CurrentOfferings.com Story:

China's Linktone has strong debut

By Andrew Morse, The Deal, March 4, 2004

Shanghai-based mobile phone services provider Linktone Ltd. rang investors' number Thursday, March 4, raising $86 million in an initial public offering that likely whetted rather than sated public investors appetite for new Chinese stock offerings.

Linktone, which provides text-messaging services and downloadable ring tones for mobile phone users in one of the world's most booming telecommunications markets, sold 6.14 million American Depositary Shares, each representing 10 shares of common stock, at $14 apiece. The offer price handily out stripped the expected range of $10 to $12 per ADS.

In early afternoon trading, Linktone's ADSs had risen 28.6% from the offer to $18.

The deal is one of the first in a series of upcoming issues by huge Chinese companies looking to tap public markets both in the U.S. and in Asia. On Wednesday, China Oriental Group Co., which controls steelmaker Jinxi Iron & Steel Co., jumped 24% after debuting on Hong Kong's stock exchange, traditionally the market used by mainland companies seeking foreign investors.

Linktone, formerly a division of Intrinsic China Technology, sells a variety of services for cell-phone users in China. Almost 270 million Chinese � a population roughly equal to that of the U.S. � use mobile phones, though penetration is just above 20%, compared to over 60% in Japan and South Korea. Though China is not as wealthy as those countries, the mobile phone penetration rate in the nation is expected to rise to 30% by the end of 2005, according to Pyramid Research, an independent research boutique.

Linktone CEO Raymond Yang said in an interview the proceeds would be used to buy smaller companies in what is a fragmented but competitive market. Later this month, Tom Online, a Linktone competitor in the mobile phone messaging market, is expected to go public, ratcheting up the contest in the market.

"We're going to aggregate companies with complementary businesses to ours," Yang said from New York. "We want to be ready for consolidation opportunities when they arise."

Credit Suisse First Boston underwrote the deal, with J.P. Morgan, Piper Jaffray & Co. and CLSA Asia-Pacific Markets also participating. Linktone turned to Charles Comey and Paul Boltz of the Shanghai office of Morrison & Foerster LLP for legal advice, while the underwriters used Chris K.H. Lin of the Hong Kong office of Simpson Thacher & Bartlett LLP for counsel.

The listing represented a handsome payoff for Asian venture capitalists, including Merry Asia Ltd., which owned 19.8% of Linktone prior to the IPO and now holds 13.7% of the company. Other institutional investors with large holdings are Intrinsic Technology (Holdings) Ltd., which dropped its stake from 13.5% to 9.3%; IP Fund One LP, a subsidiary of Acer Technology Ventures Asia Pacific Ltd., 9.7% to 6.7%; Lunar Group Ketchum Partners I LLC, 8.6% to 6.2%; and Lunar Group Stokenchurch Partners I, 7.5% to 6.2%.

Linktone CFO Mark Bergert declined to detail how well the venture capitalists did on their investment in the four-and-a-half-year-old company, but said they had shown great confidence in the company.

Linktone racked up $16.6 million in sales in 2003, a 285.3% increase from the $4.3 million in 2002. The company had a $3.6 million profit for the full year, after posting a $500,000 loss in 2002.

Though the company's share performed well in their debut, observers fretted that the excitement over Chinese IPOs was exhibiting the hallmarks of a bubble. "There's an insatiable demand for these things," said Tom Taulli, a professor at the Marshall School of Business of the University of Southern California. "To me, it looks speculative."