In a 21,000 square foot space in Cosco Tower, Hong Kong, the sound of hammers and saws mingles with the tapping of computer keyboards, and the latest pop tunes filter through the static of a cheap radio. In one corner, decked out in jackets bearing the company logo, sits a team from Gorilla Asia, a marketing and conference-organizing company. In another nook sits the team from Softpub, a web design and development company, and in another, a group called Linux Center, which provides Linux software solutions.

Welcome to the offices of techpacific.com. Over the next month this incubation factory will become home to some 25 start-ups and a handful of service, or toolbox companies, such as Gorilla Asia, that can help them grow. The factory is run by techpacific.com, a Hong Kong-based internet investment company that raises capital for young technology companies and provides a range of technology and financial services to help them expand.

So far, techpacific has been dismissed by investors either as an incubator with no hope of showing real profits for years, or a venture capital company whose value depends on the IPO success of the companies it invests in. Since few investors are enthusiastic about technology companies, techpacific's shares have fallen to HK$0.37 since it first listed on Hong Kong's Growth Enterprise Market in April at HK$1.05.

Scepticism.com

"People are still very sceptical about internet stocks, especially incubators," says Ronald Chan, head of Asian internet research at Dresdner Kleinwort Benson in Hong Kong. "Future profits will depend on the stock market and with the current caution towards tech stocks, people are wondering where the exit route is."

Yet techpacific is rare in the dotcom world. It's profitable. In the first six months of this year the company posted a net profit of HK$5.6 million ($722,000) on revenue of HK$25.6 million. Of that, 72% came from fees generated through its capital-raising business, 10% from fund management fees and 18% from interest income on the $40 million it raised in its share offering. In time it hopes to make more money as the companies it nurtures in its factory come to the market or get bought by larger concerns. Yet the fee income it generates means it can afford to wait for the public markets to get better. And the upside of the downturn in technology stocks is that investors can buy into companies at cheaper rates.

"A relatively low entrance price is very important," says Joseph Tong, associate director of Softbank China Venture Investments, a Hong Kong-based venture capital company that holds about 5% of techpacific. "For direct investors, now is the time to buy."

The price is right

 Techpacificconsiders its shares undervalued for a company making a profit. For some, though, the company's revenue, even from its fee-based business, is too unpredictable to justify a higher valuation. The company is trading at 80 times earnings - annualizing its first six months' profit - and 17 times annualized revenue.

"When people think of dotcoms they want to see a revenue stream that's recurring," says David Moy, an analyst at Salomon Smith Barney in Hong Kong. "The problem with fees is that they can change radically from year to year, and there's no guarantee the company can sustain that pace."

 Techpacific claims its funds management, advisory and consulting services give it a firm base from which it can operate its incubation business. In the first half of 2000, the company raised $30 million for five new technology ventures, garnering $2.4 million in commission income.  Johnny ChanIt also began receiving fund management fees in the second quarter, recording $300,000 from its two venture capital funds: the Nirvana Fund, a $66 million closed end fund and Applied Research Fund, a $32 million fund the company runs for the Hong Kong government in conjunction with Softbank.

"Some of the fees we receive are not only stable but represent an annuity," says Johnny Chan (pictured right), the company's chief executive. "Our venture capital management fees are payable quarterly for the next five to eight years, and our technology consulting fees will also be a stable source of income going forward."

The company has substantial amounts of cash still to invest. The Nirvana fund has $45 million univested, and the company has $42 million in cash left over from its listing and previous fundraisings. In the first half techpacific took a 25% stake in Linux Center, a 40% stake in Softpub, a 31% stake in Asset Publishing, which publishes The Asset financial magazine. It also took a 25% stake in LegalStudio, which offers online legal services. Companies it has made money from include AsiaAntiques.com, an online antiques exchange which it sold to realize a net gain of $80,000 - a return of five times its original investment.

In total, the company has invested $38 million in 34 companies, including investments made by the Nirvana Fund. These include Gogo.com, an internet music company; Surfgold.com, an online rewards company; Entone, a company that provides technology to telcos and cable operators to assist in the delivery of broadband content; Viztel, a Malaysian company that offers a unified message service and voice portal; Edgetech, an interactive point-of-sale company, and Agrakom Detik, an Indonesian portal and web development company. It also invested in Netease.com, a Chinese internet portal that recently listed on Nasdaq.

One shot deal

"Our average in-price is pretty low," says Chris Leahy, techpacific's chief financial officer. "We only have to have one or two of our investments go majorly right to have a significant effect, and we think we have several with that potential in our portfolio."

It may take a while to realize those investments though. Technology IPOs are out of favor with investors, as are incubators, which typically invest between $500,000 to $2 million in early stage companies.

One such company is Divine InterVentures, a Chicago-based incubator that invests in and operates a community of associated companies. The firm posted a net loss of $119,568 in the first six months of this year after struggling to get itself listed last month. Other US companies that invest in startups such as Internet Capital Group and CMGI have seen their shares fall 70% and more since March. In Asia, internet investment company Softbank has seen its shares fall 67% since the beginning of the year.

The team

Still, techpacific has a heavy-weight management team, lead by Chan, formerly managing director of Bear Stearns Asia. He and partner Ilyas Khan, a former investment banker with Nomura International set the company up in December 1998. Robert Owen, former head of Hong Kong's Securities and Futures Exchange is the company's chairman. Jose Borromeo, the company's chief operating officer, was formerly president of the stock brokerage business for Credit Lyonnais Securities Philippines.

While the team's investment expertise is clear, there are not many in its ranks who have had operational experience in technology companies - something that young startups look for in their incubator mentors. Chan was for two years director of finance and operations at a manufacturing company with some 6,000 employees. And Robert Owen was the former chief executive of Lloyds Merchant Bank in the UK. But this experience is minor compared with the collective experience of the team in investment banking. Not everyone, though, considers this a disadvantage.

"I think the management is very strong and sharp," says Dresdner Kleinwort Benson's Chan. "Their investment experience means they know how to help companies go for a listing, and they have technology people on their advisory board if they need them. In the end someone who has good business sense is probably more important than someone who knows technology."