This stock has China. It has the Internet. But it also has people scratching their heads, trying to figure out where the value is.
The company in question is
China Prosperity International Holdings
, a Hong Kong-based, Australian-traded construction and investment company whose American depositary receipts trade on
. Those ADRs, which had done little but lose value since the company's 1995 IPO, rocketed in recent weeks on the prospect of freer trade with China and speculation over an interactive TV project in China. But potential dilution in the stock and the company's extremely optimistic projections for the interactive venture could signal that prosperity remains far off for shareholders.
China Prosperity, which was known as
OLS Asia Holdings
until earlier this year, went public at a reverse split-adjusted 6 1/4 in late 1995. The ADRs, which now represent 20 China Prosperity shares, slowly drifted downward, hitting 1 on Nov. 15. As the shares drooped, the company's operating performance deteriorated as well: From the first half of 1998 to the first half of 1999, revenue plummeted to HK$60.5 million ($7.8 million) from HK$152.9 million, with the loss attributable to shareholders doubling to HK$50 million from HK$25.5 million.
stock message boards, which launched a China Prosperity thread in August, stockholders didn't often praise the company; instead, they posted their unhappiness with the brokerage firm
, which they blamed for getting them into the stock. "OLS Asia performed well when the management of the company was executing its original strategy," responds Brian Herman, vice president, investments for Barron Chase, in a written statement. The ADRs, which Barron Chase underwrote in 1995, rose above the offering price, he points out, blaming subsequent investor disenchantment on losses the company sustained after it got involved in the Hong Kong derivatives market.
Turning It All Around
But all that changed after the U.S. and China signed an agreement paving the way for China's entry into the
World Trade Organization
. On Nov. 16, the stock gained more than 1,000%, jumping from 1 to 10 1/6. The next morning, the ADRs made a quick round trip to 80 before ending the day at 32 1/16.
Signaling in part the resurgence of good old-fashioned momentum daytrading, the trajectory of China Prosperity's ADRs appears to stem from excitement over the company's planned involvement in something called the
Century Vision Network
project -- an attempt to bring Internet access, video on demand and online shopping to Chinese households via telephone lines and television set-top boxes. (
couldn't find any institutional owners of the stock or published research in the U.S.)
On the evening of the 16th, for example, one poster identified as "Wall_street_king" favorably compared China Prosperity to another intersection of China and the Internet,
: "Both based in Hong Kong, both in the business of getting internet to China. Big difference: China.com at 127, CPIH just getting started. This is only the ground floor, folks. Welcome to Fantasy Island."
The Plane, the Plane
Fantasy Island may indeed be an appropriate name for investor optimism. First of all, the Century Vision Network isn't operating yet. Financing for the project hasn't been fixed. Agreements with state-owned companies amount to no more than nonbinding letters of intent. It seems almost pointless to point out that China Prosperity doesn't even have a stake in the Century Vision project yet; that should come Friday, when China Prosperity's majority-owned, Hong Kong-listed subsidiary votes on an acquisition of 33% of the shares of Century Vision's parent company and other assets.
But the continuing threat of dilution to shareholders is especially troubling, says a China Prosperity short-seller, who spoke on condition of anonymity. As of June 1999, China Prosperity had 102.7 million shares outstanding. But convertible notes quadruple the fully diluted share count, says
Sino Securities International
, an Australian firm that underwrote China Prosperity's 1995 offering and issued a lukewarm report on the company this July.
Accounting for the dilution, China Prosperity International has a value of less than 28 cents per share, putting the value of the ADRs at about $5.50 each, Sino Securities said last week.
Investors in the stock for any reason other than momentum may be betting that the Internet project in the world's most populous country will mean untold riches. But the forecasts that China Prosperity Hong Kong is circulating about the Century Vision Network project are staggering.
For example, China Prosperity Hong Kong envisions that Century Vision will have revenue of about $860 per subscriber in 2000.
That's somewhat optimistic when you think that the network is unbuilt and 2000 is only a month away. But it gets downright implausible when you look at
latest fiscal year. Using an extremely generous estimate, the biggest Internet company, based in the world's biggest economy, garnered $298 in revenue per subscriber.
China Prosperity's corporate secretary, Candice Pang, doesn't think the Century Vision estimates are unrealistic. "Maybe in China the competitive environment is very, very different from the U.S.," she says. "I don't think the direct comparison is that appropriate. Maybe more analysis needs to be done."
The short-seller isn't so sure about the ADRs, which closed Wednesday at 12 9/16, down 1/2. "You've got all these extremely optimistic projections and all these potentially dilutive transactions. It's really hard to see value here."