China portal risks Nasdaq delisting

Netease CEO William Ding faces a potential Nasdaq delisting of his company

By CNN's Kristie Lu Stout

HONG KONG, China (CNN) -- China portal Netease faces a possible Nasdaq delisting on Friday for failing to submit its annual report.

Following news of the possible delisting, American depositary shares in the company fell 20 cents to a record low of 62 cents on Tuesday night in New York.

Netease, which has 24 million registered users, intends to request a hearing before Friday to defer the delisting.

Revenue misreporting

"We will submit our appeal to Nasdaq before Friday, so the delisting won't happen on that day," Netease spokesperson Liang Xiangnong told CNN.

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"We are trying our best to fulfill our requirements for Nasdaq and to calm down the situation and make everything normal again," she added.

A Nasdaq notice said Netease violated stock market rules because it was two months late in officially filing its 2000 annual report.

The portal company said it delayed the filing of its annual report to finish an internal investigation of possible revenue misreporting.

The company's internal audit began May 8.

Netease also said that, based on the results thus far of its internal investigation, the public should not to rely on its published audited financial statements for the year 2000.

A delisting would threaten the company's chances to raise new funds.

But analysts say the company's war chest from last year's initial public offering can support its existing obligations for the short term.

Netease reported having $102 million in cash at the end of last year.

Revenue pressure

Netease, like other China portals, has been under pressure to pump up revenues in a bid to win back positive sentiment in an Internet-wary market.

Beijing-based IDC analyst Matthew McGarvey told CNN he disregards advertising revenue reports from China portal firms out of fear of gross misreporting.

"We just completed our online advertising figures for China. We completely disregarded public statements from companies because what they say is usually a combination of barter and offline ads," said McGarvey.

"They work with numbers very loosely."

In February, Netease hired Goldman Sachs to help it find a buyer.

But acquisition negotiations with Hong Kong's I-Cable collapsed last month over the would-be buyer's fears of potential shareholder litigation.

"They are not an ideal purchase now," said McGarvey.

"It's like adopting a sick child. Something you don't want to do."

Netease's chief executive officer King Lai and chief operating officer Susan Chen resigned last month, with the company's internal audit left unfinished.

Chairman and founder William Ding took over the two positions.

China's dotcom shakeout

The dotcom shakeout in China picked up the pace when AOL and Legend inked a $200 million pact last month.

"The landscape in the China Internet space is different," said Ion Global analyst Frank Yu.

"AOL-Legend changes things, it's a different investment focal point for people looking at the China portals. The original investment impetus may be different."

Analysts say all four Nasdaq-listed China portal firms -- Chinadotcom, Netease, Sina.com and Sohu -- need to boost revenues in a crowded market that will only get more uncomfortable when Legend-AOL formally enters the fray.

All four Web sites are vying for control of China's limited $100 million Internet advertising market.

Sina.com has been hit by layoffs of 15 percent of its workforce as of June, as well as aftershocks from the forced departure of chief executive Wang Zhidong.

Though Sina.com has shut Wang out of the boardroom, he remains a key investor in the P.R.C. company that operates the portal.

In contrast, rival China portal Sohu is seen as operating on more stable ground.

Sohu, the mainland's largest portal in terms of registered users, announced on Tuesday that revenues in the quarter ending June 30 more than doubled, mainly from online advertising.

Its second quarter net loss widened by 17 percent.

China has 26.5 million Internet users, according to the China Network Information Center.