DOUGLAS A Pleasant Surprise at Hartcourt in Beijing
By Douglas C. McGill
Lo and behold, there is something to The Hartcourt Companies after all.
Those of you who've followed my coverage of China Internet companies know I've been skeptical of Hartcourt, a California-based venture capital firm whose OTC stock was among the highest of high-flyers last year, rising from a penny stock to more than $15, for a total 5,264 percent on the year.
No one doubts that a good portion of Hartcourt's spectacular performance was fueled by a steady stream of extraordinary "Letters to Investors" penned by the company's chairman, one Dr. Alan V. Phan. Widely and admiringly cited on various investor bulletin boards that follow Hartcourt, Phan's letters are filled with rousing "to the mountaintop" rhetoric, checklists of grand projects and achievements, personal anecdotes, and inspiring quotations from Robert Louis Stevenson, Abraham Lincoln, and Leclerc Comte de Buffon (a 17th-century French mathematician, but I had to look it up).
The questionhas always been, where's the beef?
Like most Hartcourt investors, I'd never actually gone to China to kick the tires at any of the companies Phan boasted about in his letters -- and I worried he was taking advantage of that fact. His grandiloquent letters are peppered with hypberbole, such as the time in his December 28 letter when he claimed Hartcourt had "the only system of online stock trading in China." Or the time on March 23, 1999, that the company claimed it had merged with China Infohighway, "the exclusive commercial Internet provider in China." Last December 21, even as companies like China Telecom, Legend Holdings, and Pacific Century CyberWorks were spending hundreds of millions to build out Internet networks in China, Phan declared that Hartcourt, a name scarcely known to anyone outside of the OTC bulletin boards, would soon become "the leading Internet company in Asia."
Well, I've finally been to Beijing to visit a couple of the companies Phan has bragged so shamelessly about. And I was pleasantly surprised. I met Simon Zhang, the Chairman and President of UAC Stock Exchange Online Co., Ltd.; Mu Zhiyong, the general manager of Huaxian Info Co.; and Jiang Tai, the president of Guo Mao, an online financial data provider.
A Gleaming Tower
Over the course of a day in Beijing, these young men (all in their late 20's or early 30's) showed me their impressive physical premises and staffs; outlined an ingenious and credible technology strategy for nationwide online trading; and a realistic business plan. They all three struck me as earnest businessmen with very considerable track records in their respective areas of specialty, with a particularly good understanding of China's telecommunications infrastructure on the one hand, and its nascent securities industry and trading systems on the other. They were an impressive bunch.
I started the day in the offices of Simon Zhang, a 33-year-old graduate of the Beijing University for Post and Telecommunications who later worked for five years as an engineer at the Ministry of Post and Telecommunications, where he helped install telecom networks in several Chinese provinces, and a year for Alcatel, the leading French telecom network provider. The Ministry of Post and Telecommunications, now known as the Ministry of Information Industry, is the regulatory agency that controls China's telecommunications and Internet industries.
UAC's offices are in a gleaming office tower located next to Tsinghua University, many of whose professors work in the building for for-profit businesses spun off from university research departments. At UAC, a dozen software programmers work in cubicles, with Zhang's executive office off to one side. The day I came, his polished mahagony desk was adorned with little more than his laptop, on which he demonstrated the company's ingenious "162" network connection for me.
Here's the nub of it -- which I was never quite able to glean from Hartcourt's press releases. "162" refers to a so-called "packet switched data network," which in layman's terms is a cable network that crisscrosses China and was originally built for the purpose of carrying important financial information -- such as that sent between commercial banks, or retail stores and banks -- securely and efficiently. It is not an Internet network. Rather, it is an "intranet," a "VPN" or "virtual private network."
Nationwide Network
Zhang knew all about this network, called CHINAPAC, from his days at college and later at the Post and Telecommunications Ministry. And several years ago, as the Internet started to make headway and many young Chinese entrepreneurs started wondering how to use it for the purpose of online stock trading, Zhang started to wonder: wouldn't CHINAPAC actually be better than the Internet for online stock trading? It had many advantages: it was more secure, because it was built for the purpose of financial data exchange; it was faster; and once you'd dialed into it, it was "always on." Most importantly, it was nationwide. While online traders over the Internet could only dial up to local ISPs, traders over 162 would dial into a network that was nationwide. He put together a proposal and sold it to China Telecom, which owns the network: he would build a company, UAC, to market the 162 network to stock market brokerages and online traders, if in return the company was given a license to be CHINAPAC's exclusive operating agent.
Zhang clinched the deal. And he showed me a copy of the contract. Of course, anyone who's worked a while in China has seen many an "exclusive government contract" conveniently disposed of when an agency or ministry discovers a better vendor. Still, there it was in black and white, to which the only reasonable response was, congrats to Zhang and UAC.
By the way, I tested the number from several locales in Beijing, and it always worked. While in China you simply dial "163" for the local Internet connection, you can dial "162" for the nationwide CHINAPAC network. In Shanghai the number didn't work, but I called Zhang, and he quickly explained there was an anomaly in Shanghai and gave me two alternate numbers that bypassed this quirk. This worked, and I was in.
Once on the network, you're prompted for a user name and a password, and once past that gateway, you get an impressive interface offering you the choice of trading at either the Shanghai or Shenzhen stock exchanges. The trading platform is simple and straightforward, with real-time quotes, easy-to-follow instructions, and standard options for portfolio management, total return analysis, and so on. Zhang also demonstrated to me how 162 can be accessed through a PC; through a television set with a special set-top box manufactured by Legend which comes bundled with a 162 program called "StockEasy;" on a Palm Pilot; and on the HP Jornada personal digital assistant hooked into an ordinary telephone line. I tried them all outside of his UAC office showroom, except for the Palm Pilot, and they all worked.
80 Million Subscribers
The beauty part is that the 162 network concept is linked with one of two different broader financial information sites -- one called Winfo, which is accessed through a cable TV connection, and one called Sinobull, a Web site that is accessed through the Internet. Each carries substantially the same information -- financial news stories, real time and historical prices, analytics programs for data display, chat rooms, bulletin boards, and so on.
Because the 162 network is relatively expensive -- RMB 0.5 per minute, compared to RMB 4 per hour for an Internet connection -- the 162 interface is a simple trading platform, while the cable site/Internet site is a full financial portal with loads of information and resources for research. Therefore, the idea is that traders will do their research on the cable site or Internet site, make their choices, and then switch to the 162 network simply to execute their trades. Zhang and Mu expect that the great majority of Chinese will eventually use the cable site as opposed to the Internet site.
Reason: there are 80 million cable subscribers in China today, as many as in the U.S. After buying the connecting software, it's a snap to hook up, and once hooked up is far cheaper, faster, and more reliable than the Internet. Total cost for the cable connection: about RMB 40 ($5) per month.
Mu showed me the Winfo interface that he had designed, and it was truly impressive. The news and information part, while well designed, was a bit skimpy in terms of daily content -- unavoidably so, as financial reporting in China is far below standards set in developed nations. But historical pricing back to the beginnings of China's stock markets, in 1990, was complete, and the analytics programs for displaying that data (moving averages, candle charts, comparative pricing, what have you) as good as I've seen anywhere on the Internet -- better, in fact, because of the high-speed cable connection.
The Hua Xia Info office was a few miles away from UAC, in the so-called Shangdi area, a section of Beijing specially zoned for high tech startup companies. There were several dozen computer programmers in the Shangdi offices, across town in its main offices located in the CITIC building could be found more than 700 people working on software development, network maintenance, and the like. There is an editorial staff of about 25 that aggregates and repackages financial news and information culled daily from several official sources, including China's major financial daily newspapers, and especially from Hua Xia Securities Research, one of China's three major financial research institutes. The latter is made available to Hua Xia Info by virtue of the fact that Hua Xia Securities is one of the three owners of Hua Xia Info; the other two being Shangdi, and Xiamen Electronics of Xiamen, China.
Expert Commentators
Next to Mu's desk was a pile of wooden plaques commemorating deals signed with almost 30 cable stations around China, gauranteeing Hua Xia Info the right to distribute its financial information over those cable networks into consumers homes.
The day I was there, I proposed a quick test. I'd read from a Hartcourt press release that Sinobull, which went online on March 1, had received 100,000 page views a day during its first three and had already proved popular with online investors and bulletin board visitors and chatters. Could we go to the Sinobull bulletin board right now, on that mid-Friday afternoon, I asked, and see how busy it was? Sure, said Mssrs. Zhang and Mu. We logged on and clicked to the bulletin board page: 1979 people were logged on at the time.
Not bad! Hua Xia Info has on staff nine of the 200 licensed online stock commentators in China. An interesting part of the Web site lists each of their names, with a number rating beside each one, denoting which are the most popular in terms of notices and responses to each of their commentaries.
Clearly, these commentators were drawing the lion's share of the traffic on the day we visited. The best of them offered not only tips and opinions but actual facts -- research and information they dug up in telephone interviews, wading through documents, and visits to companies. In a country where good financial information is still nowhere near up to snuff for sophisticated investors, what these commentators offered is the best there is.
There are major obstacles ahead for UAC. Perhaps the biggest is that for the system to work, to be truly nationwide, the company has still to market its services to every one of the 4,000 securities brokerages around the country. Each of these brokerages has to agree to pay for the laying of a dedicated line that connects the brokerage to the CHINAPAC network. That process would take, on average, between two and three months per brokerage, Zhang predicts. What's more, there is still a national law prohibiting brokerages from recruiting customers outside of its locality. Naturally, this doesn't get mentioned in the "everything is beautiful" letters from the Hartcourt chairman (lest you think I'm being sarcastic, here is an actual quote from one of his letters: "Life is wonderful, and everyday in Hartcourt land is Christmas day.") In person, Simon admits to this fact, but also argues that he expects the rule to be relaxed soon. Asking around in Shanghai and Beijing, I hear the same thing, and think it's true.
Who Knows?
The law against online trading itself was recently relaxed, and things are going in that direction.
This last little example nicely illustrates the strength and weakness of Hartcourt as I now see it. After my visit to Beijing and my meetings with Mssrs. Zhang, Mu, and Tai, I tend to see Phan's letters more as well-intentioned but possibly harmful (because it amounts to hyping the stock) exagerration, as opposed to deliberate deception. I still think Phan seriously underestimates the potential for major stumbling blocks for any business in China, and thus misleads investors to some degree with his unrelievedly sunny, not to say hyperbolic, calls to arms. Yet the reality I saw was impressive; the products, ingenious; and the people, modest and realistic.
There was plenty more to see of Hartcourt in China -- especially a whole other section of its venture business, a wireless and internet telephony project centered around a Chinese company called Innostar. That project, Phan declares in one of his letters, is potentially "five times as big" as the Sinobull project that I visited. Well, there he goes again.
But after that visit I have to say "who knows?" The folks I met in Beijing have just as good a chance as anyone, I'd say, to find their way to introducing nationwide online stock trading in China. Phan may go overboard in his letters, but if his Beijing companies are any indication, I'd say he can pick promising young companies.
They've worked hard, they've got a plan and a product nailed down. From now on, it's a matter of execution. I'm rooting for them.
Risk Rating: V-2
To reach Douglas C. McGill: dmcgill@virtualchina.com
By Douglas C. McGill
Lo and behold, there is something to The Hartcourt Companies after all.
Those of you who've followed my coverage of China Internet companies know I've been skeptical of Hartcourt, a California-based venture capital firm whose OTC stock was among the highest of high-flyers last year, rising from a penny stock to more than $15, for a total 5,264 percent on the year.
No one doubts that a good portion of Hartcourt's spectacular performance was fueled by a steady stream of extraordinary "Letters to Investors" penned by the company's chairman, one Dr. Alan V. Phan. Widely and admiringly cited on various investor bulletin boards that follow Hartcourt, Phan's letters are filled with rousing "to the mountaintop" rhetoric, checklists of grand projects and achievements, personal anecdotes, and inspiring quotations from Robert Louis Stevenson, Abraham Lincoln, and Leclerc Comte de Buffon (a 17th-century French mathematician, but I had to look it up).
The questionhas always been, where's the beef?
Like most Hartcourt investors, I'd never actually gone to China to kick the tires at any of the companies Phan boasted about in his letters -- and I worried he was taking advantage of that fact. His grandiloquent letters are peppered with hypberbole, such as the time in his December 28 letter when he claimed Hartcourt had "the only system of online stock trading in China." Or the time on March 23, 1999, that the company claimed it had merged with China Infohighway, "the exclusive commercial Internet provider in China." Last December 21, even as companies like China Telecom, Legend Holdings, and Pacific Century CyberWorks were spending hundreds of millions to build out Internet networks in China, Phan declared that Hartcourt, a name scarcely known to anyone outside of the OTC bulletin boards, would soon become "the leading Internet company in Asia."
Well, I've finally been to Beijing to visit a couple of the companies Phan has bragged so shamelessly about. And I was pleasantly surprised. I met Simon Zhang, the Chairman and President of UAC Stock Exchange Online Co., Ltd.; Mu Zhiyong, the general manager of Huaxian Info Co.; and Jiang Tai, the president of Guo Mao, an online financial data provider.
A Gleaming Tower
Over the course of a day in Beijing, these young men (all in their late 20's or early 30's) showed me their impressive physical premises and staffs; outlined an ingenious and credible technology strategy for nationwide online trading; and a realistic business plan. They all three struck me as earnest businessmen with very considerable track records in their respective areas of specialty, with a particularly good understanding of China's telecommunications infrastructure on the one hand, and its nascent securities industry and trading systems on the other. They were an impressive bunch.
I started the day in the offices of Simon Zhang, a 33-year-old graduate of the Beijing University for Post and Telecommunications who later worked for five years as an engineer at the Ministry of Post and Telecommunications, where he helped install telecom networks in several Chinese provinces, and a year for Alcatel, the leading French telecom network provider. The Ministry of Post and Telecommunications, now known as the Ministry of Information Industry, is the regulatory agency that controls China's telecommunications and Internet industries.
UAC's offices are in a gleaming office tower located next to Tsinghua University, many of whose professors work in the building for for-profit businesses spun off from university research departments. At UAC, a dozen software programmers work in cubicles, with Zhang's executive office off to one side. The day I came, his polished mahagony desk was adorned with little more than his laptop, on which he demonstrated the company's ingenious "162" network connection for me.
Here's the nub of it -- which I was never quite able to glean from Hartcourt's press releases. "162" refers to a so-called "packet switched data network," which in layman's terms is a cable network that crisscrosses China and was originally built for the purpose of carrying important financial information -- such as that sent between commercial banks, or retail stores and banks -- securely and efficiently. It is not an Internet network. Rather, it is an "intranet," a "VPN" or "virtual private network."
Nationwide Network
Zhang knew all about this network, called CHINAPAC, from his days at college and later at the Post and Telecommunications Ministry. And several years ago, as the Internet started to make headway and many young Chinese entrepreneurs started wondering how to use it for the purpose of online stock trading, Zhang started to wonder: wouldn't CHINAPAC actually be better than the Internet for online stock trading? It had many advantages: it was more secure, because it was built for the purpose of financial data exchange; it was faster; and once you'd dialed into it, it was "always on." Most importantly, it was nationwide. While online traders over the Internet could only dial up to local ISPs, traders over 162 would dial into a network that was nationwide. He put together a proposal and sold it to China Telecom, which owns the network: he would build a company, UAC, to market the 162 network to stock market brokerages and online traders, if in return the company was given a license to be CHINAPAC's exclusive operating agent.
Zhang clinched the deal. And he showed me a copy of the contract. Of course, anyone who's worked a while in China has seen many an "exclusive government contract" conveniently disposed of when an agency or ministry discovers a better vendor. Still, there it was in black and white, to which the only reasonable response was, congrats to Zhang and UAC.
By the way, I tested the number from several locales in Beijing, and it always worked. While in China you simply dial "163" for the local Internet connection, you can dial "162" for the nationwide CHINAPAC network. In Shanghai the number didn't work, but I called Zhang, and he quickly explained there was an anomaly in Shanghai and gave me two alternate numbers that bypassed this quirk. This worked, and I was in.
Once on the network, you're prompted for a user name and a password, and once past that gateway, you get an impressive interface offering you the choice of trading at either the Shanghai or Shenzhen stock exchanges. The trading platform is simple and straightforward, with real-time quotes, easy-to-follow instructions, and standard options for portfolio management, total return analysis, and so on. Zhang also demonstrated to me how 162 can be accessed through a PC; through a television set with a special set-top box manufactured by Legend which comes bundled with a 162 program called "StockEasy;" on a Palm Pilot; and on the HP Jornada personal digital assistant hooked into an ordinary telephone line. I tried them all outside of his UAC office showroom, except for the Palm Pilot, and they all worked.
80 Million Subscribers
The beauty part is that the 162 network concept is linked with one of two different broader financial information sites -- one called Winfo, which is accessed through a cable TV connection, and one called Sinobull, a Web site that is accessed through the Internet. Each carries substantially the same information -- financial news stories, real time and historical prices, analytics programs for data display, chat rooms, bulletin boards, and so on.
Because the 162 network is relatively expensive -- RMB 0.5 per minute, compared to RMB 4 per hour for an Internet connection -- the 162 interface is a simple trading platform, while the cable site/Internet site is a full financial portal with loads of information and resources for research. Therefore, the idea is that traders will do their research on the cable site or Internet site, make their choices, and then switch to the 162 network simply to execute their trades. Zhang and Mu expect that the great majority of Chinese will eventually use the cable site as opposed to the Internet site.
Reason: there are 80 million cable subscribers in China today, as many as in the U.S. After buying the connecting software, it's a snap to hook up, and once hooked up is far cheaper, faster, and more reliable than the Internet. Total cost for the cable connection: about RMB 40 ($5) per month.
Mu showed me the Winfo interface that he had designed, and it was truly impressive. The news and information part, while well designed, was a bit skimpy in terms of daily content -- unavoidably so, as financial reporting in China is far below standards set in developed nations. But historical pricing back to the beginnings of China's stock markets, in 1990, was complete, and the analytics programs for displaying that data (moving averages, candle charts, comparative pricing, what have you) as good as I've seen anywhere on the Internet -- better, in fact, because of the high-speed cable connection.
The Hua Xia Info office was a few miles away from UAC, in the so-called Shangdi area, a section of Beijing specially zoned for high tech startup companies. There were several dozen computer programmers in the Shangdi offices, across town in its main offices located in the CITIC building could be found more than 700 people working on software development, network maintenance, and the like. There is an editorial staff of about 25 that aggregates and repackages financial news and information culled daily from several official sources, including China's major financial daily newspapers, and especially from Hua Xia Securities Research, one of China's three major financial research institutes. The latter is made available to Hua Xia Info by virtue of the fact that Hua Xia Securities is one of the three owners of Hua Xia Info; the other two being Shangdi, and Xiamen Electronics of Xiamen, China.
Expert Commentators
Next to Mu's desk was a pile of wooden plaques commemorating deals signed with almost 30 cable stations around China, gauranteeing Hua Xia Info the right to distribute its financial information over those cable networks into consumers homes.
The day I was there, I proposed a quick test. I'd read from a Hartcourt press release that Sinobull, which went online on March 1, had received 100,000 page views a day during its first three and had already proved popular with online investors and bulletin board visitors and chatters. Could we go to the Sinobull bulletin board right now, on that mid-Friday afternoon, I asked, and see how busy it was? Sure, said Mssrs. Zhang and Mu. We logged on and clicked to the bulletin board page: 1979 people were logged on at the time.
Not bad! Hua Xia Info has on staff nine of the 200 licensed online stock commentators in China. An interesting part of the Web site lists each of their names, with a number rating beside each one, denoting which are the most popular in terms of notices and responses to each of their commentaries.
Clearly, these commentators were drawing the lion's share of the traffic on the day we visited. The best of them offered not only tips and opinions but actual facts -- research and information they dug up in telephone interviews, wading through documents, and visits to companies. In a country where good financial information is still nowhere near up to snuff for sophisticated investors, what these commentators offered is the best there is.
There are major obstacles ahead for UAC. Perhaps the biggest is that for the system to work, to be truly nationwide, the company has still to market its services to every one of the 4,000 securities brokerages around the country. Each of these brokerages has to agree to pay for the laying of a dedicated line that connects the brokerage to the CHINAPAC network. That process would take, on average, between two and three months per brokerage, Zhang predicts. What's more, there is still a national law prohibiting brokerages from recruiting customers outside of its locality. Naturally, this doesn't get mentioned in the "everything is beautiful" letters from the Hartcourt chairman (lest you think I'm being sarcastic, here is an actual quote from one of his letters: "Life is wonderful, and everyday in Hartcourt land is Christmas day.") In person, Simon admits to this fact, but also argues that he expects the rule to be relaxed soon. Asking around in Shanghai and Beijing, I hear the same thing, and think it's true.
Who Knows?
The law against online trading itself was recently relaxed, and things are going in that direction.
This last little example nicely illustrates the strength and weakness of Hartcourt as I now see it. After my visit to Beijing and my meetings with Mssrs. Zhang, Mu, and Tai, I tend to see Phan's letters more as well-intentioned but possibly harmful (because it amounts to hyping the stock) exagerration, as opposed to deliberate deception. I still think Phan seriously underestimates the potential for major stumbling blocks for any business in China, and thus misleads investors to some degree with his unrelievedly sunny, not to say hyperbolic, calls to arms. Yet the reality I saw was impressive; the products, ingenious; and the people, modest and realistic.
There was plenty more to see of Hartcourt in China -- especially a whole other section of its venture business, a wireless and internet telephony project centered around a Chinese company called Innostar. That project, Phan declares in one of his letters, is potentially "five times as big" as the Sinobull project that I visited. Well, there he goes again.
But after that visit I have to say "who knows?" The folks I met in Beijing have just as good a chance as anyone, I'd say, to find their way to introducing nationwide online stock trading in China. Phan may go overboard in his letters, but if his Beijing companies are any indication, I'd say he can pick promising young companies.
They've worked hard, they've got a plan and a product nailed down. From now on, it's a matter of execution. I'm rooting for them.
Risk Rating: V-2
To reach Douglas C. McGill: dmcgill@virtualchina.com
