Business

Ready For Take-Off

by Anthony Mills
written by Anthony Mills

In the United States today more than a third of all plane tickets are bought on the web, thanks in great part to the fact that 68% of the country’s 328 million inhabitants use the internet – according to www.internetworldstats.com – and that the credit card has become almost as ubiquitous as the wristwatch. In stark contrast, across the Middle East, only 8.2% of roughly 261 million inhabitants use the internet and many people have never seen a credit card. But despite this world of difference, Mitri Kurban, a partner of Lebanon’s Kurban Travel, is convinced that now is the time to launch a Middle East online travel booking agency – appropriately named uflyonline.com.

A revamped concept

Uflyonline – the website – has actually been around for a couple of years. But it has kept a distinctly low profile, operating behind the existing travel agent Kurban Travel. So, although you could buy a ticket online, you had to pick it up from Kurban Travel. “Not the best way of doing it,” agreed Kurban. Only recently, though, did he and his fellow investors decide that the time was ripe to transform uflyonline from an unpublicized website into a fully-fledged, independent company – a move streamlined by a marketing campaign that by the end of the year will have cost almost a quarter of a million dollars (around 70% of total costs).

“Two years ago, we didn’t feel that the market was ready. For two years, we advertised only online. Now, more people in Lebanon and the region are using the internet, technology has advanced, the internet is much faster, and airlines like Emirates, Saudi Arabian Airlines and even MEA are using e-ticketing and the internet more,” Kurban said. “We have opened a real bricks-and-mortar shop to let people know that we exist, that internet booking is a reality, that it’s the best way to book for a journey. The shop is licensed and operated in Lebanon. It’s open 24 hours. The choice is there and prices are very competitive.

“If we don’t move into the business, in this region now, someone else is going to.”

Uflyonline had only been functioning in its new form for five days when Executive spoke to Kurban, but he said sales already indicated the marketing campaign was drawing customers to the site. “We’ve been positively surprised by the appetite of people for this service,” he said. “People have been catching on immediately, jumping on the internet and booking.” In the 48 hours before the interview, Kurban said, uflyonline had sold 10 tickets.

Following international trends

Kurban witnessed firsthand the boom in online booking in the United States when he was living there in the late 1990s, and predicted its spread to Europe. In fact, one of uflyonline’s current owners is a Frenchman who set up an online booking agency in Europe just as the boom was spreading. “He told me: we should try this in the Middle East,” Kurban recalled. “I began seeing how it could be implemented here. I went from Cairo to Dubai to Abu Dhabi to establish the system. It took us almost a year-and-a-half to create alliances and understand the business. And we had to adapt the technology. We dealt with a lot of problems, a lot of bugs. We changed our business plan many times. Finally, we came to the conclusion that we would have to set up a shop in each target city and begin promoting online booking as a real product and give people the choice.”

The company is owned by four partners: Kurban, the French online booking agency owner who suggested the Middle East venture to Kurban and apparently wishes to remain anonymous, Openfares, a Canadian software solutions company active in North and South America and Europe and hoping to expand into the Middle East, and a Saudi silent investor. Together, the four have already invested almost a million dollars.

An inexpensive startup

“That’s actually a very small amount for this type of business,” said Kurban. “The startup budget for my French partner’s Europe venture in 1998 was 12 million euros. Today it would cost him 30, 40 or 50 million euros.

“The reason it has cost us so little here is first, we haven’t done that much yet; second, the cost of advertising and many other costs are much lower; and third, we don’t for the moment have any competition.”

But Kurban said he expected competition to flourish as the concept took hold in the region. “We have noticed that Europe follows the US by three to four years,” he said. “And we follow Europe by three to five years. So the gap between the United States and us is about 10 years. Online travel developed in the United States in 1996. Today, almost a third of European air travelers purchase online. In five or six years from today, online booking may take a 10% share of the Middle East market.

“I don’t think it will ever reach 30% or 40%,” he added, “because of the lack of education, of people speaking the languages. But even 10% of the Middle East online market is a lot of money.”

Kurban said he expected the company to spend a lot more over the next few years establishing client bases across the Middle East.

In Lebanon, over the coming year, another $300,000 to $500,000 will be spent, he said. And then come other Arab countries. “If our Lebanon venture is successful, we’re moving into Dubai next, then Abu Dhabi, then probably Kuwait. We’ve seen a huge number of US soldiers using our services in Kuwait.” Kurban said the company expected to spend another $6 million in the region over the next three years.

Regional reach

When uflyonline established its low-key internet presence behind an existing travel agent in Lebanon two years ago, it did the same thing in seven other Arab countries – Bahrain, Egypt, Jordan, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates. And just as it has transformed itself in Lebanon into a fully-fledged independent company, so it hopes to do the same in the other seven countries.

Kurban said he sees the company breaking even within two years. He said he hoped to be doing $10 million worth of business in Lebanon within two years, “comparable to one of Lebanon’s top five travel agents,” or 3% of Lebanon’s roughly $300 million travel agency sector.

Kurban acknowledged that it may not be easy drawing customers in this part of the world away from the traditional face-to-face purchasing they are used to. The website “doesn’t talk,” he noted. But he is convinced that there are enough modern, aeroplane-using internet users in the Middle East to make the system work. And in an effort to retain a reassuring human element, uflyonline has established call centers that are open to queries during regular working hours. Customers are also free to pick up their tickets from uflyonline offices.

In another tacit admission that it will take time for Middle Eastern online bookers to become as automated as their Western counterparts, uflyonline doesn’t oblige customers to pay by credit card. “People are happy to drop in at our office and pay cash. Many don’t trust credit cards,” Kurban observed. Nonetheless, he added, half of the purchases over the past five days had been made by credit card. “For the moment we are educating people in the region,” he said.

Kurban is keen to stress that uflyonline is not a subsidiary of Kurban Travel. It is an entirely separate company. However, his share of the investment is effectively a Kurban Travel investment. “And so we’re trying to do it in a way that hurts Kurban Travel least,” Kurban explained. “That’s why we’re keeping it totally separate, so the customer doesn’t have two choices in the same office.”

Uflyonline currently counts 25 staff, of whom only seven actually work in Lebanon. “Everything else is outsourced to web and technology people, mostly in Canada,” explained Kurban.

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Business

Crossing the rubicon

by Michael Young
written by Michael Young

With Lebanon having crossed the Rubicon of the Mehlis report, it must now prepare for the storm that will follow. In many respects, the country will have to use the upcoming months to define, or redefine, what kind of society it expects to be – whether one imbued with a capitalist culture of openness and free markets, or one racked by fear and diffidence.

The answer is not an easy one, as the Lebanese will have contradictory answers to the three major challenges they can be expected to face: addressing the implications of what the United Nations investigator Detlev Mehlis revealed, and the legal consequences of this; the breadth of economic reform, and the limits of the society’s openness. In his report, Mehlis found compelling evidence to hold Syrian and Lebanese security officials and politicians responsible for former premier Rafik Hariri’s assassination, and described a widespread conspiracy that appeared to reach to the top leaderships in both countries. Whereas Mehlis’ conclusions may invariably lead to a clash with Syria, the dictates of the free market point in an opposite direction, namely to some sort of agreement so that Lebanese exports can travel through the common border, but also so Syrian guarantees of Lebanese security make the investment climate agreeable. The only problem is that intimidation and free markets rarely mix for long: if one party gains the upper hand, mutually beneficial exchanges – of goods, services, and much else – come to a grinding halt in favor of imposition by the stronger party. That’s why the Lebanese were compelled to applaud when months ago Syria was forced to end its border blockade of Lebanon after Iraq imposed a similar blockade on goods entering Syria. In other words, the desire for free markets may have to come accompanied with recognition that turbulence in trade and other exchanges will probably be inevitable in the coming months. This will not mean the government has no role to play in alleviating the consequences; but it does mean that it should probably not be held responsible for a worsening relationship with Syria it will almost certainly have little control over.

The fate of reforms

If foreign trade suffers from the aftershocks of the Mehlis report, the question of domestic economic reform is a different matter altogether. The difficulties of privatization are well known, and the government will certainly have to face those politicians or parties expected to lose the most from a cutback in the civil service. But instead of letting the ambient tension freeze privatization, the Seniora government (if indeed it remains in office in the coming months) must try to use the momentum created by that tension, so that any effort to derail a bureaucratic cutback can be played up as Lebanon’s missing a chance to be on the same page as foreign aid donors.

That might work if all things remain constant. Otherwise, Prime Minister Fouad Seniora’s ability to pursue reform will be a function of political cohesiveness, or lack thereof. The prospect that Lebanon may enter into a period of confrontation over the presidency, for example, may mean many weeks of costly idleness, where the international community loses interest in Lebanon. A third question the Lebanese will have to answer is how open they want their society to be. This means, particularly, looking at the future of media freedoms. The bomb attack against LBCI anchorwoman May Chidiac came as a shock; it shouldn’t have after the assassination of An Nahar columnist Samir Kassir and the threats directed against other journalists, particularly An Nahar owner Gibran Tueni. Lebanese media have accepted a small measure of self-censorship, particularly on matters Syrian, but overall this has been limited to the commentariat – as many journalists understand, it is less what they say specifically that disturbs the neighbors than the fact that Lebanon has a relatively free media sector in general. A warning to one journalist is a warning to all, and if something must be clarified in the coming months, it’s how extensively journalists will defend this; but also how wide a margin of expression the government will give media outlets.

No turning back

The Mehlis report was a break-off point between Syrian-controlled Lebanon and what now follows. The findings will hardly bring serenity, but they do push us into a new phase where it’s up to the Lebanese to begin defining the system they intend to build. There are no easy answers, and relations with Syria are bound to worsen before they get better. In that time, Lebanon’s government and society should stick to the proven certainties: adhering to an internationally sanctioned legal process in the Hariri assassination, pushing economic reform, and defending an open society.

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What went wrong at investcom’s IPO?

by Executive Staff
written by Executive Staff

Much anticipation surrounded the launch of the IPO of Investcom Holdings in the Middle East. While the Lebanese company did not have any major assets in the GCC or the Levant, it benefited from a high profile due to the political heritage of its main shareholders, as well as its presence at a number of high profile auctions in Europe and Africa.

An initial assessment of the IPO’s success and investor response should have been very positive, underpinned by an eight times oversubscribed offering. Such a response to the offering was not surprising, given the plethora of high-net-worth GCC investors and institutions seeking to benefit from Investcom’s strong economic performance. Coupled with the buoyant equity markets in the region, subscription applications were running out at various receiving banks across the region. Lebanese and regional banks were able to satisfy investor demands, as the lead bookrunners and receiving banks mobilized large numbers of sales agents and private banking officers to ramp up demand for the IPO and funds began flowing into escrow accounts at various receiving banks. Press coverage continued to entice new investors, and the Dubai International Financial Exchange (DIFX) was capitalizing on the hype to boost its own profile as a regional stock exchange, where Investcom would be the first listed company.

It wasn’t until the subscription period came to a close and allocations were complete that investors began to realize that things had not gone according to plan. Then the phones began to ring. Many high-profile GCC investors, who had put tens of millions of dollars into escrow accounts, had received practically no share allocation at all. Outrage erupted, but the underlying reason for the fallout was simple.

What transpired

The share allocation for Investcom’s IPO was completely “discretionary,” following neither the “pro-rata” nor “equal allocation” share offering formula (see box). The ultimate result was that Investcom alienated a large number of GCC investors, who are now up in arms at the results of the offering and are publicly vowing to be more cautious in future business dealings with the company unless satisfactory explanations are provided.

Perhaps one would understand the position of such investors, given that they were personally and individually approached by Investcom to subscribe to the IPO, and despite putting up a combined amount of more than $100 million, none received a single share in the company.

To make matters worse, upon receipt of notification by Investcom of no allocation of shares, those investors were also notified in writing that Investcom would immediately return the funds transferred by those investors (which had already been in an Investcom escrow account for a week). The refunds, however, didn’t materialize for another week. Assuming an average credit interest rate of 4%, the opportunity cost for those investors exceeded $150,000.

As of the date of the publication of this article, Investcom has not yet publicly responded to such allegations, which have ultimately prompted a group of large GCC investors to prepare an organized action to lodge an official complaint with the Lebanese government. Whether such a move is more of a theatrical ploy to spur a response from Investcom is not clear, but there is no doubt that many high-profile investors in the Gulf are irate.

They were not the only ones affected by the allocation. Most investors were brought in through the receiving banks appointed by the lead bookrunners (HSBC and Citigroup) for the GCC. The receiving banks included Abu Dhabi Commercial Bank, Audi Saradar Investment Bank, Dubai Bank and the Global Investment House in Kuwait. Some investors blamed their receiving bank for not securing the sought allocation. Many of those receiving banks in turn invested heavily in promoting the IPO, only to receive minimal allocation (and consequently a fraction of the placement fees).

While it may be difficult to clearly understand Investcom’s reasoning, this is how they might argue their case: Investcom was undertaking the IPO primarily to raise additional funding for new telecom acquisitions (such as Spacetel Yemen); and provide an opportunity for the founding shareholders to reap the benefits of their work (with the added benefit of reshuffling the shareholder structure of the company).

With the total offering accounting for 25% of the company’s overall share capital, the ultimate post-IPO shareholder/ownership structure would be a serious consideration to Investcom’s management and existing shareholders. With some of the largest GCC-based investors capable of bidding sufficient amounts to acquire a blocking or influential minority stake in the company, Investcom might be justified in attempting to keep the ownership structure in favor of management, and therefore avoiding the risk of a future hostile take-over. In effect, the discretionary allocation ultimately allowed Investcom to maintain an ownership structure for the 25% offered. It was highly fragmented in certain cases, and in the hands of “loyal” investors.

Interest in Investcom was fourfold. It was the first IPO of a Lebanese company outside Lebanon and a high-profile telecom IPO when the telecom craze was at its peak in the Middle East. GCC investors were (and are) swimming in liquidity, and last but not least, by any stretch it was the inaugural IPO of the new Dubai International Financial Exchange.

Whether the disappointment felt by GCC investors in the allocation will deter them from putting money on the table again, or whether Investcom’s experience should be a lesson learned for future IPOs, smaller investors continue to satisfy their appetite for speculative trades given market and liquidity conditions.

Still there is a bottom line. In the finance community, an IPO’s success does not culminate with raising enough funds to cover the offering, but with the performance of the listed shares in the immediate period following the listing. In the case of Investcom, the stock is up less than 10% since listing on the London Stock Exchange, in comparison to post-listing gains of more than 100% on recent Saudi or UAE IPOs.

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Investcom: Lebanon’s Telecom adventurers

by Tarek Zein
written by Tarek Zein

The figures from the Investcom IPO were truly phenomenal, making it the biggest international share sale by a Middle East company. Some 59.9 million Global Depositary Shares (GDS) with a value of $12.35 each were sold, totaling $741 million. Representing 22.6% of the company, the share sale – which was eight times oversubscribed – created a $3.3 billion market capitalization for the company. It may sound similar to many offerings in today’s booming Gulf, but this one was special: it was homegrown in Lebanon, compliments of the Mikati family. But what made Investcom Holding so attractive to investors? How does the company operate and how does it differ from its competitors, the giant Orascom Telecom and the market thirsty MTC Group?

History of the company

Since its conception, Investcom Holding has transformed itself from solely offering telecommunications engineering services to managing one of the largest mobile telecommunications empires in the region with licenses in 10 countries.

The story began in 1984, during the height of the Lebanese civil war, when Taha Mikati, scion of a respectable Sunni family from Tripoli, founded the Investcom Group to provide telecommunications engineering services in Lebanon via Inteltec (the group had been offering similar services since 1982, before the company was officially founded as a corporate entity). After entering into the field of radio communications and the operation of private satellite terminals, Investcom constructed, implemented and launched Lebanon’s first Advanced Mobile Phone System (AMPS) mobile network in 1991. It was the first such privately owned and operated network in the Middle East. The network gave the group its first real exposure to the management and operation of mobile telephony. However, the AMPS network provides for analog cellulars operating in the 800 MHz band, compared to GSM, which usually operates in the 900 and 1800 MHz band. Considered a first generation technology – it was susceptible to static and interference and lacked adequate voice quality, privacy and service requirements – the rudimentary network was quickly replaced worldwide by the more advanced and popular digital service.

Investcom followed suite and in 1994, the company acquired its first GSM license when it won – along with France Telecom – a BOT contract put forward by the Hariri government, allowing it to operate the France Telecom Mobile Liban (FTML) network – more commonly known as Cellis. FTML, a joint venture between France Telecom Mobile International (66.7%) and the Mikati Group (33.3%), was Investcom’s first venture into the GSM field and its springboard for successful expansion within the region. Through the operation of this state-of-the-art network – which recorded unparalleled growth levels – Investcom was able to amass the expertise required to become a major regional player, especially since France Telecom was able to transfer its years of know-how on through constant vocational and technical training. During this period, Investcom also began weaving tight-knit relationships with strategic firms such as Ericsson, Siemens and Nexans – all of which now play important roles in the company’s expansion strategy.

Diversification has been key

While Investcom did stumble and lose its 350,000 subscriber-strong FTML network due to tedious Lebanese political infighting – especially between President Emile Lahoud and the late premier Rafik Hariri – the company was able to plant enough seeds in other countries and secure enough financing from Lebanese banks to minimize the impact of the loss.

As early as 1996, Investcom had moved into Ghana, a country with a population of over 21 million that coincidentally, also boasts a powerful Lebanese community. This move not only showcased the company’s intent to expand but also highlighted its strategy to enter under-developed markets. In 2000, Investcom took over a license in Benin and in 2001 it was able to enter the cellular markets of Liberia, Syria and Yemen. By the time the Lebanese government revoked the BOT contract awarded to the FTML joint venture, Investcom already had a solid presence in five countries with a total population of some 70 million. And by the time Investcom offered its GDS shares, it was also operating in Guinea Bissau (2004), Cyprus (2004) and Sudan (2005) – effectively increasing the population it covers to 107 million. Additionally, the company has recently won licenses in Guinea (2005) and Afghanistan (2005) where it still is in the process of installing the necessary infrastructure before officially launching operations. Investcom Holding currently boasts a total subscriber base of some 3.3 million customers in countries with low mobile penetration rates and even lower fixed line penetration rates.

Reviewing strategy

The numbers are impressive, but questions remain over the company’s decision to operate in such poor markets. With the exception of Cyprus, with its population of 700,000 and a GDP per capita of $22,000, all of Investcom’s operations are located in under-developed economies (see box). Yet under-developed economies have come to mean one thing to Investcom: emerging economies with under-penetrated cellular markets and high growth rates. And Investcom truly believes that it has enough expertise to turn these highly under-penetrated markets into profitable operations, no doubt a talent acquired from operating the first GSM network in the Middle East.

Fixed-line telephone penetration in most of the countries Investcom operates in is below 10% – with the exception of 13.6% in Syria and 60.6% in Cyprus – while mobile telephony penetration is below 15% – with the exception of 109% in Cyprus.

In comparison, fixed-line and mobile penetration rates stands at 56% and 95% in Western Europe. And it is these low-penetration rates that Investcom is seeking since the growth of its business largely depends on the continued development of the mobile telecommunications market it operates in. All of its markets recorded high year-on-year mobile growth rates, ranging from 124% in Liberia to 30.8% in Benin during 2003/2004 (the more developed Cyprus recorded a 19.3% increase, still much higher than the increases in Western Europe). And to the advantage of Investcom, studies suggest that in a typical developing country, a rise of ten mobile phones per 100 people boosts GDP growth by 0.6%, thus creating a much favorable domino effect.

Moreover, the company seems to have well understood the dynamics and the shortfalls of operating in these mostly cash-based economies, explaining why it has focused selling its services via the easily accessible pre-paid cards instead of the more binding post-paid subscriptions – a rate which currently stands at over 83% of its total customer base, compared to 80% in 2004, 69% in 2003 and 65% in 2002. And such a focus – as volatile as it might be – seems to be paying off since Investcom’s number of subscribers increased from 1.9 million during the first half of 2004 to the current 3.3 million – representing an impressive 72% growth – while directly competing in its markets against famed rivals such as Norway-based Telenor (which has management control of One Touch in Ghana), Luxembourg-based Millicom (Ghana), Hong-Kong based Hutchison Telecom (Ghana), UAE-based Etisalat (through Telecel-Benin), Kuwait-based MTC (through Celtel in Sudan) and Cytamobile-Vodafone (Cyprus). Even more impressive, Investcom was able to increase its consolidated revenues from $408 million in 2003 to $633 million in 2004 – a 55% growth.

The shortfalls

“We operate in eight countries and have two more licenses under our belt. We have increased our customer base by 72% and our revenues by 55% in one year and we operate in high growth markets,” you might expect a PR manager at the firm to say. However, nice as it might sound, there is one major soft spot in this chef d’oeuvre.

Investcom’s revenues originate from three different sources: mobile telephony, international (through its Monaco-based Mednet) and fixed-line telephony and other services such as the provision of engineering and consulting services to third parties. Standing at $551 million in 2004, mobile telephony alone represented a large 87.2% of the company’s consolidated revenues, compared to 83% in 2003 and 73% in 2002. And out of the total of $551 million, Syria and Ghana contributed the largest amount to Investcom’s gross operating revenues from mobile telephony, standing at 53% and 22% for 2004 respectively.

Additionally, out of the total customer base of 3.3 million in June 2005, 70% (or 2,317,453) were located in these two countries alone. These unbalanced ratios showcase the company’s current weaknesses to external factors, such as international sanctions or a complete change in government that seems to be looming, especially in Syria.

Another negative scenario could emerge from a deteriorating relationship with powerful economic personalities. Analysts say that no foreign company can operate in Syria, without the consent of Rami Makhlouf, the first cousin of Bashar al-Assad and an unforgiving businessman. One example of this occurred– which could occur in any country with an autocratic government – when Orascom Telecom was suddenly kicked out from SyriaTel over a brawl for management control after being awarded a BOT contract. “The court ordered to revoke the registration of the 720,000 SyriaTel shares from the name of Orascom Telecom and to re-register them in the name of Rami Makhlouf,” said a statement from SyriaTel. “The court further ordered Orascom Telecom to pay Makhlouf compensation of 1.062 billion Syrian pounds,” (about $20 million) continued the statement issued in 2002. If Investcom’s operation in Syria or Ghana is adversely affected one way or the other, then the company’s total operating revenue could take a hard, and potentially fatal, blow.
To avoid this, Investcom is currently working quickly to spread the contribution from its mobile telephony operations over four main countries – Syria, Ghana, Sudan and Yemen, and to a lesser extent Afghanistan. By focusing on these five main countries, which have a total population of 124.6 million, Investcom hopes to reduce the contribution of Syria and Ghana to around 50% during the next two years – to make it less vulnerable to these external factors.
This is expected to easily take place since Investcom just acquired an additional 40% interest in Spacetel Yemen from Al Bashair Telecom, increasing its shareholding to 82.8%, which will effectively allow Investcom to consolidate revenues from Spacetel Yemen in its accounts (Investcom was previously operating under a management contract). Additionally, with its operations in Sudan just off the ground, Investcom is expecting to see revenues from this country grow considerably in the coming months.

However, the real spread in mobile telephony contribution will occur by penetrating further markets. There is speculation that Investcom Holding is seriously looking to acquire the third mobile license in Saudi Arabia scheduled to be awarded in 2006 – a country which fits the Investcom profile of having a low-penetration rate and high growth potential. But Saudi Arabia, with its GDP per capita of $12,000 and population of 26 million, might prove to be too tough a target to acquire for the time being.

Etisalat, which won the second mobile phone license in Saudi Arabia in August of last year, had to pay a hefty $3.25 billion with the help of six heavyweight Saudi partners to overcome the tough competition coming from Spain’s Telefonica, Kuwait’s MTC, South Africa’s MTN Group, Egypt’s Orascom Telecom and Italy’s Telecom Italia Mobile.

In comparison, Investcom’s most expensive license fee was Sudan’s, at 150 million euro, while Afghanistan’s license cost a sizeable $40.1 million. Guinea’s cost 30 million euro, Ghana’s $22.5, Cyprus’s $28.5 million, Benin’s $9.6 million and 2.2 million euro for Guinea-Bissau. Investcom operates in Syria under a 15-year BOT contract that requires it to share its revenues incrementally throughout the years, from 30% during the first three years to 50% during last nine years.

Another possible operating environment said to attract Investcom’s attention is Iraq – a country that not only fits the company’s profile, but is also undergoing many security challenges that could put the big international telecom players’ bids on hold. Investcom, on the other hand, is known not to blanche at security issues and merely sees them as a 10% increase in operation costs.

Regional competition and the future

So is Investcom picking up the scraps of the major regional telecom players such as Orascom Telecom and the MTC Group, or is it emerging as a serious player?

In terms of its subscriber base, Investcom – with its 3.3 million customers – still trails behind MTC and Orascom. The MTC Group boasts a subscriber base of some 10.55 million customers in 18 countries – 6.55 million customers in 13 sub-Saharan countries were added in March 2005 when the group acquired Celtel and its various operations – while Orascom Telecom has a proportionate subscriber base of 14.8 million in six countries. This represents a current subscriber base one-third the size of the MTC Group and one fourth of Orascom Telecom.

Additionally, both companies enjoy enviable features that Investcom evidently lacks: strong financial backing and a good distribution of revenues. The MTC Group, with its sound financial support, is looking at exceeding 20 million subscribers by 2011, and is currently on the fast track of achieving this goal, while Orascom Telecom benefits from a comfortable spread in its revenue distribution (40% from Algeria, 25.3% from Pakistan, 15% from Egypt; 12% from Iraq, 5.4% from Tunisia and 0.8% from Bangladesh). Both companies are also located in strategic countries with high growth potential.

However, comparing the financials of all three companies through their services, to quote business portal Zawya.com, gives a clearer insight. For the year ending December 2004, Investcom Holding had a total of $824 million in assets – a fifth of that of Orascom Telecom and nearly one third of the MTC Group. Additionally, Investcom’s gross revenue for the same period reached $632 million – a third of Orascom and over half of that of the MTC Group. Operating profit was recorded at $219.6 million – more than half of the MTC Group and one third of Orascom. Finally, Investcom achieved a net profit of $148 million – over one third of that of the MTC Group and surprisingly, nearly half (44%) of Orascom Telecom. It is important to note that Investcom’s net profits for the first half of 2005 grew to $100.6 million from $73.7 million in the same period of 2004.

In any case, the recently successful IPO has equipped the company with enough ammunition to acquire other similar telecom licenses in Investcom-friendly markets, which in turn will allow it to better withstand the competition. As of October 24, 2005, Investcom’s market capitalization is $3.67 billion. It has caught the eye and faith of many, who are eagerly waiting to see what the Mikatis have up their well-tailored sleeve.
 

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Who Lost Out

by Clay Holden
written by Clay Holden

To listen to Jean Riachi tell it, the massive success of Investcom’s recent IPO offering could have been predicted by anyone in possession of even the most basic understanding of the regional investment market. “This was expected,” the chairman of Financial Fund Advisors (FFA) said, adding, “because once the IPO was announced, we received a lot of calls from Gulf customers who told us they were interested. And this level of interest was confirmed by HSBC and Citibank’s [participation] in the issue.” But what neither Riachi, the bookrunners, nor anyone else in Lebanon’s investment community seems to have predicted was the potential for widespread animosity and resentment in the aftermath of the allocation.

Out of their hands

Audi Saradar Investment Bank, the one Lebanese bank that was appointed a distribution agent, was unable to distribute the bulk of Investcom’s virgin shares to its own clients. In the end, Investcom carried out the allocation on a basis far removed from the “pro-rata” custom of distribution used to smooth client egos and guarantee at least a modicum of fairness in what remains a under-regulated industry.

There were red faces all round and, because many of the bank’s clients had broken time deposits to release funds, hastily-prepared explanations were dispatched. “The significant majority of the Bank Audi allocation (approximately 85%) was directed, by the company and the selling shareholder, to certain Gulf investors,” stated a Bank Audi circular to its reportedly 360 clients who had generated a demand of some $1.2 billion. “We regret any inconvenience that the allocation process may have caused you and wish to assure you our continued commitment to our clients.”

Accusations flew: the offering was flawed, hyped as an IPO but in reality it behaved as a private placement; the company was nothing more than a money making front for Syria’s Assad family and its entourage who, in a fit of pique, deemed there should be minimal Lebanese allocation; the IPO was merely an opportunity to turn a fast buck (a doubter only had to point to the extremely mediocre performance of the share price two weeks after the offering – slipping from $15 to $12.5 – to draw that conclusion).

Whatever the rumors and conspiracy theories on the local market (Investcom has denied them all – see page 68), the IPO was the event that propelled the company from relative obscurity into the spotlight of the financial world. From continuous coverage from the Financial Times and Dow Jones, to a successful capping replete with flashy advertisements on international news channels, the IPO was seen as a motif of optimism, growth and prosperity. The offering also set two milestones: first, by being the biggest international share sale by a Middle Eastern company, and second, as being the first to be listed on the newly formed Dubai International Financial Exchange (DIFX). The IPO – which was an international offering to institutional investors outside the United States – offered 59,995,428 GDSs (128,548,569 new shares and 171,428,571 existing ones) at a price of $12.35 per GDS. Each GDS, listed on the London Stock Exchange and the DIFX represents five ordinary shares. Upon issue, the GDSs were evidenced by a single Global Depositary Receipt.

The effect of the malaise

But what of the residual bad feeling? According to Walid Mussalam from the Middle East Capital Group, Investcom’s public debut was “handled in a manner which is unusual for an IPO of this kind, especially in developed markets.” But while Mussalam noted “it’s not unusual to have an allocation to friends and family of 5% or 10%,” the hearsay currently making the rounds among Lebanon’s investment community puts that figure much higher in the case of Investcom’s allocation. Mussalam said that while he personally views the Investcom IPO as being “definitely very good for Lebanon,” he also admitted that the current wave of bad feeling should also be “a lesson for anyone who tries to do this in the future.”

While making clear that he was speaking in broad, theoretical terms – and not talking about Investcom – Nicholas Sawan from Fidus noted that the practice of allocating shares among company favorites can work against the interest of the company itself, as well as against the interest of investors without connections. “It can result in a bad conflict against the idea of what IPOs are supposed to do in the first place,” Sawan said, noting that most companies should be using the opportunity of a public offering to build up a core of committed, outside investors who won’t simply flip the stock after a more-or-less guaranteed first-week profit. Also, if too many of a company’s shares are allocated to those close to the original owners, Sawan said: “What they do is hand pick, and when they hand pick, they are thinking about their short-term interest.”

Even less charitable was an official at a prominent investment house – who requested anonymity so that he could speak frankly about Investcom without damaging the interests of his clients – who said: “They [Investcom] should have been more careful. They blew a real success story with the way they handled their IPO. In fact, I was very happy the way it [the IPO] was handled poorly, that is, outside of Lebanon … If it had been done here, and it had happened like this, all the focus would be on Lebanon, and a lack of transparency.”

And while it’s important to remember that, with no cellular operations in Lebanon, the question of what, if anything, Investcom owes the Lebanese investment community is a fair one to ask, investment experts interviewed by Executive voiced private concerns about whether Investcom’s IPO model would become an acceptable model for privatization in Lebanon. One expert who requested anonymity said: “If this is going to be the norm, some of the clients we have will not be in the market. The bigger the client, the more upset he is when he is not given special treatment. Some clients take it personally … the real big ones are saying: ‘We’re out, we’ll never touch another Lebanese issue again.’”

Recovering from the backlash

But even Investcom’s most fervent critics doubt that the sharp pain of being cut out of the IPO will have a long-lasting effect on the company’s ability to do business. “People will go for the rational, not the emotional,” said one. Another critic simply said, “business is business.” Of course, the rub is that few would have cared about transparency and institutional fairness if Investcom weren’t so profitable in the first place.

Citing liquidity in the Gulf region and broad-based interest in the telecom sector as the main drivers behind Investcom’s over-subscription, Riachi suggested Investcom’s aggressive pursuit of profit in risky locales such as Afghanistan was, for the moment, being rewarded with a willingness on the part of investors to come along for the ride. “It [the stock’s current price] might be high for such risk … but the market has an appetite for this risk right now. They [Investcom] know how to take a profit through clever moves. It’s a success story, and the company’s management is quite good.”

Or at least good enough to not need to worry about ruffling feathers. That, finally, may be the lesson of IPO’s in Lebanon, where being able to turn a healthy profit in Syria means never having to say you’re sorry.

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Business

Azmi Mikati defends Investcom’s IPO

by Thomas Schellen
written by Thomas Schellen

E There has been a lot of reaction to the IPO. Many within the sector claim it was nothing more than a private placement disguised as an IPO, designed to drag in small investors to hype the event. Can you comment on this?

There was no need for any hype. We knew very early on that there would be a lot of demand for this offering. We went on a road show in Europe and met a lot of institutional investors over there who liked the story, so it wasn’t over-subscribed through hype; it was over-subscribed because it was a story of growth, a company that has a very strong track record, an excellent management team and a company that is operating in markets with a lot of potential. The fundamentals are there. We are not looking for hype. Anyway, overall demand came from Europe but being a Middle Eastern company with its roots in Lebanon we had demand here too. Far from being a private placement, it was a full public offering in which 60% [of demand] came from Europe but [in the end] we allocated 50% to the Middle East and 50% to Europe.

E So why was there no, or virtually no, Lebanese allocation?

Working with our global coordinators, we allocated mostly to institutional investors – Middle Eastern or Europeans – while a small portion went to individuals, mostly to our employees. We had a lot who requested allocation and they are the ones who deserve the most because they are the ones who have contributed the most to the success of the company. So most of the individual allocation went to those who have worked for the company and who have been with us for a long time.

E So what do you say to the many people, Banque Audi customers in particular, who broke time deposits and who received no allocation at all?

It’s an open market. There is nothing stopping someone buying shares on the open market even if he has not been allocated. These are shares that are tradable in volumes on the LSE and very soon on the DIFX (Dubai International Foreign Exchange). But in terms of allocation, we were way over-subscribed. Tough decisions needed to be taken and we decided to allocate to institutional investors. E But surely if there is a heavy over-subscription, allocation is reduced accordingly and everyone gets something, don’t they?

This might be the way it works in the Middle East but this is not the way it works in Europe. We did an IPO based on international standards. You cannot expect an investor X to come and demand his 10% allocation in the same way investor Y can come in and get his 10% allocation. At the end of the day you want a large investor base and like I said, tough decisions had to be made when we made that allocation in coordination with the global coordinators and this was the outcome. Today if somebody wants shares, let him buy them on the open market. So if I knew what the real problem is [that you are raising] it would be easier for me to discuss it.

E Have you felt any of the negative feedback?

I know a lot of local investors were unhappy because they did not get shares. I can understand their unhappiness, I really wish they could actually have been allocated and I hope they can become shareholders in the future – that they believe in the company and buy shares on the market.

E Roughly 40% of your company’s revenue comes from Syria. Given the international interest in that country, wouldn’t you say that this puts Investcom in a precarious situation should any embargo occur?

I don’t see why. In the countries in which we operate, there is always a level of risk. We operate in emerging markets, but these risks are more than compensated by the growth that these countries offer. So yes, there is risk but this is more than compensated by growth and profitability and investors do understand that. I don’t know if you have seen our prospectus; we have done an offering based on international standards. Everything is disclosed and this is key to us … that we operate in full transparency … and coming back to the first issue, we clearly said that the allocation is discretionary. It is not a proportional allocation and people should understand our position.

E Banque Audi was particularly embarrassed by the share allocation. You have a close relationship with the bank. Can you understand their position?

We had, have, and will continue to have an exceptional relationship with Banque Audi. Banque Audi was a key element in our success. They financed a lot of our operations when other banks were unwilling to take the risk or did not see the potential and Audi was beside us. Audi cares about its customers.

E Given your ties with Syria and the fact that there was no Lebanese allocation, some people are drawing unfavorable conclusions. Can you comment on this?

I don’t get what conclusions they are making. You say there was no Lebanese allocation but most of our employees are Lebanese and most of the non-institutional allocation went to Lebanese. I can’t make any correlation with what you are saying.

E Investcom shares are currently trading at around $13?

Around $13.50 to $14.

E They peaked at $15?

Yes, that is correct.

E What do you say to those people who say the current price is an indication that the offering was an opportunity to turn a fast buck and not a commitment to the long-term growth of Investcom?

These are not the type of investors we are looking for. I am not looking for flippers, in and out to make a quick buck. I am looking for investors who believe in the company, its strategy, management team and want to make more than a buck over a week or a month, but want to see growth in the long term. These are the sort of people we want as our shareholders.

E Moving on to your operations, how confident are you about developing under-developed markets such as Guinea Bissau, which has a population of 1.5 million and a GDP per capita of some $180?

Guinea Bissau is a good example. We started our operations in August 2004, and in less than a year we were EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) and net income was positive on a month-to-month basis by July of this year. Countries like that are small but with high potential. They are highly under penetrated and we have the expertise to make them profitable and have them contribute to the net income of our business.

E Do you really believe that such markets will make you more competitive?

What do you mean by more competitive?

E Well these, as you say are underdeveloped markets. Where is the competition to develop your edge?

This is the nature of our business. Look at the contribution to the country, its population and its economy. There is a direct correlation between the direction telecom penetration rate and GDP growth. It is obvious we are contributing to regional development. It’s a way to have people talk to each other. So direct economic impact is profitable for us as a group. In Ghana we are up against three international players Hutchinson, Millicom and Telenor and yet we have held our position as the market leader with a 67% market share. So you can’t say it’s easy prey.

E You currently operate in 10 countries?

We operate in eight countries and we have two new licenses so within the next six months we will [be in ten].

E The word on the street is that you are eyeing up Saudi Arabia. Can you comment on this?

Well, we are looking for non-organic growth. We want to put our feet in countries with a relatively low penetration rate that have growth potential as well as countries that have a compelling competitive environment. If this profile is met, then we would be very interested.

E So does that mean you are looking at Saudi Arabia?

If you look at the profile of Saudi Arabia, it does meet these criteria.

E Currently over 70% of your revenues originate from only two of your markets, namely Syria and Ghana. How will your revenue distribution change in the next two years?

Sudan, Yemen and to a lesser extent Afghanistan will become the bulk contributors along with Ghana and Syria. The latter two will be then contributing around 50%, so there will be more of a spread.

E How challenging will Afghanistan be?

If you look at Afghanistan it fits our market criteria.

E You are really starting from scratch.

Totally. It has a population of 30 million, lots of growth potential and we believe it’s a great opportunity and we are looking forward to starting there.

E What about security?

Security is a concern in a few of the countries we operate in, but it is still manageable and we will deal with it like all the multinationals that operate in these environments.

E As Investcom Group, you started operations in Lebanon in 1982 under Inteltec. What sort of telecommunications engineering services did you offer and most importantly to whom? How successful was it?

As a corporate entity Investcom was founded in 1984. The group began its telecom adventure back in 1982. The partners lived in Abu Dhabi but moved back to Lebanon. They found the telecom situation very bad due to the war. We started selling and installing satellite phones designed for ships on office buildings as a sideline. We installed about 50 phones but they were very expensive, about $50,000 each with calls costing $10 per minute. Eventually we installed the first cellular network in the 1990s and we moved on from there.

E All of your operations are centralized via Beirut, how does this affect your operations across the board and do you have one similar strategy for all the countries you operate in?

We are headquartered in Lebanon but all our operations have their own structure and their own team and whenever there are value-added opportunities that can be created, then those functions are centralized in Lebanon.

E Can you tell us about Mednet, your international telecommunications operator based in Monaco? Is it successful, how does it operate and who does it serve?

Sure. Mednet is the international arm of the Investcom group and what Mednet does is it aggregates and carries traffic from the operations where we have the licenses to the outside world and at the same time it carries the traffic of other international carriers such as France Telecom, Telecom Italia, AT&T and BT into the markets where we have our own networks. It’s a long distance carrier based out of Monaco and contributing positively to the overall income of the group. It’s very successful.

E Finally, how will the IPO proceeds be used?

For non-organic growth. If we wanted just to go for organic growth we have a balance sheet that is very strong and under-leveraged and positive cash flow coming from our operations, so we wouldn’t have needed the IPO. The proceeds will be used to go after opportunities that fit the criteria we have discussed.
 

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Special Report

Film and TV Production

by Peter Speetjens
written by Peter Speetjens

Intro

Despite having several critically acclaimed films, Lebanon has no real film industry to speak of. The fact is that without foreign funding, most Lebanese films would never see the light of day. However, Lebanon is one of the leading players in the regional TV market. The country boasts ten TV stations with a combined annual budget of some $150 million, a significant part of which is used to produce news programs, talk shows, TV series and recent monster hits such as Star Academy, Superstar, Survivor and The Farm, making LBCI and Future TV among the region’s most popular and profitable channels, while a dozen or so Lebanese production houses lead the market in terms of TV commercials and music clips, a market worth some $75 million.

Film

There has been the sweet taste of success for Lebanese films and Lebanese directors in recent years. In 2003, Randa Chahal Sabag won the prestigious Special Jury Prize at the Venice Film Festival for her cross border love story The Kite. In 1998, Ziad Doueiri put Lebanon on the world filmmaking map with his coming of age drama West Beyrouth. The film won several international awards and was a commercial success as well. It cost some $800,000 to produce and cashed in over $1 million, thanks to theater admissions, television and DVD sales.

It must be noted however, that while these movies were Lebanese in the sense that both directors and most actors are Lebanese and both films are set in Lebanon, they were actually French productions. In Lebanon no government subsidy system exists as it does in Europe, nor is there a commercial studio system as in the United States.  Therefore, we can hardly speak of a Lebanese film industry. Lebanese directors, who want to make a film, have to go abroad. Most turn to Paris.

One of the consequences of foreign funding is that directors are obliged to hire foreign crews. The director of photography, cameramen and many technicians will have to be flown in. The editing too, arguably the most expensive part of making a film, has to take place in the country that funded the film. In that sense, foreign film funding is comparable to most of today’s governmental aid to developing countries, as the aid has to be spent in their country of origin.

Still, there are other ways. Lebanese director Phillipe Aractingi raised some $800,000 in shares to make his musical dream L’Autobus reality. The film is currently in postproduction. More common among Lebanese directors however, is to go low budget, shoot on video, and rely on the goodwill of fellow artists in the industry. That is how director Elie Khalife managed to make his short film Van Express, which cost a mere $15,000.

Education

As hardly any films are made in Lebanon, most of the country’s wannabe directors, cameramen and editors mainly end up working for TV, or in the production of ads and music clips. Apart from the American University of Beirut, most major universities offer film production courses, including: Lebanese American University (LAU), Academie Libanais des Beaux Arts, Universite Saint Esprit Kaslik, Universite Saint Joseph, Notre Dame Universite, American University of Science and Technology, American University of Technology and the Lebanese University. To illustrate the importance of TV, from the 300 students at LAU’s Communicative Arts department, 90% do television, which includes everything from production to directing and editing. They will not only work for Lebanese channels as there are over 150 regional TV stations, in which Lebanese employees highly represented.

A brief history of Lebanese TV

Unlike most Arab countries, yet in line with the country’s traditional laisser-faire philosophy, Lebanon’s first TV channel was launched by two local businessmen, Wissam Izzedine and Alex Arida. In 1956, they obtained a government permit to launch the Companie Libanaise de Television (CLT), which started operating in 1959.

Backed by the American Broadcasting Channel (ABC), a second private station, the Compagnie de Televsion du Liban et du Proche Orient (CTLPO) started transmission in May 1962.

Both channels became profitable by the early 1970s, but as soon as the war erupted in 1975 were on the brink of bankruptcy. To guarantee the country TV access, the government was forced to step in and in 1977 established the Lebanese Television Company (TeleLiban), which incorporated remnants of the CLT and CLTPO. During the 1980s, a large number of pirate private stations appeared, each linked to one of the warring factions, among which most importantly the Lebanese Broadcasting Company (LBC), Mashrek and New TV (NTV). In 1991 there were no less than 46 TV channels, although not all operational.

In 1996, the government decided to regulate the TV-sector and issued broadcasting permits to but 4: LBC International (LBCI), Future Television (FT), Murr TV (MTV) and the National Broadcasting Company (NBN). Critics accused the Hariri government of trying to silence political opponents. Al Manar obtained a permit later that year, while during the brief period Salim Hoss served as Prime Minister in 1998, NTV and IUCN also received a license. Christian channel TeleLumiere does not have a permit, but is tacitly allowed to broadcast. As IUCN is not operational, Lebanon currently boasts 7 active channels, with MTV reopening its doors soon.

Satellite a Go Go

With the arrival of satellite in the early 1990s, most Lebanese TV broadcasters today have both terrestrial branch and satellite branch to reach the broader Arab region Especially LBCI and Future TV have proved successful in increasing viewers and today rank among the 5 of most watched Arab TV channels. The reason is that, from the start, both channels perceived broadcasting as a business venture. LBCI may originally have been a Maronite station, even during the war it broadcasted the popular Fawazeer Ramadan show to attract Muslim viewers. What’s more, the privately owned Lebanese channels never had to serve as a government mouthpiece, as channels in Egypt or Saudi Arabia. Last but not least, Lebanon has always had a more relaxed attitude towards sexual morals.

What is it worth?

The Lebanese TV sector operates on a combined annual budget of some $150 million, while employing up to 2500 people full time and up to 500 people a month on a freelance base. Most broadcasters are rather tight lipped about annual budgets, and viewer numbers, yet it is estimated that the leading channels operate on annual $30 million to $35 million budget, some 60% to 70% of which is dedicated to in-house productions, while the remainder goes to the administration, as well as buying foreign films and TV series.

Partly owned by Saudi Prince Walid bin Talal, who for $98 million bought a 49% stake in the company, LBCI employs 550 people fulltime, while hires an additional some 50 part-timers a month. LBCI produces a variety of programs, among which Star Academy and The Farm, news, talk shows, programs for kids, a comedy Abdo & Abdo and weekly drama series such as Marti wa Anna and Familia.

Future TV has a staff of up to 500 and hires some 100 freelancers every month. Likewise, it produces big entertainment shows such as Superstar, Soccer Star, The Trap, news, talk shows, kids’ and sports programs.

Operating on an estimated annual budget of $15 million, Al Manar has some 300 employees, which includes bureaus and correspondents in Iran, Dubai, Jordan and Egypt. Other Lebanese channels generally employ between 100 and 200 people and operate on a budget of less than $10 million.

While some local drama and comedy series, Lebanese TV channels are hardly involved in the production in films, documentaries and drama series. It is the market leader in entertainment shows and, to a certain extent, talk shows. Egypt leads the way in terms of films and drama, followed by Syria, which produces hardly any films but up to 40 dramas a year. It is mainly regional channels such as Al Arabya and Al Jazeera that produce documentaries for an average price of $20,000 to $25,000 for a 50-minute film.

Having been closed for over 3 years, MTV is keen to reopen its doors and join the fray. With an estimated annual budget of up to $40 million, it aims to employ 550 people. While most of the staff of some 450 at the time of closure had to find work elsewhere, the MTV studios in Naccache were hired by other broadcasting companies, such as MBC, Al Hurrah, Manar and Rotana. The experiment was so successful, that MTV is currently constructing a second studio worth some $60 million.

Funding

Lebanese broadcasters rely first of all on advertisement revenue to pay for their annual budget, and hence for their production capacity. With the exception of LBCI and Future TV however, none of them actually breaks even. Total income from national TV advertisement in recent years decreased from some $90 million to $50 million a year. The regional advertisement market is where the money is, worth an estimated $300 million. Yet with over 150 regional broadcasters, competition is fierce. Most Lebanese channels are kept afloat by powerful backers for ideological reasons and, in the case of Manar and Telelumiere, by private donations.

Advertisement rates vary per channel, program and timing. A 30-second-ad on Future TV terrestrial costs $1500 to $5000, while the satellite rate amounts up to $7,000. Likewise LBCI charges $3,000 for a 30-second-ad between 7 and 8 PM, $6,000 during the news and $5,000 to $7,000 during the prime time evening programs. Mornings and afternoons are generally cheaper. Future TV works with its own advertisement department, while LBCI advertisement is in the hands of Audiovisual Media (AVM), part of the Choueiry Group, which takes a 40% cut from the brute revenues mentioned earlier.

LBCI and Future TV are able to break even, or actually make profit, mainly thanks to massively popular entertainment and reality shows. Take the ultimate LBCI hit Star Academy, in which rates for a 30 second clip in the show’s semi-finals and finals increase to $11,000. Revenue is further boosted by the exclusive sponsorship deal with Pepsi worth $8 million for two years. Similarly, the rates for Future TV’s Superstar final stages amount up to $12,000, while Lipton and Ford signed an exclusive sponsorship deal worth some $3 million a year. Last but not least, a significant part of revenue for reality TV shows and voting contests stem from Short Message Services (SMS).

Production houses

Lebanon boats a dozen or so of major production houses with up to 40 employees and tens of smaller ones. The major players include companies such as Intaj, Laser Film, Talkies, Signature, Vip Films, The Post Office, Independent Productions and Filmworks.

There are several post-production companies, most importantly VTR, that just opened an $8 million state-of-the-art facility, offering highly specialized (and expensive!) software to create animation characters and special effects, as were used in films like Shrek and Toy Story. Aim is to offer the stop from people going to Europe to acquire similar services. 

Representing some 80% of the market, the big production houses mainly do TV ads, video clips, and corporate videos. Like TV broadcasters, their staff consists mainly of producers and administrative people, while creative, such as directors, cameramen, editors, are hired on a freelance base.

The major productions houses make on average three or four commercials a month, mainly for the Arab world. “If there were not for Saudi Arabia, we would all be out of job tomorrow,” one producer said. It is estimated commercials worth some $50 million a year are produced in Lebanon. The market for music clips is worth up to $25 million. Lebanon is regarded market leader, followed by Dubai, Egypt and South Africa, which rapidly captured a share of the Arabic market, as it offers European standards for a more affordable price In case of a TV commercial, it is generally the advertisement agency that comes up with concept, which the production house will execute. In case of a video clip, it’s the production house, in cooperation with artist and director, who create the clip.

Prices differ greatly, depending on the material being shot on film or video, the number of shooting days, and special effects. Throw in a famous actor or actress and prices will of course explode. So, Nicole Kidman reportedly received $12 million for a series of 30-second clips for Chanel No. 5.

(BOX)

Producing a TV commercial in Lebanon*

Format

Film $25.000 – $35,000/day

Video $15,000 – $25,000/ day

Genre

Music video $20,000 – $125,000

30-minute corporate video $20,000 – $70,000.

Personnel

Director (depending on reputation) $1,000 – $4,000/day

Director of Photography $1000 – $2500

Cameraman $150 – $500

Editor $80/day.

*In the case of 30-day TV series or show, a package deal will be agreed upon.

Sound & vision

Finally, as vision is nothing without a sound, a word on dubbing. Every foreign language film, documentary or TV series must be dubbed before it can be screened in Lebanon or the Arab world. There are some 5 major studios in Beirut specialized in dubbing. Specialized in dubbing cartoons and Mexican soaps, Filmali charges between $1,000 and $2,000 per episode. It employs some 20 to 30 actors on a freelance basis. For many Lebanese actors, dubbing is in fact the main source of income.

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Special Section

Fadi Osseiran

by Executive Contributor
written by Executive Contributor

The Blom banking group also for 2004 occupied the leading position in important categories for Lebanese banking, including ranking first in assets, profits, and shareholder equity. BlomInvest is the investment banking and private banking arm of the group. Executive talked to general manager, Fadi Osseiran, about the performance of Lebanese and regional markets, the general outlook, and the group’s development perspectives.

How do you judge the performance of Lebanon’s financial markets in the recent past?

Financial markets in Lebanon are developing quite ok, especially on the fixed income side. I am looking now from the issuer point of view. On the dollar side, the market for sovereign paper has developed quite well for primary issues, secondary market, and market makers. The Lebanese Pound side has not been developed properly and I think there is room for improvement.

On the corporate side, banks have issued CDs and eurobonds, but less happened from corporations, apart from Ciments Libanaise. I think there is also room to go forward in this area. This is not an easy thing, however, because you need investment banks to play a role.

Why could that pose a difficulty?

Because investment banks are mostly part of commercial banks, those banks have no incentives to help corporations issue bonds when they will receive lending directly from the banks. In this sense, I believe that there is a role to play for a financial company that is not related to banks. In fact, banks would love to participate in corporate issues, if a specialized institution came to the market and arrange for this. For us as bankers, it is much more difficult to do this, because we are competing with our commercial bank.

Is there muscle in Lebanon’s capital markets?

On the equity side, there is major room of improvement because the privatization process has not been realized. If the government would privatize or, apart from privatization, sell the stake it owns in private companies, like Intra, the whole equity market would also develop. 

The most important thing is for corporations to come to the market. The difference between corporations and banks in that respect is that corporations do not have the exposure of banks, especially to international or Arab investors, and that they are not regulated in the way banks are regulated. That makes them less inclined to issue and therefore to be bought as equity. They also need size, because you can’t increase equity if you have a small size. I can see that many corporations need increase of capital. I think the only choice for them is to go to the capital markets.

Are these the only reasons why the equity market is developed less well than the fixed income market?

Seen from the regulatory angle, the bond market has developed more because it is an interbank market. For equity you have to go to the stock exchange. The lack of financial authority and regulations did not help develop the market. By establishing a special authority for it, the equity market will develop much more.

A third lacking is on the demand side, investors. Our investors, at least the Lebanese ones, are more inclined towards a fixed-income instrument. They are deposit takers and don’t want exposure to fluctuation in prices or losses. On the demand side you need also major investors that are the pension funds. Pension funds do not exist in Lebanon and thus a player that is supposed to play a major role in developing the market on the demand side, does not exist.

What are our chances to improve our market cap significantly, like other Arab stock markets have increased theirs?

The channeling of funds has been a feature of the Lebanese economy but because there is no alternative, the most liquid of investments are bank deposits. I am not saying that there is no way of investing in other instruments. But they have to exist.

There is a major tool if you offer investors alternatives whether in real estate, or real estate funds or stocks or corporate bonds or whatever instruments you can create. If you have funds flowing into the stock market, this will not lower your deposits. You can have both and the more instruments you have, the bigger the market will be.

When talking about funds that have been flowing into the stock market and into Solidere lately, one important point to be mentioned is that these were not only Arab funds. Even foreign funds, emerging market funds, came here which are looking at the Lebanese market as part of the Arab markets and want to invest into this new developing market. If reform were to happen in Lebanon, the market would increase much more but that should be concomitant to introducing new instruments.

What is life like for an investment banker these days with such diverse developments all around, between the GCC and Lebanon? Are times very difficult, are they exciting, or perhaps dry and boring?

It’s never dry, it’s never boring. Exciting is the proper word. We are torn between two issues. One is to look after our customers, the second is to promote Lebanon not only because of patriotic reasons but also we feel value there. When I see how the markets are prospering in the region and what opportunities exist, I have to tell my customers about these opportunities but I also am keen on bringing enough customers to Lebanon and see the value of the place.

What are the focal activities of BlomInvest?

We do mostly private banking, and we do investment banking. We do private banking since my horizon is the whole world and my customer is my priority. He can invest in Lebanon, in the Arab world, in the US, he can invest in the bond market, the equity market, in a structured product, in deposits, in foreign currency – and there is always a market that will satisfy my client.

In investment banking, the issuer is my priority and my role is confined to Lebanon. If the government is issuing, I am there and in fact, we have been there. If the corporate market is issuing, I am there whether in the bond market or in equity. But if they don’t issue because of regulatory or whatever reason, I cannot do something that is not there.

So you are saying that even as one of the largest players in the financial market and the BSE, you cannot create this market?

Let me put it more specifically. If the government doesn’t want to privatize, I cannot force it to privatize. Privatization will lead the market. Suppose the government would privatize, we would be there and at the forefront of the privatization process in helping whether in investment banking or private banking. If for whatever political reasons there is no privatization, I cannot do anything.

Some people in private banking expressed that they see investment banking currently as the more difficult activity in Lebanon of the two. Would you share that perspective?

I think it has been all the time more difficult. Had you asked me ten years ago, “why you don’t do investment banking?”, my answer was just the way I am answering today. I didn’t think at that point in time that the time had come for the authorities to understand investment banking. However, I feel that now we are really approaching the era of investment banking, and very, very fast. Before, you see, we haven’t seen the need and it was leisure to do investment banking. Now, it is a necessity. 

Where do you see the coming period lead us, and what does that mean for investment banking?

The government has to privatize and corporations have to increase their capital. And the economy needs restructuring both on the government level and on the corporate level. All the three processes need investment banking. I believe that the only way to move forward is to do some kind of restructuring – and you cannot do restructuring without investment.

Whether this investment bank is to be local or foreign, is a different story. As a local investment bank, we’ll be there and we will be competing. We have all the capabilities of competing and doing a good job.

I don’t know how things could turn but I can see that we are at a crossroads and this is why the need for investment banking is now more pressing than 10 years ago. Little by little, investment banks will constitute another pillar of the economy like commercial banks have been, are still today and will continue to be a major pillar of the economy. Financial markets will help Lebanon also to receive a lot of money that will not go straight into deposits and cost us but will go into foreign direct investment, FDI.

Turning to Blom Bank, which just issued $100 million in a preferred shares issue. Could you tell us the rationale behind this step?

The bank is growing and this growth in assets is bigger than the growth in capital that is being retained. The increase in capital is warranted. The choice is how to increase your capital. We think that increasing our capital in dollar is important because our loan portfolio, our exposure is in dollar.

Regulation will tell me that if I have to increase my capital through issuing ordinary shares, I have to increase it in Lebanese Pounds. The rationale for issuing preferred shares is that the law has allowed banks to increase capital in preferred shares but keep them in the currency that they are issuing in.

Your GDRs performed nicely over the past twelve months. Are there any considerations about trading the bank with its regular shares fully on the stock market?

Nothing prevents it. Historically, when the GDRs were listed, it was the only way to list our shares. We issued GDRs to be able to be traded by foreigners, started trading abroad and brought them back to Lebanon. The question, why not trading all the issues – we did not think about it but nothing prevents us from thinking about it. There is no taboo. We will look into it and see what the benefits of the shareholders would be. That is basically our concern.

Do you have any concerns that regulations or management of Lebanon’s stock market would be insufficient?

We have reservations in that we believe the financial market needs to be regulated much more but that has nothing to do with the day-to-day management of the exchange where I think the BSE has been doing an excellent job. Now, they are moving to extended hours of trading. The BSE is also looking seriously at online trading from sites like the banks, and in very latest developments will probably be starting the trading of options. It is in the discussion.

The opening of the regional Dubai International Financial Exchange has been scheduled for the end of September. Does Blom have any inclinations towards DIFX?

Before they started the process of opening they paid us a visit to see if we want to join either as issuer or as broker. We looked at it and are still looking at it and we’d like to see how it will develop before we make any decision. There are a lot of hurdles, in terms of currencies, settlement and trading, but if it works, it will be wonderful and we definitely should help them. The times are definitely not boring. They are the antithesis of boring.

Any further BLOM intentions? There were stories about more regional expansion?

That’s in the plan. We have been in Syria and in Jordan and are already in the Gulf.

There was some talk about Egypt

Could be. I am not in a position to say, but by the time this story is out, something could happen. We will see.

As private banker, would you say that investing in Blom today is not a bad idea?

It was never a bad idea. Even as Blom shareholders have seen the prices drop during some period, dividends were more than enough to help them carry the stock. But in the long run, it was always a mine of gold and I think it will remain that way. 

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Special Section

Sitting Pretty at the Top

by Marianne Stigset
written by Marianne Stigset

With women representing less than 30% of the Lebanese labor force (despite over 50% having a university degree), one could be excused for assuming that the traditionally male dominated world of finance would be the last bastion to fall under the onslaught of career-minded females. Yet over the years more and more competent women are forcing a change in the traditional mindset.

“It’s harder for women in this business, especially in the Arab world, where there is a tendency to take women less seriously,” Roula Habis, a funds and products desk manager at Financial Funds Advisors, says. “It’s a man’s world so you have to be tough to be in it, but women can compete and they have proven themselves to be good managers. The industry is changing, notably because you’ve had several successful women who have proven themselves. This has helped change mentalities.”

Despite being one of only four female brokers on the floor of the Beirut Stock Exchange (BSE), Lara Dib says she has rarely experienced any discrimination.

“I haven’t had to face many problems as a woman,” the young mother says. “Occasionally you will find an elderly client who prefers to work with men, but these are rare. Your regular investor is aware and highly educated – he will be able to gauge whether you are competent or not. Furthermore I work with a lot of banks and companies, where you also have women dealers.”

Changing lifestyles as a result of a shift in mentalities has further contributed to the promotion of women in the financial world.

A growing number of working women are choosing to have their children in their mid to late thirties, giving them more time to establish a career.

“The culture is not what it used to be,” Serene Mawlawi, managing partner and founder of ProFinance, notes. “For those who are married, there is now a greater tendency to think that you don’t know what will happen further down the line, so a woman needs to get an education and a job. Parents are also giving their daughters more leeway. For instance more are now willing to let their single daughters move to Dubai if a good job opportunity presents itself.”

Yet if mentalities have changed in Lebanon, the rest of the Middle East has not followed suit as rapidly, making for the occasional challenge posed when negotiating with foreign clients.

“It can get a little tricky when you are doing business with clients from the Gulf, although most of these countries, such as Dubai, have become much more open over the years,” says Mawlawi. “It is generally just with the Kuwaitis and especially the Saudis that I may need to be a little bit more aggressive. The Saudi bureaucracy can also be difficult, in terms of granting visas for instance. I wouldn’t send any of my female employees alone to Saudi Arabia.”

Women over Men

Despite the occasional challenge posed when dealing with clients from the Gulf, Mawlawi, whose company has four women and one man, still prefers to hire women. She finds they tend to be more detail-oriented and focused.

Dib concurs. Her company, Credit Commercial et Foncier (CCF), also has a majority of women and was transformed from a real estate company to a financial institution by her sister Carole Dib, the assistant general manager.

“It hasn’t been a deliberate recruitment policy, but we find that women tend to more hard-working and can put up with more,” the broker, who completed her MBA while working full time, notes.

Women who try to rely too heavily on other assets than their brain cells however, are unlikely to complete the race to the top.

“Mentalities have changed – connections and beauty are not enough,” Dib comments. “If you are not competent, you will lose your position.”

As a result, incidents of sexual harassment remain virtually unheard of.

“You are talking about people’s personal investments here, their own money, so it has to stay serious,” says Habis.

But without resorting to the arms of seduction, several women acknowledge that their gender can actually be an asset.

“The presence of a woman eases the atmosphere in a male dominated world,” says Habis. “And as a woman, it might be easier to obtain a meeting with a client. But once you get there, you’d better be professional and present something good, otherwise it won’t work. If you succeed in doing that, the interaction will shift away from the male-female dynamic, to one of two equal partners doing business.”

According to Dib, male clients tend to be less aggressive with women, leading to fewer confrontations and more constructive collaboration.

The upside to the economic downturn

If hard work and degrees are helping women get their foot in the door, the economic slowdown from which Lebanon has suffered over the course of the past decade has not necessarily played in their disfavor.

As local job opportunities dwindle, more men than women have chosen to pack up their bags and seek fortune abroad. With educated youth being advantaged in the emigration process, there has been a decrease in men competing for jobs in the financial industry.

Furthermore, women are willing to accept lower salaries than men, giving them a comparative advantage when applying for entry level positions.

“Women are more willing to sacrifice themselves at the initial stage,” says Dib. “They will take a lower salary, say $500 a month, with the strategy of later being rewarded for their hard work. Men tend to want to start in high positions with greater remuneration immediately.”

Men are also more frequently restricted by the burden of having to provide for their families, thereby automatically setting their minimal salary requirements above those of their female counterparts.

“Single women will be living at home with their parents, whereas married women are generally the second source of income in the household,” says Mawlawi. “Therefore, they will be willing to take a pay cut. Job satisfaction will play a greater role for women than money.”

As a result of this, women overall tend to earn less than their male colleagues, by an estimated 10 to 20%.

Less cut-throat than the West

The Arab financial industry remains a comparatively young one by European and American standards.

As a result, the job conditions have yet to reach Wall Street norms, where 100 hour work weeks and an up or out mentality prevail. The more humane job terms in Lebanon, where work weeks average 50 hours, have made it easier for women not only to enter the industry, but to stay in it after having had children.

“When I worked for Lazard investment bank in London, I would get projects that required that I stay in the office until 3 am, Monday through Sunday, for months,” says a senior corporate finance associate. “Among the 18 partners in the firm, only two were women, and they were single and without children. These types of women would be the only ones promoted. I would never have envisaged starting a family while working there. Here in Lebanon, I would consider it.”

The quality of life in Lebanon also makes the long working hours more bearable, according to Mawlawi.

“When I worked for City Bank in New York, I would get out of work at 10 pm and simply go home,” she says. “Here, you can work hard and play hard. Being able to have even just two hours of fun once you get out of the office affects your performance positively. And the fact that you have the sun and the beach gives you a proper break during the week-end. In New York, I got burnt out and needed to take vacations. Here, I haven’t had a vacation in years. The lifestyle allows you to work much harder.”

Twice the effort

Yet if women’s access to the industry may be less insurmountable than it once was, climbing the ranks whilst juggling a family life remains a daunting task, before which many are forced to cave in.

“In order to spend time with my daughter, I come into the office from 8 am to 2 pm, then I spend the afternoon with her, and go back to work from 9 pm to 1 am, unless I have a business dinner I need to attend,” Mawlawi explains. “With my first child, I worked full-time.”

“By the end of the week I am exhausted,” adds Habis, who had her two children before she began working in finance ten years ago. “You can manage, it’s just a question of organizing yourself, but it’s really tough. I work from 9 am to 6 pm, but the American markets don’t close until 11 pm, so you continue to follow up and stay in touch with the clients once you’ve left the office. Sometimes you check the markets in the middle of the night. It really is non-stop.”

All agree that compared to the amenities working mothers are offered in Europe and America, Lebanon still has a long way to go.

“Most nurseries close too early, at 3-4 o’clock, and I haven’t even been able to find one in the Solidere area,” Dib complains. “If it weren’t for my mother helping me out with the childcare, as well as my husband, and wouldn’t have been able to do it. Fortunately in this region, you have at least a solid family network that can back you up.”

According to Mawlawi, there are many options that would facilitate the task for working mothers, and that remain unexplored.

“There are no flexible work schedules available here like in the West,” she says. “One could work part time, or work from home – a lot of our work doesn’t have to be done at the office. As long as one is performing and meeting targets, one should be able to stay on. I would also like to see large companies who can afford it, such as banks, provide in-house child-care for their employees.”

Government intervention unwanted

Partly as a result of the challenges posed to combining motherhood with the demands of a challenging career, the number of women in the upper echelons remain few.

“At the very top, senior levels, it is definitely very male dominated, I will go to meetings and there will be only one other woman there, if any at all,” Mawlawi says. “At the mid-management level you will find more women, approximately 30 to 40%.”

“I have been working on the floor at BSE for four years, during which the number of women hasn’t increased at all,” notes Dib.

However few view government intervention as being the answer to promoting women in the industry. Whereas Scandinavian countries have experienced a certain degree of success with government imposed gender quotas for board of directors of listed companies, few consider these types of measures appropriate for Lebanon.

“There is already too much government interference here,” Mawlawi grumbles. “Besides, you would run the risk of sectarian quotas being mixed into it, so unless it managed professionally, I wouldn’t recommend it.”

Others see the problem first and foremost as a cultural issue among Lebanese women, on which government regulations would have little effect.

“The problem is not with the government, it’s with the women,” says Dib. “Women don’t tend to be ambitious here. In our culture, a woman’s priority should be her house. She might get a good university degree, but once she gets married and has babies, she will quit her job.”

A fervent believer in women being the architects of their own success, Habis maintains that Lebanon will be better served by not being forcefully rushed.

“Just look at our government: a few years ago, there were no women there,” she argues. “Now we have to or three, who made it due to their competence. They did so slowly, but they did it on their own. We’re on the right path. Government intervention wouldn’t be right at this point. Women will become CEOs on their own.”

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Special Section

THE CHINA SYNDROME

by Faysal Badran
written by Faysal Badran

Leave it to the mainstream media, from CNBC to Newsweek, to hammer a particular investment theme when it’s all a bit too late.  As they became enthused with the “Tiger Miracle” of the late 1980s, just before the collapse, and as cover stories raged about technology investment, just before it took an 80% haircut, now China is all the rage.  You can’t escape it.  Intuitively it may even make “sense”.  After all the demographics are on your side.

The bells of joy regarding China have been ringing for the last three to five years, to the point that one wonders, is this the modern day El Dorado? Will Chinese growth ever slow down? Should I not be investing in what is being billed as the “next economic superpower”? Everything ranging from booming oil prices to the collapsing prices of electronics is being linked to the perma-growth story that is China. 

It is true that China’s usage of oil has been a factor, and that its mega capacity in all things electronic coupled with its low cost of production has made it an economic engine to be reckoned with.  As the Bank of China gives lip service to calls for openness, it has continued to amass colossal reserves making it one of the top global funders.  Its share, for instance of US Treasury bond holdings has been whispered to be around 22% of all outstanding debt. This basically means that it has one of the largest claims on the US Dollar assets in the world, and it has become a key player in the global currency casino.  So in many respects, China has earned itself a role of money broker to the global financial system, and has a firm grip on the market for goods.  It has also made baby steps toward a more liberalized banking system.  All this has been happening for nearly a decade, but the proverbial “party” is over for the time being, at least when it comes to China as an investment option. 

China’s entry into the WTO in 2001, increased the trade boost engendered by the opening up of China as a production powerhouse and flooded global markets with cheap Chinese goods, all the while maintaining its position as one of the world’s top two destination for foreign direct investment (FDI), adding, according to the US State Department, $64.0 billion for a cumulative total of $563.8 billion through the end of 2004.

This situation has created, not only a flood of dollars, but also a GDP growth rate, which has averaged an eye-popping 9% over the last few years.  This has not only been the result of the massive influx of direct investment, but also the because of the amassment of a large surplus with the US, its main trading partner.  This appears to be a relatively unsustainable position, as it has created a protectionist drive in the US, and to a lesser extent in Europe, aimed at correcting this imbalance and pushing the Chinese to moderate their competitive edge. 

Most recently, there have been loud calls for China to reevaluate its currency, the Yuan, which has been pegged to the Dollar for decades and which is  thought to give China an unfair advantage, as it is accumulating a large amount of $ reserves, and in counterpart, glutting many electronics and even car production markets. So to a large extent, the road to Chinese economic dominance is paved with an unfair advantage, that of an artificially maintained exchange rate.

In a developed world where 9% usually refers to unemployment rates, especially in Europe, China has awakened the speculative juices in most players and observers, large and small. However, the path to liberal and open system, is paved with uncertainty.  So while the future of China as a powerhouse is not in question, we must remember that China is a one party dictatorship, that the gap between rich and poor has grown immensely, and last but not least, one of the pillars of its growth, in my opinion, the currency peg to the US Dollar, is in its final gasps of air. Soon, China will remind the over anxious, that it succumbs to the laws of economic cyclicality and that its opaque social and political system will need to be reformed, for it to truly embark on sustainable development. 

Take advantage of China by buying cheap LCD televisions, but be very careful when you are pondering an investment.  Lured by the hype, you will surely get bulldozed.  For one, I have included a chart of the China Fund, a US traded proxy for Chinese companies.  Obviously, and since a picture is worth a thousand words, one can see that the time to be positive on China was just before the turn of the century…As the Chinese stocks topped and rolled over, the media, and so called “analysts” have continued to aggressively promote investing in China.  The results, much like those of internet stock buy ratings in 99, would have been awful.

As the China fever picks up steam all around, and is seen as a “must own” by many portfolio managers and speculators, the pressure is on to get in on the action. 

Henry Blodget, a pillar of the high tech bubble and ex star-analyst at Merrill Lynch, is adamant that China is not the place to be, especially for the individual investor.  Since A Shares, which trade in local currency are not open to foreigners, investors are left with broadly two realistic choices to take advantage of the China story.  Obviously, becoming a Qualified Foreign Institutional Investor, which facilitates transactions in local shares and ventures is a cumbersome affair reserved mainly for large institutions and requires a hefty $10 billion to set up.

The first option is to look at proxy markets which can be expected to benefit from the Chinese economy. Hong Kong stocks have had a good record at mimicking the state of affairs in China, but they tend to be extremely closely correlated to US markets as well, so in that sense, they are not purely a bet on China.  But at least, Hong Kong has tougher listing requirements and thus tends to get better quality companies than Shanghai and Shenzen.  As recent headline calamities confirmed, there are a lot of fundamentally weak companies or even shell companies in the local market that have caused local players serious heartache, leaving thousands with unrecoverable losses.

The second option is to look at Chinese companies, which have listed in the US, in the form of an ADR (American Depository Receipt).  The caveat here, according to Mr. Blodget is that these are companies that have contracts in China but tend to be offshore entities, and this causes two problems: 1) if governance is not tight enough, the profits and losses may not be clearly reflected in the companies’ financial statements, 2) due to the companies’ structures, there may be a significant time lag in the flow of information.  Within this option, there are also several country funds (see chart).  While this may be, on the surface, the least risky way to go, its performance has been worrying of late, and the reporting suffers from the opaqueness of China’s overall compliance laissez-faire. 

So as China roars on toward becoming the world’s largest trade partner, there is, as Blodget put it a China paradox, since as “the economy is screaming along, China’s domestic markets are sucking wind—and have been for years”.  One would not gather this fact from reading the headlines and raving articles penned on China.  It seems lately that most media has focused on China as a new frontier for easy money. It tends to back this claim with the notion that one billion people are laboring hard to become rich, simultaneously.  But the truth is far from clear, even on this point, as mainland rural China is stuck in low growth-low employment cycle, and China’s new billionaires, have built their fortune on cheap labor.  From that perspective, China appears like more a booming emerging market, than a prospective member of the G8.  And while it is difficult to see any speeding up of the democratic process, there will be no change in the perception that China is a treacherous place to do business.

The pivotal point in China’ prospects is how it manages to control its growth rate in order not to jeopardize the safety of the banking system.   Periods of hyper growth, such as the last decade, has lead to relatively relaxed credit policies from banks, which could well come back to haunt them should the economy turn sour.  It is estimated that non performing (bad) loans are on the rise in China and that the country would need to maintain a very high GDP growth rate in order to avoid a full blown banking crisis.

Markets in general tend to be a discounting mechanism, i.e. they incorporate expectations, well before these expectations become reality.  As such, we can see that the real smart money “excitement” over China began nearly six years ago, as early movers saw the boom from trade that China would reap.  Of course, individual investors cannot time their moves perfectly, but what is worrying for someone looking at entering now, is that a near perfect peak or top of sorts seems to be in place sine 2003 (see chart).  This is quite relevant since it shows that China, as an investment is diverging wildly from China as a macroeconomic story.

The fact that China now has a massive surplus vis a vis the US and Europe means that there will be pressures from all sides to cool off China’s growth.  This scrutiny will likely cause more loosening of the currency peg, and more protectionist measures, in areas such as textiles and electronic goods. If one is very eager to benefit from the long term trajectory of the Chinese economy, my guess/estimate is that the safest way is to invest in US and European companies that are increasing their presence in China.  The first ones that come to mind are Motorola in the goods arena, and Union Bank of Switzerland in services.

 As it stands, India appears to be the next China, but we’ll leave that to a future piece.

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