It's a matter of [Ｉｔ’ｓ　ａ　Ｍａｔｔｅｒ　ｏｆ　Ｔｒｕｓｔ]

　　While the Chinese Internet industry is finding its own way of 　　making profits, it still gets a standoff attitude from Wall Street stock analysts
　　Since the mainland’s first Internet company China.com was listed on the Nasdaq Stock Market in 1999, China’s Internet companies have been on a roller coaster ride. Their fate on the market was largely in the hands of Wall Street, whose analysts couldn’t agree on a profit-making model for these companies. Some said this stock was not attractive to U.S. investors as they had no confidence in the majority of Asian cyber companies showing profits.
　　In 2001, Chinese cyber stocks were left in the lurch. No matter what Chinese cyber companies did, they failed to capture Nasdaq’s attention, and over half of these stocks dropped lower than their offering price with some literally worth a handful of cents.
　　Before 2003, most of these cyber companies still hadn’t found models suited to their own development and relied on copying their U.S. examples, which focused on making profits through advertising. This option failed, as their U.S. listings mainly relied on foreign risk investment, which necessitated heeding the Wall Street word. The word was that Wall Street believed Chinese consumers were weak in purchasing, and they subsequently stopped providing free Internet services. Years later, seeing Wall Street’s directives were not bringing them any profit, the Chinese cyber companies took the bull by the horns and began to take control of their own affairs.
　　“Currently, the development of Chinese Internet business is different from the U.S. model,” said Lu Benfu, Associate Dean of the School of Management of the Graduate School of the Chinese Academy of Social Sciences.
　　According to him, in the initial period of development all Internet business was on the same footing, as at the time web portals were all copies of each other. However, today this is no longer the case, and there is no one web portal that is superior to others in such aspects as traffic, business, growth potential and strategic value. This obviously means the application structure of China’s cyber world is dramatically changing as people rush to find their ultimate “selling point.”
　　Though some Chinese listed cyber companies are still influenced by the U.S. model, they now put much more emphasis on their own market. Alibaba is devoted to reducing trading costs between businessmen. Ebay focuses on “e-business auctions.省略 is dedicated to offering a cyber platform for employers and employees. Netease sells a lot of Chinese-style products and conducts its business in a way that resonates with China’s market. It offers photo and ring tone downloading and other value-added services for cellphone users. Its profits mainly come from services of messages, cyber games and other new fields, instead of advertising stressed by Wall Street.
　　Xinhua News Agency disclosed last year that the average monthly growth of cell phone users was nearly 5 million, bringing the total cellphone users to over 393 million. During the seven-day holiday in the Spring Festival this year alone, cell phone text messages exceeded 12 billion (11 billion in the same period last year). “Thumb culture” shows great business potential. Up to December 31 last year, Chinese netizens numbered 111 million, including 64.3 million broadband users. Cyber game players maintained a 50-percent increase rate, bringing the total number to around 35 million.
　　“We need to subdivide the cyber market to offer more delicate and featured services to clients,” said Ma Huateng, Chairman and CEO of Tencent Computer System Co., Ltd., one of China’s comprehensive web portals. The company concentrated on developing its Instant Messenger QQ and has created a huge online empire. Currently, QQ is no longer a simple instant messenger, but a multi-functional platform that combines messenger, entertainment and business.
　　
　　Wall Street and the Chinese model
　　
　　In Ma’s opinion, Wall Street doesn’t know the Chinese market and this is the reason why his company chose to get listed in Hong Kong instead of Nasdaq. Lu agrees, feeling Wall Street’s analysts don’t quite understand the growing Chinese model in the cyber world, resulting in their losing the plot.省略, one of China’s chief web portals, pointed out that the people on Wall Street are not users of the Chinese Internet, like Sohu.com, so it’s impossible to see the true value of the best websites here and the development trend. He said they only judge a Chinese cyber company by a short-term performance in making profits, which caused Chinese listed cyber companies to be underestimated for years.
　　In fact, on September 12 last year, a 118-page research report titled “Chinese Internet’’ was released by Mary Meeker, a famous analyst at Morgan Stanley who has been optimistic about Internet stocks since the 1990s. She and a fellow Wall Street analyst, Richard Ji, analyzed seven Chinese cyber stocks, of which six were listed on Nasdaq. Soon after the report was released, however, prophets of doom chorused their doubts of these optimistic predictions, turning a blind eye toward the development of the Chinese Internet.
　　“The summer has come, but Wall Street still use winter rules on us. How can we listen to someone who has no idea of China’s Internet market,” said Chen Tianqiao, CEO and cofounder of Shanda Interactive Entertainment Co., Ltd.
　　Shanda spent five years exploring the value of cyber games, which made 33-year-old Chen Tianqiao the richest man in China. In March last year, Shanda bought 19.省略, one of the three biggest Web portals in China, helping to raise the price of Shanda’s stock on Nasdaq to $42.90, an all-time high since it was listed. In late November 2005, Shanda offered three cyber games, including The World of Legend, for free. Those games had earned the company 150 million yuan in the previous quarter and before that every quarter they generated hundreds of millions of yuan for the company. This decision received unexpected negative results, as many securities analysts on Wall Street reacted pessimistically, causing Shanda’s stock to drop dramatically. The company’s 2005 financial report shows that in the fourth quarter it suffered a net loss of 538.9 million yuan. Despite Shanda’s best performance in China’s market in 2005, with a revenue of 1.896 billion yuan and a high growth rate of 46 percent, its stock still dropped to a historical low nearing the offering price of $11.
　　“To let the players play the game for free doesn’t mean we make no profit. For instance, every day we earn about 700,000 yuan by selling individualized virtual props,” said Chen. He said the earliest users of Shanda are those loyal netizens for cyber games who are willing to pay, but currently owing to the numerous similar types of cyber games, the company needs to change its profit-making model to cater to the needs of customers. According to Chen, while other cyber companies still charge for their Internet games, like Netease, free offering has brought Shanda dozens of millions of users, who are capable of supporting its value-added profit-making model and constitute a solid foundation of users for its long-term family-oriented strategy. Nonetheless, analysts on Wall Street didn’t consider this a good idea. They believed that despite The World of Legend’s profit dropping to 155 million yuan in the third quarter last year, it still accounted for 31 percent of Shanda’s revenue. Therefore, if the games are played free by users, Shanda must suffer bigger losses, making this decision a mistake. It also confused these Wall Street analysts that Chen entered a new field that develops and promotes a unique type of TV decoder for interactive home entertainment based on telecom, Internet, broadcasting and the TV network, with the idea of using the Internet via a remote control. “Their confusion toward Chen’s idea directly led to the drop in Shanda’s stock,” said Li Meng, an economic analyst in Beijing.
　　A securities investment company revealed that they prefer to invest in Internet companies with profit potential instead of only an operational model, which well explained Wall Street investors’ attitude. Internet stock has been a growth stock, unlike traditional companies in the telecom, petroleum or chemical industries, whose profit growth follows a more natural pattern. Lu Weigang, senior Internet analyst in China, said investors tend to prefer speculation to gain more profits despite bigger possible risks. “But this is also the reason why small changes can cause sensitive follow-up moves. For instance, the ups and downs of Internet stock are closely connected with its industry characteristics, and the type and psychology of investors.”
　　Lu Aibing, Internet consultant of Donfanggaosheng Investment Consulting Co., Ltd., thinks it’s not that Wall Street doesn’t understand the Chinese market, but that it understands it from a different perspective. Lu said American companies place much emphasis on a business plan, and analysts give their analysis based on the plan and the progression of that plan. However, the same thing is not as cut and dried in China, which makes it difficult for Wall Street’s analysts and investors to make predictions. Their deep-rooted economic views naturally put them in a hard position to understand China’s new model, he said.
　　“Wall Street’s attitude toward Chen Tianqiao’s decision to run the cyber games for free better explains their perspective,” Li Meng said. Compared with the uncertain prospect and prediction, investors are more concerned with the American-style figures of profits and losses, although the Chinese Internet world may develop a bright future. Li also said Chinese companies should learn how to attract those investors with a “wait and see” attitude through developing their businesses and improving their management, so as to win the support of analysts and investors.
　　Lu Benfu added that you can’t ignore all of Wall Street’s words, as the aim is after all to get listed in America. “Then you have to consider their words as they are the mainstream,” he said.
　　Some experts say Wall Street needs the voices of Chinese analysts. They also suggest that Chinese companies learn to communicate and get along with Wall Street to gradually gain their trust, and try to remove the differences in cultures and concepts. But in the final analysis, it is generally agreed that with a transparent operation, good performance and attractive dividends, why would people not want to buy a company’s stock?

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