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November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek technology

OCTOBER 1, 1999 VOL. 25 NO. 39

Done Deal
Peter Yip's bargaining skills took China.com from Xinhua to Nasdaq and gave Asia a spectacular Internet IPO
By STUART WHITMORE

Peter Yip had waited years for this moment. When it came, he was caught napping. Yip's company, China.com, was about to make history by becoming the first Asian Internet "portal" to list on New York's Nasdaq stock exchange - and Yip, the chief executive officer, was about to become very rich. Yet, as the firm's trading symbol, CHINA, inched along the ticker for the first time July 13, the 46-year-old Hong Kong businessman nodded in and out of sleep high above the Pacific Ocean on a flight bound for home, the last leg of a draining 15-city roadshow to promote the initial public stock offering. A few seats away sat Peter Hamilton, China.com's chief operating officer. He ordered another glass of champagne and tracked the share price by phone. As the airliner flew on, CHINA roared above its public offering price of $20, fell back, climbed again. "Peter would tell me the stock was up, then I'd wake up and the stock was down," says Yip, hazily recalling the flight. When the market closed, CHINA stood at $67, a stunning 235% gain. "I was very pleased," Yip says. "I was just exhausted."

Yip needs his sleep, because the real work of building the company is just beginning. China.com is an unproven - some say unconvincing - competitor in a field that is still being invented. The Nasdaq listing raised $78 million, providing the company with a deep cash reserve with which to improve its operations. It also made China.com the most talked-about company in Asia's nascent Internet industry. Not all of the talk is congratulatory. In the days following the IPO, press accounts surfaced quoting disgruntled employees who felt shortchanged because they didn't get stock options. Then came the critics, who quite rightly noted that, although China.com is positioned to serve millions of potential Internet surfers in the mammoth China market, the company's five-year track record is pockmarked with failure and that the website's golden name, its URL, is one of its few substantive assets.

Unquestionably, other Chinese-language portals (websites that act as mass entry-points to the Internet by offering a broad range of content and links to interesting online destinations) are more complete and attract larger audiences. In a recent survey of mainland surfing habits, China.com ranked 39th in terms of daily page views, a key metric for ad-revenue-dependent portals. More popular mainland-based sites, including Sina.com, Sohu.com, and Netease.com, get around double China.com's 1.3 million daily views. In fact, its websites are the least-developed part of its business. Yet "for the IPO, they sold themselves as a China portal," says Hanson Cheah, a Hong Kong venture capitalist. "Yip is probably the best salesperson you could get in the world. He could sell ice to the eskimos."

He is, some say, more a classic Hong Kong wheeler-dealer than a Silicon Valley-style technopreneur. Physically unimposing, he is perpetually doing business. "In the U.S. people say that if you call Hong Kong at 3 a.m., Peter will be there to pick up the phone," says Vicky Hung, China.com's senior vice president for marketing and product development. In private conversation, he is loquacious and charming, but his public profile is minimal. Around China.com headquarters, he rarely roams the halls or chats up the staff. "He won't waste time walking to your office," says Hung. "He summons," agrees Ian Henry, a former movie director who is now China.com's senior vice president for strategy.

Yip prefers back rooms and boardrooms to the spotlight. He hates having his picture taken (he recently barred reporters from a speech he gave at a Hong Kong Internet conference, although the press had been invited by the event's hosts). Though a subject of some local interest, the newly minted Net tycoon has been somewhat eclipsed in the media by his more outgoing son Antony Ip, a fresh-faced 20-year-old who co-founded Outblaze, a Hong Kong website-hosting company, and is now buying up mainland Internet sites through a new venture, Myrice.com.

"I think with entrepreneurs, a lot of things are glorified," says Yip. "The best thing to do is to keep your head down and just do the job. At the end of the day I'm not trying to impress anyone."

In these days of instant dot-com millionaires, an IPO always makes an impression. Yip owns 14.8% of the company through Asia Pacific Online Limited, which in turn is owned by a family trust and Yip's second wife, Nicola Chu. With CHINA stock worth nearly $70 a share on Sept. 20, Yip's stake was roughly $219 million. But he's no overnight success. Yip has already amassed a comfortable fortune. He declines to say how much. "I never count it. I don't want the children to think about it," he says. Yip also has two daughters.

The family estate was built on serial entrepreneurship. After growing up in Hong Kong, Yip studied computer engineering at the University of Pennsylvania and earned an MBA at its Wharton business school. In his more than 10 years in the U.S. after college, he started several businesses, among them YipKon, founded in 1982 to provide computer systems integration services primarily to the U.S. government. When Yip sold YipKon to SHL Systemshouse (which was eventually acquired by MCI, the U.S. long-distance telecommunications giant), the company was thriving with $43 million in orders on the books. "Peter's great ability is to be able to see the side of the deal that no one else can," says Henry. "He'll always have three plans behind the one that you're talking about. Working with him is a great education in how to do a deal - and how to win. Like most of us, he doesn't like to lose."

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China.com, however, was not Yip's brainchild. The founder was James Chu (no relation to Nicola), who like Yip cut his teeth in the U.S. technology industry, then returned to Hong Kong. In 1994, he established China Internet Corp. (CIC), China.com's predecessor. Before there was an Asian Internet boom, Chu had the foresight to register the China. com web address, as well Taiwan.com and Hongkong.com. Chu, who was best man at Yip's wedding, brought Yip aboard.

Chu also secured the backing of an unusual but potentially helpful ally: Xinhua News Agency, the propaganda arm of China. With the three parties - Chu, Yip, and Xinhua - each holding a one-third interest in the operation, an ambitious business plan emerged. CIC would create the China Wide Web, envisioned as a universal Internet service provider for Chinese citizens. By running a countrywide network, segregated from the chaotic global Internet, CIC and Xinhua could theoretically block citizens' access to uncensored news and unsavory material residing on sites beyond China's borders.

Reconciling the ungovernable Internet with Xinhua's need to build the Great Firewall of China proved unworkable and unprofitable. While the group was able to secure private funding, Yip tried twice to take the company public - only to back off because institutional investors weren't interested.

This summer, Yip's third try to take the company public proved lucky, although he had to overcome skepticism. "Many of the investors said, 'Peter, you again? I thought you gave up,'" Yip recalls. Deal number three, however, was different. The company had been reorganized and incorporated in the Cayman Islands as China.com, with new emphasis on providing Internet content including portals in Taiwan and Hong Kong. Chu had gone - according to speculation deposed in an acrimonious boardroom fight. New managers were in place. Additional backers were found. New World Infrastructure, a construction company with ties to the mainland that is owned by one of Hong Kong's top families, became the largest single shareholder with a 20.6 % post-IPO stake. China.com had also established a revenue stream by acquiring The Web Connection, a website design firm, and through a partnership with 24/7 Media, a pan-Asia Internet ad placement service.

When Yip made his move, Internet stocks were booming in the U.S. But it was his deal-making prowess that virtually guaranteed a successful IPO. Just three weeks before going public, China.com announced it had sold a 10% stake in the company to America Online. The largest Internet service and content company in the U.S., AOL's has stature in the online business on par with Microsoft's in computer software. AOL, plus that valuable China.com URL (and the potentially vast mainland audience it promised) was a combination that dispelled in American investors' eyes much of the taint of the association with Xinhua. The proof: the stock surge of more than 200% on the first day. "If you want to talk about the brilliance of Peter Yip," says Steve McKay, who heads the Web Connection, "ask yourself: 'Would it be possible to assemble a group of investors that includes Xinhua and AOL?' It can't be done!"

To some, however, the timely appearance of AOL underscores assertions that China.com's IPO was all about salesmanship. It's a curious complaint in some respects. Scores of other Internet firms have gone public with sparser operating histories, lesser backers and more obscure business strategies. China.com even reported a surprise profit of $1.9 million in the quarter ended June 30. True, the black ink was due to a one-time investment gain of $5.1 million, not everyday operations. China.com is losing money. But the company's quarterly revenue of $2.4 million was up 174% from the same period a year ago, a respectable growth rate for an Internet start-up.

"We're everybody's favorite whipping boy," says Henry. But company officials acknowledge that not all the criticism is unfounded. McKay readily admits the flagship mainland portal is light on content. "We're very unapologetic about it," says McKay, figuring China.com has plenty of time to catch up. Online advertising in all of Greater China (Hong Kong, Taiwan and the mainland) currently totals a paltry $2 million a year. This number may cause some to wonder whether China.com's stock market capitalization of $1.43 billion is justified, but Internet stock valuations are always based on rosy projections. The latest surveys estimate China's online population, now four million, could reach 140 million by 2005. "When people say 'I've got more page views than you,' it's like a couple of four-year-old kids in a room saying 'I'm taller than you are,'" says Henry. "It's like: You're four. You're going to be 20 one day."

At the moment, China.com can afford unbridled optimism. The company has $150 million in working capital and that gives it the ability to radically outspend competitors. "Building a portal is for people with very deep pockets," says Hung. Watch our dust, says Henry, who is spending some of the cash to beef up the websites through new partnerships with content providers. AOL Chairman Steve Case is scheduled to visit Hong Kong this month, and it is widely assumed he will announce a major initiative with China.com. "We'll stand up to be counted on what we're delivering over the next six months," says Henry.

In Hong Kong, the company has launched a major advertising campaign, including TV spots. New employees are being hired at a rate of 60 a month. The most visible recruit; chief technology officer Edward Hou, who was poached from Sina.com, China's top website. "I've seen better candidates in the last six weeks than in the last four years," says Henry. "Since the IPO, people whom we have wanted to hire for years are calling wanting to work for us."

The company has also received help from an unusual quarter. Earlier this month, the Chinese government declared that foreign investment in mainland Internet start-ups is illegal. The policy, if it sticks, is a disastrous blow to China-based competitors. Sina.com is based in California and its own initial public offering, expected before the end of November, should not be affected. But others, such as Beijing-based Netease, may not be able to raise capital without relocating abroad.

Yet in some ways, China.com is the company with the most mainland baggage. Xinhua is the third-largest shareholder with a 10.9% stake (behind Yip and New World Infrastructure). Cheah, the venture capitalist, says the company's flagship portal won't be able to attract surfers because it will be sanitized and news reports censored. "They'll never be able to do anything interesting, anything sexy or controversial as long as Xinhua is on board," he says.

China.com officials, who point out that news at competing sites is also censored, play down Xinhua's involvement. "They have a seat on the board like AOL and other major shareholders," says Henry. "The day-to-day impact is minimal." Says Yip: "I firmly believe, after many years working in China, that to make things happen you have to work in partnership with the government, instead of sitting on the other side criticizing."

Moreover, China.com officials are confident they have the right team and the right business plan, after several false starts. "Rather than planning a model," says Henry, "Peter would just tell people: 'Go and do this.' Then halfway through he'll say, 'Well, this isn't working, go and do this. Try everything.' A lot of the time I don't think people in the company knew what the hell was going on, but what he was doing was forming the plan." Adds McKay: "He went down a few cul-de-sacs, and he was always smart enough to pull out in time instead of crashing through. What we have is a very solid business as a result."

Yip jokes that he has aged so much since China. com went public that people think he looks 60 years old. China.com "will probably be my last project," he says. "I've given the company a strong foundation, and I think my role should be diminishing over time." The workaholic is thinking of buying a racehorse, but retirement has not yet sprung to mind. "Building this company is much more than a five-year or seven-year project," he says. "We have a lot of responsibility to continue to be successful and set an example for entrepreneurs in China. I feel gratified that our stock symbol is trading, reminding every Chinese that they could be another China.com." Yip knows the thrill personally. "The most exciting moment of the IPO for me was when I came home and turned on CNBC and the ticker symbol came through: CHINA. That was the moment money cannot buy."

PETER YIP ON MONEY: "I never count it. I don't want the children to think about it.'"

ON DEALING IN CHINA: "You have to work with the government, instead of sitting on the other side criticizing."

ON THE STOCK LISTING: "That was the moment money cannot buy."

Pic: Graham Uden for Asiaweek


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