Chinese Linux developer XTeam raises $2.7 million in Hong Kong IPO


Author: JT Smith

By Mike Newlands
One of China’s top Linux software developers, Beijing-based XTeam, lists today on
Hong Kong’s answer to the Nasdaq, the Growth Enterprises Market (GEM). Following a successful initial public offering that raised HK $21 million (USD $2.7million) and valued XTeam at HK $204 million (USD $26.2 million), the company plans to use the proceeds to expand product development, open a sales office in China’s financial center Shanghai, and set up a training and certification program.

The company will be concentrating on the corporate server Linux market, as this is the segment most likely to grow significantly, said XTeam chairman Gary Ma at a press conference in Hong Kong. Ma and a unit of Japan’s Mitsubishi Corp. are the two largest shareholders in XTeam.

When XTeam was founded by a group of young Linux enthusiasts led by 28-year-old “chiphead” (the Chinese version of propellorhead) Ren Yi, its first products were for the desktop market and it was successful under its initial name of XTeam Software Ltd., outselling Windows PC operating systems with its XTeamLinux and XTeamLindows products. Last year, it also began to make inroads in the OEM market.

Although XTeam began by targeting desktop PCs, it started to shift its emphasis to the corporate market with the launch of XTeamServer 3.0 E-Class in October 2000. Linux usage continues to grow steadily in this sector but PC users and China’s PC manufacturers are being wooed back to Microsoft Windows after a flirtation with Linux, according to Ma.

Four of China’s top PC vendors, market leader Legend Holdings, TCL Computer Technology, Great Wall Corp. and Tsinghua Tongfeng, which jointly have a 60% market share, have all announced in the past week that they plan to install Windows XP on all PCs leaving their factories. This comes as a big blow to developers concentrating on the Linux OS and applications development, because Legend and other makers had been bundling Linux with some ranges of Pcs.

The Chinese government has been pushing government departments to adopt Linux on their servers primarily because of security concerns over what the government suspected were hidden “back doors” into Windows operating systems. With Open-Source Linux, the Chinese government had no such concerns. The world’s largest circulating
newspaper, Chinese communist party mouthpiece the People’s Daily, said the government hoped “to pry the computer industry from the grip of operating system giants like Microsoft.”

Despite Microsoft’s vigorous denials of their existence, the fear of back doors is particularly acute in China, where the government worries that the U.S.
military could tap into and shut down its military command networks. “What if the U.S. and China go to war?” Li Gong, Sun Microsystems’ chief representative in China, told the South China Morning Post recently. “If these things get pushed to extremes, they don’t want to be dependent on a U.S. operating system.”

XTeam hopes to cash in on this sentiment with aggressive expansion around the country. “In order to sell products, we need support, we need geographic coverage,” Ma said. “A customer will not buy a product in Shanghai unless there are people on the ground to support it in Shanghai.”

As well as expanding its offices, XTeam will also continue partnering with systems integrators and operators of data centers, which are often in a position to recommend software to clients, he said.

Ma says that only a “tiny” percentage of the estimated 260,000 servers sold in China last year were installed with Linux operating systems, and 70% of these systems were either from XTeam itself, the Chinese Academy of Science spin-off Red Flag, or Japanese/U.S. software developer Turbolinux. With no reliable statistics, market share in China is a matter of claim and counter claim. Last year U.S .industry leader Red Hat said it was making inroads into the Chinese Linux server market and claimed a 55% share for itself.

Whatever the merits of the different claims, there is optimism that the market will grow rapidly. “The Linux market share in China should increase significantly and the server market will grow at a fast pace as well,” said Ma.

From November 1999, when the company was incorporated, until March 31 this year, the end of the financial year, XTeam sold HK $11.5 million worth of server software; HK $4.2 million worth of embedded Linux software for use in set-top boxes and personal digital assistants; HK $2.6 million worth of PC software thanks largely to a contract with Legend; and HK $3.5 million in services.

However, for the two months to May 31 this year, the period covered by the company’s prospectus, the figures showed HK $5.6 million worth of embedded Linux sales, HK $1.4 million worth of server Linux sales, and just HK $34,000 to the PC market. Despite this, Ma said the focus is very much on the server market and the embedded Linux market will remain a sideline for the company.

Analysts expect Hong Kong investors to give the shares a warm welcome in view of what has been happening to the GEM’s other Linux play, Hong Kong Linux software developer Thiz Technology, which listed on July 27.

Despite reporting a loss of HK $3.85 million for the six months ended September 30 this year, Thiz’s share price has gone up 68% since its debut at a time when most technology stocks have taken a pounding. Thiz is depending on the mainland Chinese market for its medium- to long-term growth, but in the short term is hoping to turn profitable by providing Linux applications to a Taiwan motherboard manufacturer it is now negotiating with.

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