Saturday, August 6, 2005

China Internet stock
tromps Hoku’s debut

The local alternative energy
company drops 10.7 percent in
its short first day of trading

For the moment, investors apparently like Chinese Internet companies more than they like alternative energy startups in Hawaii.

That was the message Wall Street sent yesterday after Kalihi-based Hoku Scientific Inc. fell 10.7 percent in its initial public offering while search-engine Baidu.com Inc. of Beijing debuted with a 354 percent rise that marked the biggest IPO gain in a U.S. market since the tech bubble.

But potential investors should look past the opening-day response, said Rob Robinson, an investor in Hoku Scientific and a professor of entrepreneurship at the University of Hawaii.

"I think the fact that they IPO'd at all can only be described as a positive development," Robinson said. "Very few companies ever get to an IPO. In terms of the pricing, there does seem to have been a miscalculation on the part of the underwriters as to what the market demand would be. And that really is an issue for the underwriters, not for the company."

Lead underwriter Piper Jaffray, along with investment firms SG Cowen & Co. and Thomas Weisel Partners LLC, filed a registration last month with the Securities and Exchange Commission projecting a price offering of $11 to $13 a share. That was lowered Wednesday to $8 to $9 and then reduced again yesterday morning to $6 before the stock market opened.

Hoku, the first Hawaii-founded company to conduct an IPO in six years, began trading 40 minutes before the market closed and finished down 64 cents at $5.36 .

The number of shares offered also were reduced -- to 3.5 million from the original 4.2 million. Hoku ended up raising $21 million, with an opportunity to gross another $3.15 million if the underwriters buy another 525,000 shares that are available. Even if the underwriters buy the shares, Hoku's gross proceeds would be only $24.15 million -- less than a third of the $62.8 million that it hoped to receive.

"It's very hard to judge what the market's appetite is going to be for a new issue, and it's a company that I don't think a lot of people know very well," said alternative energy analyst Walter Nasdeo of New York-based Ardour Capital Investments. "Being in Hawaii, they haven't been able to go out and market as much as a company located on the mainland."

Dustin Shindo, chief executive and co-founder of Hoku, declined comment yesterday because of a 30-day quiet period required by the SEC following an initial public offering.

Robinson said Hoku is well positioned to be successful because of the global emphasis on energy conservation.

"If you look at the world and say oil is at $60 a barrel and the president just signed an energy bill that included significant incentives for alternative energy sources like fuel cells, the environment is very good and there is zero doubt that fuel cells are going to be a major technology going forward," Robinson said. "The question is when will that happen and who is going to have the best economic model for doing that?"

Robinson said what makes Hoku attractive is that it doesn't create fuel cells, but it supplies a so-called membrane, a critical component for any fuel cell. It is a very thin film that creates the electrical potential inside of the cell by stripping the electron from the atom during the chemical process that runs the fuel cell.

"Hopefully, if they manage this correctly, whoever emerges as the major fuel-cell manufacturer will buy their product," Robinson said.

Nasdeo said it's promising that Hoku has received testing and engineering-service contracts with Sanyo Electric Co. and Nissan Motor Co.

"Obviously, some of the bigger companies think they have something going on or they would not be lined up with them," he said. "Some of the fuel-cell companies are in that boat in anticipation of a more robust fuel-cell market down the road."

Still, Nasdeo said the apparent lack of interest in the IPO does raise some concern.

"That's usually not a good sign, quite honestly," he said. "If the interest is not there at this stage, you've got to be careful."

Baidu.com, on the other hand, raised $109 million, 40 percent more than it initially expected to receive. The stock soared $95.54 to $122.54 from its IPO price of $27. Baidu.com, which models itself after Google Inc., raised its offer price at least twice.

The issue with Hoku, Robinson said, is not whether its offer price was $6 or in the $8 to $9 range but rather how the stock does in the next couple of months.

"I'm not as concerned about the first-day performance as I am going to be about the long-term performance," he said.

Shindo, who owns 28.8 percent of Hoku following the IPO, has a paper worth of $25.7 million. Co-founder Karl Taft, the chief technology officer, is worth nearly $5.4 million. However, they cannot sell their shares for at least 180 days.

Cal Shindo, Dustin's father, said he doesn't his son will be phased by his newly acquired wealth.

"He's not that type of person to think about the money where it's going to get to his head," said Cal, who is vice president of Mehana Brewing Co., a family-run microbrewery in Hilo that was started by Dustin in 1995.

"In the future, he just wants to make sure the company goes where it should go."

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