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Seeking the Ideal Laboratory
To Test Bubbles? Try Hong Kong
July 19, 2000
Tech Center
By JON E. HILSENRATH
Staff Reporter of THE WALL STREET JOURNAL
HONG KONG -- You could call this city Bubble Town.
Investors across the globe may be wrestling with tech-stock fallout, but this densely packed home to nearly seven million souls has made booms and busts a way of life. In the past three years alone, Hong Kong has seen investment crazes in tech shares, China-related shares, real estate, taxi licenses, Queen Elizabeth stamps and Snoopy dolls given away by McDonald's restaurants. The main stock index has risen 40%, fallen 60% -- and then nearly tripled.
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This is the story of Hong Kong's one-year love affair with the latest bubble, the dot-com craze, as told through the experiences of four individuals whose fortunes rose and fell with it. This particular frenzy didn't begin here, and its ups and downs may have been greater elsewhere. But Hong Kong, a modern city perched on the doorstep of developing China, is an ideal laboratory for the study of the bubble phenomenon. When gold prices soared in the 1980s, jewelry shops here morphed into trading houses. Then when real-estate prices soared in the mid-1990s, restaurants, clothing shops and hardware stores closed -- and quickly reopened as real-estate firms. And earlier this year, Hong Kong citizens lined up by the tens of thousands for a chance to get in on the initial public offering of a new Internet portal.
How did the city get this way? For most of the past century it has been at its heart a frontier town, rooted in the trading ethos, and infused by waves of immigrants fleeing China who came well-versed in family parables of misfortune, risk-taking and thriftiness. "Many of these are people whose life experience included sudden, unanticipated loss," says Dr. Michael E. DeGolyer, a pollster and professor at Hong Kong's Baptist University. "When you've got a chance to make money here, you make it as fast as you can, as much as you can."
It's a trait amplified by economic fundamentals. Hong Kong's economy is loosely regulated; it's the preferred entrepot to China, the world's biggest developing economy; and the local currency is pegged solidly to the U.S. dollar. It leaves the city fully exposed to the waves of greed and fear that wash through the global economy.
The result: A city of opportunists who are primed to reinvent themselves at the whiff of the next big idea.
Francis Leung Reinvents Himself
Francis Leung is a stout, religious man with a serious face. A crucifix hangs in his small, windowless office; he prays in the morning at a Catholic church opposite the Happy Valley horse-racing track. He's also had his hands on the controls of two of Hong Kong's most recent bubbles, the 1997 craze for China-related shares called red chips, as well as this year's tech-stock run-up.
Few people exemplify Hong Kong's ability to reinvent itself as well as Mr. Leung. The son of immigrants from southern China, he grew up in a tiny stone shack near a Hong Kong industrial site. In the late 1980s, he co-founded a local investment bank called Peregrine Investments Holdings Ltd. with a former British race-car driver named Philip Tose. For the next decade, he spent his days searching China for companies to dress up and take public in Hong Kong. At the height of his power in mid-1997, thousands of investors lined up in the streets to get their hands on the shares of one such red chip, Beijing Enterprises Holdings Ltd., just weeks before Hong Kong's return to Chinese rule.
By the start of 1999, however, that bubble had popped on Mr. Leung. The market for red chips collapsed, after many of the companies proved to be poorly managed or riddled with murky accounts. Peregrine collapsed, too, because it was overexposed to Indonesian debt. Mr. Leung and his team jumped to jobs at Banque National de Paris's local securities operation. But in all of 1998, he completed just one deal -- raising US$25 million. The environment, he says, "was impossible."
Everything changed for him on March 3, 1999. With Hong Kong's economy in recession and the government determined to stimulate activity, officials announced plans for the construction of a new technology center. They handed the project to Richard Li, the ambitious 33-year-old son of Hong Kong's most powerful businessman, Li Ka-shing. The announcement sparked an outcry -- many people complained that the project, called Cyberport, was granted to a favored family and without a public tender. Others shrugged it off as merely a real-estate deal that wouldn't enhance Hong Kong's status as a tech center.
Not Mr. Leung. He was soon on the phone with Richard Li's deputy, Francis Yuen, a former investment-banking colleague, talking about doing deals. When Mr. Yuen asked whether BNP could help expedite a stock-market listing of Mr. Li's company, Pacific Century Group Holdings Ltd., Mr. Leung knew exactly what to say. "I said immediately, 'Done." " says Mr. Leung. "I didn't even think about looking at their numbers."
A few weeks later, Pacific Century CyberWorks Ltd. was born when it skirted potentially lengthy listing procedures by taking over a tiny, listed telecommunications company and renaming it. Such "backdoor" listings were Mr. Leung's signature modus operandi.
In less than two months, the Hang Seng Index climbed 37% to 13586. Mr. Leung was back in business as the city's most prolific underwriter. In the next year, he completely refocused his efforts on technology -- underwriting 53 deals and raising $4.4 billion for Pacific Century and others, outpacing blue-chip investment banks such as Morgan Stanley and Merrill Lynch. Pacific Century CyberWorks grew so big it gobbled up the city's main telephone company, Cable & Wireless HKT, in Asia's largest takeover.
"The whole environment changed," says Mr. Yuen. After a decade of real-estate speculation, "people saw there was a way to make money besides property."
At the height of the market in late February of this year, people took to the streets once again, lining up by the thousands at banks around the city to apply for shares in an Internet portal called tom.com Ltd., underwritten by Mr. Leung and backed by billionaire Li Ka-shing. Maintaining order proved futile. One policeman was even reprimanded later for jumping the line to get in his own application.
Regulators castigated Mr. Leung for feeding the frenzy by creating a shortage in applications. But he shrugged off responsibility. "I don't create the bubbles," said Mr. Leung later. "I'm just a middleman."
Cecil Chao Cashes In
Cecil Chao, a 63-year-old property developer, briefly rode the wave that Francis Leung helped fuel. Mr. Chao, who wears dark glasses and keeps his hair slick and wavy, is a local playboy. His fleeting 1990s relationship with model Terri Holladay was the stuff of tabloid legend, resulting as it did in a son named Roman and a raft of lawsuits after the couple's split. His cylindrical mansion, which he calls Villa Cecil, is home to a fleet of Rolls Royce limousines, a hand-carved dining-room table that seats 36 and a poolside adorned with statues of Greek goddesses.
Mr. Chao is the son of Chao Tsong-yea, a Shanghai immigrant and a deceased patriarch of Hong Kong's shipping industry. But the son's own company, Cheuk Nang Properties (Holdings) Ltd., became the focus of his technology dreams. Cheuk Nang has long been a third-tier real-estate player, with a small portfolio of residential- and commercial-property investments. In a market dominated by billionaires, the company's market capitalization is a puny 129 million Hong Kong dollars (US$16.5 million).
By the end of 1999, Mr. Chao could see how quickly the environment was changing. The larger property developers launched ambitious Internet plans. Nineteen Hong Kong companies formally changed their names: Pearl Oriental Holdings Ltd. became Pearl Oriental Cyberforce Ltd.; Frontier International Holdings Ltd. became eBiz.hk.com Ltd.
So on Jan. 10, with the Hang Seng Index up to 15848, Mr. Chao followed the "irresistible trend." He changed his company's name to Cheuk Nang Technologies (Holdings) Ltd. Property holdings would be sold and investments focused on technology. "We will act like a middleman to introduce potential Chinese companies to foreign investors," he said.
Leading his small technology team was Kenny Choi, a former banker who studied computers in college in the 1980s but cut his professional teeth financing toll-road construction projects in China. Driving to a meeting in his boss's white Rolls Royce one day earlier this year, Mr. Choi confessed: "When I was in school, there was no such thing as the Internet. I have to get updated on all of these things."
The change marked a turning point in Mr. Chao's dealings in his own company shares. Since January 1993 he had dipped into the market to buy Cheuk Nang nearly 200 times, lifting his stake in the company to nearly 67%, according to Primark Global Information Services.
Then came a payoff. Cheuk Nang's share price more than doubled in the weeks leading up to and after the name change. A month after Cheuk Nang Properties became Cheuk Nang Technologies, Mr. Chao sold 33 million of his shares, 16% of the company, through local brokerage firms, netting HK$46 million, or US$6 million.
Mr. Chao said the sale was made to boost trading activity in his company; since he held so many shares, trading tended to be thin. He noted that the share sale was at a steep 40% discount to the market price.
But his timing was impeccable. Mr. Chao signed a few joint-venture agreements and made a few investments in Internet start-ups. Nevertheless, Cheuk Nang's share price tumbled more than 70% after the sale, as tech mania deflated. Today, he says he's more cautious about investing in technology. "Some of these IT companies, they don't have profits," he says.
Where Are the Regulators?
David Webb is a boyish-looking, 34-year-old whiz kid who found his voice during the dot-com bubble as an online Internet gadfly, detailing the inefficiencies of Hong Kong's markets. He left a life as a corporate financier in 1998 to become a private investor and to develop his site, webb-site.com (www.webb-site.com).
Mr. Webb works from an apartment overlooking the Happy Valley race track, on a lush green hill lined with gravestones. His bookshelves include titles such as "Does God Play Dice," an allusion to Einstein's theories on quantum physics and order in the universe.
Coming so soon after the 1997 red-chip bubble, the 1999 tech-stock bubble left some investors worried that regulators had their guard down again. Of particular concern was a new stock exchange, the Growth Enterprise Market, created to mirror the Nasdaq market in the U.S. as a launching pad for tech firms. Regulators granted waivers to new companies, allowing insiders to sell shares six months after listing, as is usually the case in the U.S., rather than the prescribed two years. Mr. Webb, who once served as an adviser to the stock exchange, went after them. "You have to draw a line between facilitating capital for companies and protecting the public from their own stupidity," he says.
He didn't just criticize regulators, he unraveled complex financial deals with withering precision. When analysts said Pacific Century CyberWorks was worth HK$35 a share, he made the case that it was actually worth closer to HK$4 a share. Later, he explained how Chau Hoi Shuen, an associate of Li Ka-shing often pictured arm-in-arm with him in the local press, controlled 32% of tom.com with minimal up-front investments.
Mr. Webb's efforts to bring better corporate governance to Hong Kong had a quixotic ring, but they caught on. Mr. Webb developed a following of more than 3,200 loyal readers and the list was growing about 5% a week.
To others he was a thorn in the side who disparaged companies without letting them defend themselves. The stock exchange said the waivers were needed to keep companies from fleeing to Nasdaq. Mr. Yuen said Mr. Webb used valuation methods that don't work in the New Economy. And tom.com said Ms. Chau is a business associate of Mr. Li, and acquired her stake in tom.com through her own business operations in China. One adversary even hired a private investigator to probe Mr. Webb's work. Mr. Webb nabbed him and exposed the bumbling investigation in the local press.
"He just won't let go," said one subject of his writings, who asked not to be identified. "He's like a mad dog."
Yet perhaps his biggest success came in the market he hopes to help tame. Mr. Webb invests in small stocks. For three years, this disciplined value investor picked up the shares of Cheong Ming Holdings Ltd., a tiny, profitable printing company with a price/earnings ratio around three.
He's not the only one who found it cheap. Looking for a presence in Hong Kong, Sega Enterprises, the Japanese gaming company, took a controlling 33% stake in the little-known printer in February and said it would rename it Sega.com.
It was a classic backdoor listing, like the one that brought Pacific Century CyberWorks to the market last year. Sega's adviser on the deal was Hong Kong's king of backdoor listings, Francis Leung.
When Cheong Ming's share price rose 26-fold in March, Mr. Webb's choice was obvious. "I sold out," he says. Thanks to the deal, his personal portfolio of small-cap stocks was up 118% through early June. The Growth Enterprise Market, however, is down more than 52% since it opened in November.
The Zimmern Family
Jill Zimmern Gallie is a local stockbroker and fourth-generation Hong Kong resident. When Hong Kong caught America's tech-stock craze last year, she reacted the Hong Kong way; she gave her 12-year-old son $HK10,000 (US$1,300) to play the market. Then, she shrugged it off when he blew it on an Internet play.
Mrs. Zimmern Gallie has seen all of this before. Her father chaired the Hong Kong Stock Exchange in the early 1970s and ran his own brokerage firm. She went to work for him as a teenager, and quickly made and lost her first million. Back then in Hong Kong there was even a bubble in stock exchanges: The city had four. Traders prowled these exchanges dealing in stock certificates -- often fake -- that they carried in briefcases. "It was Wild Bill Hickok town," she says. Years later, one sister had her jaw broken in a scrum on the main stock exchange.
Hong Kong has mellowed a bit over the years, but Mrs. Zimmern Gallie says there's still just one way to operate in a city that straddles the developed and developing world: "You have to go with the flow."
Comfortable with Hong Kong's way, Mrs. Zimmern Gallie, her four sisters, her mother and her two sons played the tech rally for what it was worth. They jumped into small no-name companies that they thought might be taken over by Internet startups in backdoor listings. They looked for blue chips that might catch the wave themselves. And then, after they saw investors standing in long queues in the streets for the tom.com offering, they recognized the signal and started getting out.
Some, like her son, didn't get out soon enough. But she was unfazed. "When everything bursts, darling," she says, "you look for the next dream."
