Business Week: July 12, 1999
International -- Asian Business: Hong Kong

Can the Internet Lift Hong Kong's Fallen `Angels'? (int'l edition)
Once high-flying companies are betting on cyberservices

Wong Kwan is a legend in Hong Kong. An illegal immigrant from China, he worked his way up to owning his own hotel-and-property company. In the early 1990s, his Pearl Oriental Holdings was a darling of investors impressed by his guanxi, or connections. They dubbed Pearl an ``angel stock'' as its shares soared. But when Hong Kong's property bubble burst, Pearl's stock fell to earth, dropping 93% from its 1997 peak.

Now, Wong and other angel-stock founders are pushing connections to the Internet rather than China to regain altitude. Wong is diversifying into software development and voice and data telecom services, as well as Internet services. To raise cash, he made an $8 million rights issue in June and is selling property. ``There is marvelous potential'' in high tech, says Wong, 51, strolling through one of Pearl's luxury houses with an exuberant decor of nude sculptures, elephant tusks, tiger-skin rugs, and vast urns of plastic flowers.

The leap into high tech certainly shows the flexibility of Hong Kong companies. Moving away from businesses based on guanxi and real estate toward promising technology businesses is ``quite sensible,'' says Peter Lovelock, deputy director of the telecom-research project at the University of Hong Kong. And investors, though once burned by the highfliers, seem willing to take another chance. Pearl Oriental's stock has almost doubled since early February, and shares of Wharf Holdings, a troubled property developer, have soared on news of its plans to offer high-speed Internet service. Smaller fry are rushing to find a high-tech angle fast in the hope of scooping up similar gains.

Still, the inrush of high-tech neophytes is causing concern among some analysts. For one thing, the shift pits local companies against global players on a much larger stage, where guanxi plays little role. Besides, the trend stirs uneasy memories of the region's real estate boom and bust. ``In 1997, expectations were so high, and then it all collapsed,'' says analyst Phoebe Wong of DBS Securities in Hong Kong. ``It may repeat in this case.''

Not all the wannabes are former real estate magnates. Leading Spirit Holdings, for example, makes domestic appliances. It soared in 1997 on rumors of a deal to bring in Chinese investors. The deal fizzled when the stock market crashed that October, and the company's share price is now 95% off its highs. But on June 21, Chairman Wong Shi-ling announced a comeback plan involving distribution of Chinese-made liquid-crystal displays (LCDs) in China and other parts of Asia. But Leading Spirit will have to contend with tough Korean and Taiwanese rivals. Unfazed, executive director Chan So Kuen predicts that LCDs will generate $645 million in new revenue by 2001. ``This is just a first step,'' she says, with more deals to follow.

Some former stars have more convincing high-tech pedigrees, giving them better chances of success against more experienced local companies such as Cable & Wireless HKT and Hutchison Whampoa. CCT Telecom, for instance, was one of the main beneficiaries of guanxi fever because Beijing-controlled Xinhua news agency owned a small stake. But CCT has more than mainland connections. It has experience manufacturing telecom equipment and doing cellular network deals in China. Last year, it bought one of Hong Kong's biggest Internet service providers, HK Net, for an undisclosed sum. Now, CCT, which lost $45 million last year on revenue of $115 million, is in talks with a Japanese investor about selling a stake in HK Net, as well as investigating a NASDAQ listing.

PLAYING CATCH-UP. Pearl Oriental's Wong can't claim many high-tech credentials, so he's trying to make up for that in other ways. Since last year, he has made acquisitions and set up joint ventures that allow him to distribute financial information electronically in China and to hook up Chinese hospital networks. He talks about spinning off his high-tech subsidiary and also going for a NASDAQ listing.

Wong even holds out hope that the newest fad will help bail out his property developments. The luxury property scene will soon have ``newcomers, especially from telecom, high tech, and the Internet,'' he says. ``I still have confidence.'' Like Hong Kong's other fallen angels, Wong expects to fly high again.

By Bruce Einhorn in Hong Kong