BUSINESSWEEK ONLINE : JULY 10, 2000 ISSUE
INTERNATIONAL -- ASIAN COVER STORY

Emerging Markets: Asia Calling
Asia leads the way, as investors regain their enthusiasm for venturing abroad

Telecom and tech: The same big themes that dominate this year's BUSINESS WEEK Global 1000 list also largely determine the rankings of the top emerging-market companies. The lesson: Investors will venture into the riskiest and murkiest markets to get a piece of the worldwide tech/telecom bonanza.

Consider the fact that China Telecom Ltd. (Hong Kong) went public just over two and a half years ago. Today, this Hong Kong-traded subsidiary of China Telecom is ranked No.1 by market capitalization in the list of the top 200 emerging-market companies compiled by Morgan Stanley Capital International. It's easy to see why: Investors can bet on China's 7% economic growth through China Telecom (Hong Kong), which has more than 90% of the mainland's mobile-phone market, and a subscriber base that could double, to 27 million, by 2003.

China Telecom (Hong Kong) isn't the only Asia play to figure high on the list. Two Taiwanese companies, Taiwan Semiconductor Manufacturing Co. and United Microelectronics-No.2 and No.5 on the list, respectively-have benefited from massive investment in the latest technologies, the global shortage in chips, and heavy outsourcing by U.S. companies. Third-ranked Samsung Electronics of South Korea jumped from the 11th spot last year, thanks to buoyant prices of memory chips. First-quarter profits quadrupled, to $2 billion, and earnings seem ready to expand further. "We'll continue to set historic records," vows Park Sang Ho, the company's vice-president and treasurer.

He's not the only one feeling confident in South Korea. Managers at sixth-ranked SK Telecom Co. are reaping big profits from the company's 58% share of the South Korean mobile-phone market, which translates to 16 million subscribers. With 6 out of every 10 Koreans owning mobile phones, the company is poised to benefit from the anticipated spike in demand for wireless Internet services.

NO FREE RIDE. But while North Asia has won back the hearts of many international investors, Southeast Asia has suffered neglect. Political strife in Indonesia, kidnappings and weak leadership in the Philippines, and ongoing concerns over the pace of corporate restructuring and financial reform have left these markets in the doldrums. Thailand's highest-ranking company on the list, Krung Thai Bank, dropped from 25th to 106th because of fears that the country's financial woes still linger. The Philippines' leading company, brewer San Miguel Corp., fell from No.64 to No.132: Investors are fleeing the political uncertainty created by the missteps of Philippines President Joseph Estrada. And Indonesia's largest company, Perusahaan Perseroan (Persero) Telekomunikasi Indonesia, plunged from 63rd to 120th, as doubts about the government's economic program grew.

Fortunately, political uncertainties are not infecting all markets equally. Investors have been a little jittery about the Mexican market as a hotly contested presidential election looms. But Mexican consumers are spending, boosting results of the country's largest retailer, Wal-Mart de Mexico, which is part-owned by the U.S. retailing colossus. And the market still favors Telefonos de Mexico, which continues to be the top-ranked Latin American company and Mexico's dominant telecom. Its drop from third to fourth place this year reflects the strength of Asian tech companies-not any problems with Telmex. "It's solid, it's broadening its businesses, and its management is showing that it can compete," says Carlos Samano, director of analysis at brokerage Casa de Bolsa Bancomer.

Brazil's telecom sector has caught fire, too. Six telecom companies moved up the rankings in the past 12 months, led by Telesp, which jumped from 35th to 21st. Geoffrey Dennis, Salomon Smith Barney's New York-based Latin American strategist, says these are "classic growth stocks" set to benefit from Brazil's better-than-expected recovery following the currency devaluation of January, 1999. GDP grew 1% in 1999 and is forecast to grow 3.5% this year.

Given the performance of telecom and high-tech companies in the major emerging markets, it's not surprising that they dominated the smaller boards as well. In eight countries with only one company ranked in the top 200-Poland, Egypt, the Czech Republic, Hungary, Pakistan, Peru, Poland, and Venezuela-each entry was from one of these two sectors.

VAST IMPROVEMENTS. Israel has also been quick to embrace the New Economy, and no company better illustrates the transformation of the economy and its booming high-tech sector than Check Point Software Technologies Ltd., the creator of software-security systems for blue chips worldwide. Though it didn't make last year's list, this year it ranks 13th thanks to a staggering 749% price gain. "Israel is similar to the U.S., where technology companies have taken over as the market-cap leaders," says Joel Maryles, managing director of Israel banking for Salomon Smith Barney. Founded in the early '90s by three former members of an elite army-intelligence unit, Check Point has become the world leader in Internet security.

Even in emerging-market banks, the ones that embrace technology have scored the biggest gains. The top-ranked bank on the list this year: Turkiye is Bankasi, which catapulted from 49 to 11. The Turkish bank, which was privatized two years ago, has been aggressively diversifying into the telecom sector, having paid $2.53 billion, together with Telecom Italia, for a potentially lucrative GSM license.

One other factor influencing investor decisions this year was the search for companies with solid accounts and honest managers-attributes investors tended to downplay in the heady days before the Asian and Russian financial crises. Now, says emerging-market guru Mark Mobius, "this is a big, big issue for us and other portfolio managers, and we are gravitating towards companies with good corporate governance."

For Mobius, president of the Templeton Emerging Stock Fund, that means staying clear of companies like Russia's oil-and-gas giant OAO Gazprom, which has been dogged by a reputation for murky dealings and accusations that it canceled the bills of politically connected customers inside Russia. Even a more-than-20% increase in oil prices in the past 12 months hasn't been able to prevent Gazprom's skid from third place last year to the No.12 spot. "We believe that Gazprom is the most shorted stock in the market," says analyst Eric Wigertz from Brunswick Warwick Research in Moscow.

Luckily, Gazprom is a poor proxy for Russia's prospects. The country has bounced back from the crisis induced by the ruble devaluation in August, 1998, and its economy is projected to grow 6.2% in real terms. That could translate into 15% nominal growth in U.S. dollars, thanks to the expected appreciation of the ruble, according to United Financial Group, a Moscow investment bank. Other Russian companies have benefited from the boom. Oil company OAO Lukoil, which moved up from 33rd to 20th on the list, is run by president Vagit Y. Alekperov, known in the financial crowd as "a good oligarch" and one of the few Russian business titans to pursue a long-term strategy. So far, he's not a player in high-tech and telecom: It's good to see somebody is bucking the trend.

By Frederik Balfour in Hong Kong, with bureau reports

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