China.com

February 24, 2000

BA 491 Emerging Markets

Summer Xia, Patcharin Deprasertwong, Charlie Q. Lin, Dohee Kwon, Susan Mlodozeniec

Agenda

• Company

– Background, IPOs, Business Model and Strategies, Positives and Risks

• Internet Industry in Asia

• Risks and Concerns

• Valuations

– DCF, Multiple Analysis, Cost of Capital

• Conclusions and Q&A

China.Com

First Pan-Asian Integrated

Internet Company

• Portal Service

• On-line Advertising

• Web Solutions

• Addresses:

– www.china.com

– www.taiwan.com

– www.hongkong.com

– www.cww.com

First IPO

• July 12, 1999 on NASDAQ• 4.3 million shares at $20/share• Closing price of $67.10/share• $96.6 million in proceeds

China.Com Stock Splits (2:1)

• December 14, 1999• Prior to split, closing

price of $159.87• Closing on day of split:

$98.125

Split-Adjusted China.com Stock Price

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7/13/99 8/13/99 9/13/99 10/13/99 11/13/99 12/13/99

Secondary IPO

• January 21, 2000• No earnings: $4.4 million loss on $5.2 million

in revenue for the three months ended Sept. 30, 1999

• Nearly 5 million shares sold with offering price of $85/share

• Closed at $92.438

CHINA.COM Performance

Business Model

MultinationalCorporations

Asia’s LeadingCorporations

Small to mediumSized businessEnterprises

Asian Governments

Clients Three Business Units

Portal Network

Content-Community-CommerceChina.com,Hongkong.com,Taiwan.com

Web Solutions

StrategyDesignMaintenanceEnhancement

Ad Network

Pan-Asia NetworkChina.com Portals24/7 media partnership

World Wide Web

Content andCommerce

Chinese users globally

English language users interested the Greater China Market

Yahoo! Netscape, 24/7 MediaXinhua News Agency, AOL, Agency France, Intel

Strategic Alliances and Shareholders

• Low Internet and PC penetration

• Rapid growth in client base, page views, revenues

• Strong market positions, early mover advantage

• Integrated business model

• Expansion across Asia - organic & acquisition

• Fragmented industry

• Strong shareholders, potential strategic partners

COMPANY POSITIVES

• Limited track record

• Increasing competition

• Reliance on partners, content-alliances

• Execution risk

• Network infrastructure and Telecom carriers

• Geographic risks

COMPANY RISKS

INTERNET INDUSTRY IN ASIA (OPPORTUNITY)

IDC forecasted “number of internet users in Asia would grow

by 33.4% and surpass growth of U.S users by the year 2003”

• China

- Large population, government commitment on internet• Hong Kong, Taiwan

- Technologically sophisticated population, high penetration rate• Asia

- With a projected Internet user growth rate of over 30%,

online opportunities will develop significantly in Asia

INTERNET INDUSTRY IN CHINA (OPPORTUNITY)

Growth Catalysts for China Market

• Prioritization of Internet development, says Gov’t

- maintain global competitiveness, efficient processing of public sector

• Technology leapfrogging

- TV-internet access, TV-based internet products

• Prioritization of Infrastructure Development

- Growth in telephone infrastructure, 19M wireline subscriber/yr, wireline

population penetration increase from 1.4% in 1993 to 8.7% in 1998

INTERNET INDUSTRY IN CHINA (THREATS)

Constraints of Internet Growth in China

• Lack of competition in the provision of telephony service

• Poor last-mile networks

• Long waiting lists for leased-line provision from China

Telecom

• Lack of credit card availability and usage in China

constrains e-commerce

• Small number of ISDN(integrated service digital network)

RISKS AND CONCERNS

• Economic Risks

• Country Risks

• Company Risks

ECONOMIC RISKS

• Volatile Asian Economic Climate- Reduce advertising in Asian market

- Reduce web solution business

- Liquidity problem

• Economic climate in Greater China

- PRC: Slow domestic demand and inflation

- Hong Kong: Deflation, Uncertainty in currency Peg

- Taiwan : Recession, Volatility and depreciation of NT dollar

COUNTRY RISKS

• Uncertainty in Internet laws & regulations

- Government authorities can force ISPs to block a web site

if believed to be socially destabilizing

- Imposing strict ISP’s licensing requirements

• Currency risks- Future restriction on currency exchange, restriction on

convertibility of Renminbi

• Limited track record

• Increasing competition

• Reliance on partners, content-alliances

• Execution risk

• Network infrastructure and Telecom carriers

• Geographic risks

COMPANY RISKS

AGENDA

• Management Forecast and Earning Projections

• Valuation - DCF model

• Main Assumptions

MANAGEMENT FORECAST

• 100% CAGR from 1998 through 2001

• Key drivers for its revenue in the future– Portal Network– Web Solutions– Advertising Sales

PORTAL NETWORK

• Generate increased traffic through greater numbers of internet users– Enhancement of content

– Establishment of co-branded portals and vertically integrate into own portals

• Increase from current 3% of total revenue to 5% in a long run

WEB SOLUTIONS

• Primary revenue stream - 78% in 1998– Web site design & maintenance services – Strategic consulting – Technical integration

• Web solutions service revenue is driven by – Number of paying clients

– Annual average yield per account

• Overall growth will be over 100% through 2001

ADVERTISING SALES

• Comprehensive ad solutions & targeted ad

– 175 affiliated web sites throughout Asia, Australia and US. – Share 30% -50% of the advertising revenues

• Ad revenue will grow to 60% of the total revenue – Steady growth in the total number of affiliated web sites – Aggregated daily page views

VALUATION-DCF Discounted Cashflow

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Revenue 13.81 30.38 60.76 115.43 207.78 353.23

Cost of Revenue 27.62 45.57 69.87 103.89 166.23 247.26 EBIT (13.81) (15.19) (9.11) 11.54 41.56 105.97 EBIAT (13.81) (15.19) (9.11) 11.54 41.56 105.97 + Depreciation 0.75 2.73 3.04 5.77 5.19 7.06 - Working Capital Needs (0.16) (0.61) (1.30) (4.70) (5.22) (8.50) - Capital Expenditure (6.72) (5.34) (10.51) (6.62) (10.93) (8.71) FCF (19.93) (18.41) (17.88) 6.00 30.59 95.82 153.32 245.31 392.50 628.00

Discount Factor 0.79 0.62 0.49 0.38 0.30 0.24 0.19 0.15 0.12 PV FCF -14.50 -11.08 2.93 11.76 29.00 36.54 46.04 58.00 73.07

Terminal Value 6,501.61 PV TV 595.64

Total Firm Value 919.44 # of shares outstanding (pre split) 21.59 Price Per Share 42.59$

Tax Rate 15% of 24% 48.30 50.26 52.45 53.65 54.92 Growth rate (2005-2009) 60% Capital 22% 60.44 63.30 66.54 68.33 70.24 Perpetuity growth of FCF 10.0% 20% 76.89 81.18 86.14 88.91 91.92 WACC 27% 16% 133.10 144.23 157.83 165.83 174.82

DCF - MAIN ASSUMPTION Revenue - will grow at over 100% till 2001, and

80% till 2004 The percentage of revenue from on-line advertising will

surpass that from web solutions

Won’t break even till the end of 2001– EBIT is expected to 20% in 2003 from current negative

257%– SG&A will decline and stay stable at 30% – Staff will drop slightly from 25% to 20% – R&D will see significant increase, up to 15% from 7%

DCF - MAIN ASSUMPTION (CON’T)

• Capex - significantly drop over the years

• Assume average $2 million each year for fixed

assets acquisition

• Targeted debt Ratio - 15%

• Stable growth (2005 - 2009) - 60%

• Perpetuity growth rate - 9%

DCF - SENSITIVITY ANALYSIS Perpetuity Growth Rate

#REF! 5.0% 6.0% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5%30% 26.48 27.21 28.01 28.43 28.87 29.34 29.82 30.33 28% 32.03 33.03 34.12 34.70 35.32 35.97 36.65 37.36

Cost 26% 39.11 40.50 42.03 42.85 43.73 44.65 45.63 46.66 of 24% 48.30 50.26 52.45 53.65 54.92 56.28 57.72 59.26

Capital 22% 60.44 63.30 66.54 68.33 70.24 72.30 74.51 76.90 20% 76.89 81.18 86.14 88.91 91.92 95.19 98.75 102.66 18% 99.83 106.55 114.50 119.04 124.04 129.56 135.70 142.56 16% 133.10 144.23 157.83 165.83 174.82 185.02 196.68 210.13

Perpetuity Growth Rate 51.20 5% 6% 7% 8% 8% 9% 9% 10%

30% 26.48 27.21 28.01 28.43 28.87 29.34 29.82 30.33 28% 32.03 33.03 34.12 34.70 35.32 35.97 36.65 37.36

Cost 26% 39.11 40.50 42.03 42.85 43.73 44.65 45.63 46.66 of 24% 48.30 50.26 52.45 53.65 54.92 56.28 57.72 59.26

Capital 22% 60.44 63.30 66.54 68.33 70.24 72.30 74.51 76.90 20% 76.89 81.18 86.14 88.91 91.92 95.19 98.75 102.66 18% 99.83 106.55 114.50 119.04 124.04 129.56 135.70 142.56 16% 133.10 144.23 157.83 165.83 174.82 185.02 196.68 210.13

HK$@US$ Price % of Change NT$@US$ Price % of Change RMB@US$ Price 9.8 29.39 -41% 34.7 40.56 -18% 12.28 43.34 9.3 33.66 -32% 33.7 42.64 -14% 11.28 44.51 8.8 38.40 -23% 32.7 44.86 -10% 10.28 45.91 8.3 43.72 -12% 31.7 47.21 -5% 9.28 47.61 7.8 49.72 0% 30.7 49.72 0% 8.28 49.72 7.3 56.55 14% 29.7 52.40 5% 7.28 52.42 6.8 64.37 29% 28.7 55.27 11% 6.28 55.97 6.3 73.44 48% 27.7 58.34 17% 5.28 60.86 5.8 84.07 69% 26.7 61.64 24% 4.28 68.05

DCF VALUATION : COST OF CAPITAL

• Tradiational Approach: CAPM Model

Emg. Mkt. companies in US: Betas and returns

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International cost of Capital and Risk Calculator

• Step1: calculate country risk:

• China: 19.9%

• Hong Kong: 18.5%

• Taiwan: 14.8%

• Hybrid rate: 18.0%

DCF VALUATION : COST OF CAPITAL

International cost of Capital and Risk Calculator

• Step 2: identify the Beta adjustment: Regression against Credit Lyonais Greater China Index

DCF VALUATION: COST OF CAPITAL

Beta Adjustment for China.com

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International cost of Capital and Risk Calculator

• Step 3: : Weighted Cost of Capital:

DCF VALUATION : COST OF CAPITAL

Tax Rate 15.0% Cost of equity 29.7%Cost of Debt 12.0% E/V ratio 85.0%D/V ratio 15.0% WACC 26.8%

VALUATION BASED ON MULTIPLES

Symbol Company Name Mkt Cap. 52-W Hi 52 Low EPS Rev/Share Price Sales 00'P/S 00'

CNET CNET, Inc. 4,615 80 27.50 0.84 1.26 61 145 31.8

EWBX EarthWeb Inc. 302 89 25.38 (3.78) 3.19 31 50 6.0

EXDS Exodus Comm. 21,136 145 9.05 (0.78) 1.42 121 437 48.4

IVIL iVillage Inc. 605 130 13.44 (5.58) 1.51 21 81 7.5

LCOS Lycos, Inc. 7,340 94 28.56 (1.00) 2.02 73 300 24.5

MKTW MarketWatch.com 584 107 26.13 (4.68) 1.80 43 38 15.4

MMXI Media Metrix, Inc. 718 74 31.00 (1.34) 1.04 36 33 22.1

STRM StarMedia Network 3,187 70 24.00 (1.91) 0.34 56 38 79.7

TFSM 24/7 Media, Inc. 1,052 70 21.75 (1.51) 2.81 45 128 8.2

YHOO Yahoo! Inc. 85,915 250 55.00 0.10 1.12 162 756 113.6

ZDZ ZDNet Group 2,303 56 13.44 NA NC 32 123 18.8

1186HK Pacific Century Cyber 230,303 29 0.10 (0.14) 0.61 25 5,531 41.4

Avearge: 34.8

• We Use Price/Sales multiples:

VALUATION BASED ON MULTIPLES• How to price the Chinadotcom?

Comparbles P/S Pricing China.comComparbles average 35 49.00 Lycos, Inc. 24 34.25 Yahoo! Inc. 114 159.10 StarMedia Netw ork, Inc. 80 112.00

Q&A