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It's Still Early Days
Testing time for Asia's tech offerings

World's Worst Bourse: Hong Kong's GEM stock exchange needs credibility

One of the rules in starting a new market is to have a catchy name. So South Korea coined Kosdaq in 1996 — a play on America's Nasdaq. Last year, Kuala Lumpur launched Mesdaq, followed by Hong Kong's GEM, Taiwan's Tiger and Tokyo's Mothers and Nasdaq Japan. With their emphasis on young companies and tech ventures, these second-board exchanges are meant to fuel the next phase of Asian growth. "In places like Korea, entrepreneurship has been throttled because the large chaebol had soaked up all the funds," says Lee Young Tae, chairman of Korea's No. 2 computer-maker Trigem. "Kosdaq has made it possible for young entrepreneurs to turn their dreams into reality." Trigem listed affiliate TG Venture on the exchange and plans more flotations.

In part because it is the oldest, Kosdaq is the most successful of Asia's tech exchanges. More than 500 companies are traded there; their number is expected to double next year. At $51 billion, Kosdaq's current market capitalization is about as big as the combined value of the main boards in Bangkok and Manila. But all is not rosy. Asia's tech bourses rode Nasdaq's record-breaking performance in January and February this year. The U.S. exchange has since seen its index plummet by nearly a third from its peak, hurting Asia's tech markets. "They were driven by retail investors, many of whom got burnt and are no longer willing to chase stocks with tall promises and dubious business models," says Khiem Do, chief investment officer at Barings Asset Management in Hong Kong.

A much bigger test is institutional interest, which has almost disappeared. "Most of the companies listed on these exchanges haven't been around for too long," says Khiem Do. "Their management is untested, not having gone through economic cycles, and there is just too much blue sky and euphoria. It's not just a question of liquidity or valuations. There is also the issue of business models. Show me a good company with a clear business model, visible earnings and cashflow and I'd consider investing in it irrespective of whether it is listed on the main board or one of the new tech boards."

But no one is counting out the region's tech markets. "It's still early days," says Roel Leuterio, an analyst for Jardine Flemings in Taipei. Tiger was set up only in April. "There may be only five listed companies now, but some 800 firms are in the process of meeting the qualification requirements," he says. Malaysia's Mesdaq has so far attracted just one listing. Mothers and Nasdaq Japan, formed by Japanese Internet icon Softbank, have 16 companies each.

Leuterio believes the tech boards will eventually prove their worth. "Ideally, with tech companies, you want to invest fairly early," he says. "While not all of them will make it, you can still potentially cherry-pick the stars of tomorrow." Khiem Do agrees, but adds that the companies must also deliver. "Investors want to have exposure to growth and technology companies, but they are looking at cash flows, earnings and sound management," says the Baring fund manager. "Perceptions of the second-tier markets will change not on the basis of how well Nasdaq is doing, but on company fundamentals." Which is what it should be.

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