Brand-Name Connection: Hong Kong Investors Lap Up the Internet

Investors' infatuation with Internet shares resembles the recent red-chip episode.
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HONG KONG -- People here go crazy for brand names. If an item has Dior, Chanel or Armani stamped on it, it gets snapped up.

That love of brand names now extends to the stock market: Anything associated with the Internet, technology or America's

Nasdaq Stock Market

seems to command a premium.

The frenzy, reminiscent of a previous love affair with the mainland Chinese companies known as red-chips, is so pronounced that shares of any company loosely affiliated with the Internet or considering a listing on the Nasdaq are rewarded by investors. And as happened with the red-chips, signs are emerging that the mania could burn itself out.

One warning signal is the return of basket warrants, bunches of warrants on a group of similar companies. Investment bank

Credit Suisse First Boston

issued one earlier this week on Internet-associated stocks, like

Hong Kong Telecom

(HKT)

,

Wharf

and cell-phone company

SmarTone

. The last time "concept" warrant baskets were popular was two years ago, when brokerages created them for the red-chips, many of which turned out to be poorly managed or broke. Some even turned out to be both.

Hong Kong Telecom, up 62% since the beginning of February, and Wharf, up 117% in the last two months, are pricey at current levels, many say. But the inclusion of SmarTone is enough to make some snicker. Although SmarTone doesn't even have an Internet service yet,

Yahoo!'s

(YHOO)

announcement that it would provide SmarTone with content sent the Hong Kong-listed stock 15% higher in mid-April.

The other two aren't particularly attractive, either. Hong Kong Telecom, the former monopoly phone company, has seen its market share erode now that competition has arrived. It is not the lean, mean, entrepreneurial sort of shop that normally commands speculative premiums in Silicon Valley.

Still, the presence of

Microsoft's

(MSFT) - Get Report

Bill Gates

for a day in March to announce a "strategic cooperation" arrangement with Hong Kong Telecom sent the stock rocketing to almost double its previous level, to around HK$22 (about $2.82 U.S.). Also helping are reports the company was thinking of listing its Internet business in the U.S.

Back then, analyst Richard Ferguson at

Nomura Asia

had a sell rating on the company, a recommendation he maintains. "I don't think it's worth HK$9.60 anymore. It's worth HK$8," he says. Nomura Asia hasn't done any underwriting for Hong Kong Telecom.

"A movement of one type of a core business to another type of core business entails risk, and risk requires reward," said Lloyd Fischer, head of Asia-Pacific telecom research at

Salomon Smith Barney

, which gives Hong Kong Telecom an underperform rating, one notch above a sell. "Where's your upside? The only upside is that someone else will come along and pay more for it," he said. Salomon Smith Barney hasn't done any underwriting for Hong Kong Telecom.

Wharf, a real-estate and freight company, is an even stranger addition to a technology basket. Although its five-year-old cable TV operation has just made money for the first time, Internet fever doubled Wharf's price in just two months. It now trades at HK$19.80.

Even analysts with buy ratings on Wharf say they based the valuation more on undervalued real-estate assets than the company's core business.

Regardless of the fundamentals, the Internet gold rush, like the red-chip boom before it, is fueling further fascination with technology, the Internet and the Nasdaq.

That fascination reaches to the consumer level. In a subway advertisement, one Internet service provider boasts "Nasdaq-listed" as one of its features. It's unclear how that helps the connection.