Beijing portal, GEM's draw is powerful. Since venture capitalists typically reap profits when a startup goes public, having no market has made it tough to attract funds. ''Many of the thousands of tech companies starting in China were starving to death,'' Zhang explains. While Zhang, too, is looking at a U.S. listing, GEM can offer one thing Nasdaq never will. ''It's on the same side of the globe as we are,'' Zhang says. ''Investors could easily know a company's product.''

That argument doesn't convince everyone. Danny Cheng, co-founder of Timeless Software in Hong Kong, thinks GEM might be too small, so he looks to Nasdaq. But unless Asian companies have a following among analysts, investors can easily lose interest. For the 12 stocks listed both in the U.S. and Hong Kong, some 83% of the trading volume comes from Hong Kong. ''Nasdaq is still the Holy Grail,'' says L. Brooks Entwistle, head of Goldman, Sachs & Co.'s Asian high-tech unit. ''But we're very excited about GEM.''

RIDING. Taiwan companies are excited, too. Many view Hong Kong vehicles as a way to skirt Taipei's restriction on companies investing more than 20% of their equity in China. ''They will go to Hong Kong because they don't have an alternative,'' says capital-markets manager Morgan Lin of Core Pacific Securities Group, which is listing several Taiwan companies on GEM.

Hong Kong has a lot riding on GEM. ''The recession has prompted us to find a new direction in innovation development,'' says Lo, who made his own fortune in property. The Hong Kong exchange also hopes that even if technology stocks have peaked in the U.S., there will still be a market for Asian tech companies. ''The whole world feels much more confident using Hong Kong as a conduit to China,'' says Lo. He's hoping to build on that confidence. So is Hong Kong.

By Sheri Prasso in Hong Kong, with Jonathan Moore in Taipei and Dexter Roberts in Beijing

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