A Brief History of Tom
21 March 2000
With apologies to Stephen Hawking, we present for you a Brief History of Tom (which as you know does not have a long history). We'll show you how the financial wizards behind upstart start-up Tom.com Ltd have created over US$1bn of paper wealth for a lady with no net cash investment who does not even sit on the board of the company. We also look at the business model of Tom.com, part of which is founded on a concept which has previously failed in the internet space.
ECLink Shenzhen
We start with a company called ECLink Electronic Network Systems (Shenzhen) Co., Ltd (ECLink Shenzhen), incorporated in the PRC on 21-Jul-97. This company was held through an investment holding company called Alexus Company Limited (Alexus). Together they are the only companies in the group with a 2-year track record in the accountants report that was required for listing. The next-oldest company in the group dates back to 26-May-99. So this is the company on the basis of which the SEHK granted listing.
Despite this, ECLink Shenzhen gets a total of just 3 paragraphs in the prospectus and is described as a "strategic investment" although Tom owns 100% of it. It says in part:
"ECLink Shenzhen has been primarily involved in the development of Electronic Data Interchange (EDI) customs declaration software to provide a secure electronic process for companies to issue their customs declarations to Shenzhen Customs."
ECLink Shenzhen is still in start-up mode and had an accumulated loss of HK$26.05m by 31-Dec-99.
Webb-site.com can now reveal the original structuring of this deal. Alexus, the holding company of ECLink Shenzhen, was set up as a shelf company and incorporated on 16-Jul-96. It came off the shelf in Oct-96 and the initial two shares were transferred to Cranwood Company Limited (Cranwood) and Ever Success Limited (both Liberian companies) on 11-Oct-96. According to Tom's prospectus, Cranwood is now wholly owned by Ms Chau Hoi Shuen (Ms Chau). Both shares in Alexus were transferred to Chopin International Ltd (Chopin), a BVI company, on 10-Jan-97.
On 8-Jan-97 the real action began. The number of issued shares of Alexus increased from 2 to 1,000. Of these, 588 shares were allotted to Chopin, giving it a total of 599 shares (59%) in the form of 'A' shares. Chopin paid only the par value of HK$5,880 (US$754) for these shares. Meanwhile Good Century Limited, another BVI company, put up HK$61.84m (US$8m) of capital in return for 400 'B' shares (or 40% of the company) and a third company called Tonteec Limited subscribed HK$100 for 10 'C' shares equal to 1% of the company.
The 'A' and 'B' classes had 50% of the votes each, and the 'C' shares were non-voting. On 13-Sep-99, the 'C' shares were converted into 'B' shares, and on 30-Nov-99 the 'A' and 'B' shares became ordinary shares with normal (60:40) voting weights.
According to a restructuring agreement dated 18-Jan-00 and seen by Webb-site.com, Good Century Ltd was then a 100% subsidiary of Hutchison International Port Holdings Limited, a BVI company wholly owned by Hutchison Whampoa Ltd, and Chopin was a wholly-owned subsidiary of Cranwood (Ms Chau's company). However, by this stage Ms Chau (through Chopin) held only 40% of Alexus and 20% belonged to a wholly-owned subsidiary of Cheung Kong (Holdings) Ltd. No word on what (if anything) Cheung Kong paid for that.
Chopin transferred its shares to two new BVI companies, Handel International Limited (Handel) and Schumann International Limited (Schumann) which are 90% owned by Cranwood. 5% of each company is owned by Ms Debbie Chang Pui Vee (Ms Chang), and the other 5% is owned by Mr Feng Qi (Mr Feng). Ms Chang and Mr Feng are both directors of Tom and were directors of ECLink Shenzhen. Despite her substantial shareholding, Ms Chau was never a director of ECLink Shenzhen and is not on the Tom board either.
The Strategic Investors
According to Tom's prospectus, Schumann and Handel are engaged in the "provision of management consulting services". Schumann was incorporated on 8-Dec-98 and Handel on 29-Sep-99. The 3 owners of the companies (Ms Chau, Ms Chang and Mr Feng) are described as "a group of consultants with extensive experience in the planning and development of projects in China". The prospectus says they have been involved in the development of many projects in China, although the only one mentioned is Beijing Oriental Plaza, a US$2bn 6m sq ft property project in the centre of Beijing.
That project was originally a joint venture between Hutchison, Cheung Kong and Orient Overseas (International) Ltd (OOIL), the shipping company controlled by the family of Hong Kong Chief Executive Mr Tung Chee Hwa. After the Asian crash, OOIL's interest was reduced in Mar-98 from 23% to 8% and two 20% shareholders, Bank of China Group Investment and China Insurance Group Investment were introduced. Hutchison now has 18% and Cheung Kong 33.4%.
The prime site was acquired in 1992, while Mr Chen Xitong was Mayor of Beijing. Chen was later convicted of corruption (although no details of his alleged crimes were made public) and sentenced to 16 years' jail in 1997.
Ms Chang is a Director of Orient Overseas Developments Ltd (a 100% subsidiary of OOIL) and Beijing Orient Plaza Company Ltd. She is also a member of the People's Consultative Party of Beijing, Eastern City District.
Ms Chau and Ms Chang each own 50% of Orient-Horizon Ltd (Horizon), a HK company incorporated on 4-May-90 which is described as "a management consultancy company primarily involved in business development in the PRC".
Since 1994, Mr Feng has been the Project Director of Horizon, and before that he worked at the China Customs Head Office where he was involved with the development of the customs clearance computer network. That was prior to his involvement with ECLink Shenzhen. He is also a 40% shareholder of Beijing ECLink Science and Technology Development Company Ltd, one of the content providers to Tom, while the other 60% is owned by Wang Qi, an employee of Tom.
The beginning of Tom
Tom.com Ltd was incorporated in the Cayman Islands on 5-Oct-99 and until 16-Dec-99 was called "Super Channel Holdings Limited". The name was changed after they bought the domain name Tom.com on 7-Dec-99.
The initial share capital of Tom on incorporation day was just 2 shares of US$1 each, of which one was immediately transferred to Schumann (Ms. Chau's company) and the other to a wholly-owned subsidiary of Hutchison Whampoa Ltd.
6 days later, on 11-Oct-99, US$50,000 worth of shares were allotted, resulting in Ms. Chau controlling 50%, Hutchison 40% and Cheung Kong (Holdings) Ltd 10%.
4 days later, on 15-Oct-99, when Tom was just 10 days old, Ms. Chau's company transferred 10% of Tom to Cheung Kong at a consideration of HK$87m (US$11.2m), increasing Cheung Kong's stake to 20%. We don't know how that consideration was arrived at given that the paid up capital was still only US$50,000, but 10 days is obviously a long time in the internet world.
On 18-Jan-00, 100% of Alexus was transferred to Tom in exchange for shares in Tom.com. Prior to this, Alexus was held in the same proportions as Tom, so no money changed hands in the process.
The Metro Radio Deal
On 30-Dec-99, just prior to the year-end, Metro Broadcast Corporation Ltd (Metro) agreed to transfer certain assets relating to the Metro web-site to Tom's subsidiary in exchange for HK$310m (US$39.8m) in cash. Note that they did not transfer the radio stations, just the assets associated with the web site. In fact, Tom will have to pay Metro on an ongoing basis for the stream of radio programmes, broadcast material and other information needed to run the web site. For the first year, the fee payable by Tom will be HK$12m. Presumably the ad revenue from the broadcast radio channels will continue to accrue to Metro, not Tom. You can hear the channels using Windows Media Player (104FM Select, 997 Hit Radio).
Of the acquisition cost of HK$310m, approximately 99.9% of it was goodwill. The tangible assets acquired, included a collection of PCs and a server, were worth just HK$436,000 (US$56,000). 17 employees came across with the site. Some of these had been working on event productions, and that was used as part of a "pro forma" unofficial track record.
Apart from the initial capital of US$50,000, the initial funding for Tom came from shareholders' loans from Cheung Kong and Hutchison roughly in the proportion of their Tom shareholdings. As of 31-Dec-99, their loans totaled HK$363m, most of which was the cost of the Metro web-site (HK$310m) and the Tom.com domain name (HK$19.5m).
Metro is equally owned by Hutchison and Cheung Kong, compared with the 2:1 ratio of the Hutchison:Cheung Kong holdings in Tom, so on a see-through basis in the Metro deal, Cheung Kong put in 1/3 of the HK$310m cost and got back 1/2 of HK$310m (net result, a surplus of $52m).
The shareholder loans were exchanged for new shares in Tom on 1-Feb-00. At this stage, Cheung Kong had advanced HK$166m and Hutchison HK$336m. You might be wondering how much Ms Chau's companies loaned to Tom - surely they put in 40% of the funding, in line with their shareholding, right? Wrong! When the shareholders loans were capitalised, her companies were allotted shares to maintain their stake in return for only HK$310,000 (US$39,900), while Hutchison and Cheung Kong were issued shares for a total of HK$502m (US$64.5m) to repay their shareholder loans. A subsequent bonus issue left Hutchison with 920m shares, Ms Chau's companies with 920m shares and Cheung Kong with 460m shares.
Who Wants to be a Billionaire?
Let's see. Ms Chau's companies invested just US$754 in 1997 for 60% of Alexus, later reduced to 40% by selling 20% to Cheung Kong for unknown consideration. Then in Oct-99 they put US$25,000 into Tom. 10 days later they got back US$11.2m for selling 10% of Tom to Cheung Kong. Then they injected the 40% Alexus stake into Tom. They then put in US$39,900 when the shareholder loans were capitalised. Add that all up, and Ms Chau's companies get net cash of about US$11.1m. In other words, the net cost of her stake in Tom was negative. Ms Chau (via Cranwood) owns 90% of companies which own 920m shares, so she effectively owns 828m shares. At today's closing price of $10.50, that translates to $8.69bn (US$1.12bn).
Other deals
On 21-Jan-00, Tom subscribed US$4.2m for 15% of OneAsia.com (Holdings) Ltd, an online retailer of Asian CDs and videos launched in Nov-99. Pacific Rim International Ltd, a shareholder of OneAsia, was given the right to subscribe for Tom shares equal to up to 5% of the IPO, at the offer price, and it did so. As a result, Pacific Rim subscribed 21.4m shares at HK$1.78. The consideration was existing shares in OneAsia valued at HK$18 per OneAsia share, equivalent to 15.98% of OneAsia, increasing Tom's stake to 30.98%. Those 21.4m Tom shares are now worth HK$224.7m (if they still hold them).
On 21-Jan-00, a 55% subsidiary of Tom called Beijing Planet Network Travel Information Technology Ltd agreed to buy some web-related assets from China Travel Network Co., Ltd for US$1.7m.
On 9-Feb-00 fellow bubble company Pacific Century Cyberworks subscribed 121m Tom shares at HK$1.07 per share for a total of HK$129.47m. They are now sitting on a paper profit of HK$1.14bn (US$147m).
Tom.com is pursuing an "infotainment" technology which it calls "Tomcast". This is an effort to "push" content to you using a proprietary program which sits on your PC's desktop screen. We hate to point this out, but Push Technology has already been tried, tested and failed by Pointcast, which pioneered the idea 5 years ago. By a delicious irony, the final Pointcast broadcast went out the day before Tom's prospectus was published - click here for the full story.
Tom-Foolery
At the current market price of HK$10.50 per share, Tom is valued at HK$30.9bn (US$3.97bn). That is quite ridiculous. Even after the float, it has the skimpiest collection of web sites and net tangible assets of around HK$1.42bn (US$182m), mostly in cash.
Perhaps investors are choosing to disregard what is in Tom today for what might be there tomorrow. Don't hold your breath. Hutchison has numerous other projects which are consumer related and so far none of them has been given to Tom. For example, they recently announced a joint venture with Priceline.com, the reverse auction site, a joint venture with DLJ Direct, the online stockbroker, and various B2B ventures. Tom has not participated in any of these projects and even if they are injected in the future, there is no reason to think that they would get them cheap. You can't value what you haven't paid for.
By comparison with Tom, the market values Wharf (Holdings) at a similar HK$31.8bn. We're no fan of Wharf, but for that price you at least get 85% of i-Cable, 10m sq ft of prime property, 51% of port operator MTL and various other trinkets like the Star Ferry and Trams.
The public shareholders of Hong Kong are going to get their Tom-thumbs badly burnt by this stock when the bubble bursts. The founding shareholders must be counting the days to when the 6-month lock up expires on 1-Sep-00 (they got a waiver, remember).
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