As we... and every computer on Earth, awaits the next breakout attempt over S&P 1112 let's look at one of our holdings, as well as a potentially interesting IPO in the same space.
Like almost all our stocks, AsiaInfo Holdings (ASIA) has just been range bound for much of the past month - however it's a good day to talk about it due to this nice write up in Investors Business Daily, plus an IPO of a smaller competitor, Linkage Technologies (BOSS), coming next week. [cool ticker symbol] Today's strong bounce in ASIA puts it at the top end of the range we've been enjoying (zzzzzz)... in complete parallel to the S&P 500 in fact. I plan to add on the breakout here... when and if.
First let's look at the story on AsiaInfo Holdings story; generally this level of customer concentration is a big issue but in China... well the government has decided there will only be so many telecom providers so there is no choice but to be concentrated if you are going to provide a service to this industry.
- U.S. telecom firms have hit a ceiling as most Americans have a cell phone and Internet access. These firms can only dream of untapped potential in China, the world's largest mobile market.
- The Chinese government shook up its telecom structure 18 months ago. At the time, China had six major telecoms, split equally between wireless and fixed-line providers, and merged them into three. And to enhance competition, it allowed all three carriers to provide both fixed-line and mobile services. Then, in January, China granted the long-awaited third-generation (3G) licenses.
- Chinese software provider AsiaInfo Holdings (ASIA) is benefiting from the explosion of communication technology as carriers enter new businesses and become full-service operators, says Kun Tao, an analyst at Roth Capital Partners.
- The Beijing-based firm is the nation's leader in telecom billing systems and business intelligence (BI) software, which helps firms find small pieces of data that help improve marketing and pricing. Other strengths include customer relationship management (CRM) and security software, as well as software that controls spam, manages networks and helps users keep track of their clients.
- 3G licenses will provide AsiaInfo with robust growth as the rollout involves major upgrades to provide a huge pool of customers with massive amounts of data, Tao said. All three now are full-service carriers, and each one has to add infrastructure to meet the demands of their growing customer base.
- In September, the nation's three main carriers, who account for 85% of AsiaInfo's sales, hit a milestone by amassing 1 billion customers. China Mobile (CHL) had more than 508 million, while China Telecom (CHA) and China Unicom (CHU) boasted 241 million and 250 million, respectively.
- China's big telecoms have curtailed capital spending over the past two years. This was partly due to the recession, but also in anticipation of the spending spree that would come upon the arrival of 3G licenses.
- China's telecoms will aggressively spend on technology to capture share in the lucrative market for mobile data services, says Sean Jackson, an analyst at Avondale Partners. For example, China Mobile plans to spend $55 billion for infrastructure upgrades from 2009 to 2011. These carriers are all in the initial phases of launching 3G services in a land-grab strategy, Jackson said. The numbers are staggering in terms of the investment requirements to build up these new businesses. An increase in the popularity of 3G services would be a huge boon for AsiaInfo as it would likely result in newer billing and business intelligence projects, he says.
- Telecoms love 3G because they can bill for a wide range of new video services, but it presents new billing challenges. AsiaInfo is happy to help. The company has started implementing new billing and CRM software in 11 provinces with four more to go for China Mobile. On average, billing and CRM contracts bring in $2 million per province, while BI contracts rake in $1.5 million, Jackson says.
- In 2010, China Unicom is expected to roll out BI solutions to all 31 provinces, with AsiaInfo and other vendors bidding on the contracts. The firm is also bidding on two China Telecom contracts with more to come and should know the results by year's end.
- The company should see at least 45% top-line growth in 2009, Tao said. He forecasts an average of 30% yearly growth for 2010-2012. But the biggest gains, he says, should come this year and next.
- Much of the talk has centered on billing, CRM and BI, but AsiaInfo made a couple of moves last quarter to build up its portfolio and expand its geographic footprint. These won't add much in the near term, but they are indicators that AsiaInfo is working to diversify beyond just the China telecoms, Jackson said.
- First, it acquired SmartCall in October. The deal gives AsiaInfo a call center that will provide targeted marketing campaigns to telecoms as competition intensifies to build up their customer base.
- Then, AsiaInfo hammered out a joint venture with Singapore to provide its core software to the country. The partnership will grow its presence in a region that is experiencing explosive growth.
Some financial metrics:
- Revenue for the third quarter jumped 42% to $63.5 million, matching views and marking the 13th straight quarter of double-digit growth. Its software and technology business unit contributed more than 80% to the top line.
- Earnings soared 75% to 28 cents a share, topping views by 4 cents. The Chinese software firm has turned in excellent quarterly profit for the past couple of years, posting double-digit growth in every quarter since 2007.
- AsiaInfo's gross margin rose two ticks to 55%, and its operating margin increased from 12% to 16%. Asia-Info also has an ideal financial position, sitting on $236 million of cash and no debt.
Sounds too perfect... what are the risks?
- China Mobile remains AsiaInfo's biggest customer -- and its biggest risk. If the telecom giant slows its upgrades -- there are only so many to be made -- that will eventually drag on AsiaInfo's top-line growth, Jackson says.
- Last quarter, the world's largest mobile operator generated 60% of the firm's sales, which have been growing at a rapid pace.
Now let's look at AsiaInfo's smaller competitor, Linkage Technologies, also from IBD:
- In 2008, mobile phone penetration in China stood at 46%. That situation is rapidly changing, however, as mobile phone subscribers have been increasing at a rate of 23% a year this decade. Even fixed-line services, which are shrinking in the U.S., are growing 9% annually in China. About one-fourth of Chinese still don't have a landline. All this is creating big growth opportunities for the Chinese telecoms and the companies that serve them.
- AsiaInfo Holdings (ASIA) is the only domestic provider trading on the U.S. market. Now along comes Linkage Technologies, a smaller but even-faster-growing player. Linkage was founded in 1997 under the aegis of Lianchuang Technology. A corporate restructuring in 2003 led to the current arrangement in which two layers of offshore holding companies formally control the operating firm.
- Software development, which provides the lion's share of revenue, encompasses three product lines.
- (1) Business Support Systems manages accounts, billing and customer relationship management. Linkage claims top market share in this space.
- (2) Operation Support Systems helps telecoms manage their networks as well as service and maintenance schedules for subscribers. Linkage says it ranks No. 5 in market share in this segment.
- Business Intelligence Systems gathers and analyzes data to help clients plan strategy. Linkage is No. 2 in market share in this field, but it is less widely used than Linkage's other systems.
- It's operating in 13 provincial subsidiaries of the big telecom operators, and the firm says it's working on three more.
- The firm plans to grow by investing in research and development, which the IPO will partly pay for. It says it hopes to expand its product offering and its geographic base.
- Linkage expects to net about $129 million from its offering of 10.2 million shares. It has reserved $30 million for research and development and the rest for general corporate purposes.
- Revenue in the first half of the year doubled over last year to $66.6 million. Net income increased almost threefold to $15.1 million.
- Preliminary results for the first nine months show year-over-year revenue doubling again to $112.5 million. Net income rose 150% to $25.3 million.
Risks are similar to ASIA - concentration of customer and competition:
- Linkage has, by necessity, a concentrated customer base. Linkage does not have long-term contracts with its customers, and it could suffer badly if any of its relationships deteriorate.
- The firm has a lot of competition for these few customers. Global players such as Amdocs (DOX), Convergys (CVG), Hewlett-Packard (HPQ) and IBM (IBM) all operate in China and have far deeper pockets than Linkage. There are also several domestic rivals.
- Like most Chinese companies planning a U.S. IPO, Linkage has had to overhaul its accounting practices to meet U.S. standards. It has not yet completed this process, and new problems may turn up.
Long AsiaInfo Holdings in fund; no personal position