Since the merger announcement last week with Linkage Technologies [Dec 7, 2009: Top Holding AsiaInfo Holding Up 25% on Purchase of Linkage Technologies], AsiaInfo Technologies (ASIA) has essentially given none of the huge surge back up.  Looks like that gap will not be filled anytime soon with Santa Bernanke ready to flush the world with US pesos since we've all been naughty this year.  Don't you feel invincible with Ben behind you?

An interesting take on future prospects for the new combined company via WSJ:

  • AsiaInfo Holdings‘ acquisition of Chinese company Linkage Technologies International has created a dominant player in software and services for the telecom industry in China. Now the question is whether AsiaInfo can follow the example of Chinese telecom-hardware giant Huawei Technologies and become a force internationally. The answer is yes.
  • What better foundation for a telecom-software firm to build global growth than China, the world’s largest wireless market with nearly 700 million subscribers?
  • But there are crucial differences between AsiaInfo’s business and corporate structure, and Huawei’s. The cost structures of the software and hardware industries are different, and AsiaInfo is U.S.-domiciled and listed — whereas Huawei is China-based, unlisted and appears to enjoy significant government support. These distinctions require AsiaInfo take a different path to the global stage.
  • AsiaInfo supports China’s big three telecom operators — China Mobile, China Unicom and China Telecom — in a number of areas: billing, customer relationship management, network management and analytics (it also has a smaller IT security business). 
  • Within China, AsiaInfo-Linkage competes with both local players, including Huawei itself and the global leader, Amdocs. But AsiaInfo-Linkage is now the China market leader in most of its core businesses. (which we stated last Monday)
  • There are two reasons that AsiaInfo must now look abroad.  The first is that, despite the vast and growing number of Chinese wireless subscribers, the market for telco software and support is not huge: roughly $1.2 billion this year, according to Susquehanna Financial Group estimates. This is just a sixth of the global total.
  • The combined firms’ revenue will be around $500 million next year. Maintaining a growth rate near AsiaInfo’s historical levels (it will grow close to 50% this year) demands expansion into new products or new markets.
  • Recent corporate activity — including a contract with China Mobile Pakistan and a majority stake in a Singapore JV — indicates the company may be leaning toward capturing footprints in emerging Asian markets.
  • Another reason why it’s necessary for AsiaInfo to look abroad is that 80% of its own revenue and almost all of Linkage’s come from the three Chinese telcos.

  • One explanation behind Huawei’s international success is that it enjoys strong government support within China. Rival telco-equipment makers wonder aloud about government subsidies.
  • Now, AsiaInfo was founded in the U.S. by U.S.-educated Chinese entrepreneurs and is listed only on Nasdaq. So one might legitimately ask whether AsiaInfo will enjoy the same advantages that Huawei has (to be fair, it is difficult to tell what help Huawei has received; the firm’s disclosures are limited to a very short annual report featuring unaudited financials and lots of glossy photos).
  • There is little evidence, however, to suggest that the Chinese government is anything but enthusiastic about the return of Western-educated favorite sons like AsiaInfo CEO Steve Zhang. And many of the technology companies that are sources of national pride in China, for example and, are similarly founded by returnees from the West, and are listed abroad.
  • On the other hand, as AsiaInfo grows, it will not have the same cost advantages that Huawei has used to bludgeon Western rivals. In telco-software services, as Susquehanna analyst James Friedman points out, you need bodies on the ground in the countries you sell into, at a scale much greater than in hardware. Low-cost manufacturing and operations within China are therefore less of an advantage.
  • Yet AsiaInfo’s U.S. listing and the accompanying transparency of its disclosures gives it an advantage that Huawei lacks: timely access to Western capital in various forms. If AsiaInfo is going to expand globally, it will need more capital.  With both the equity and debt markets suddenly open and hungry for risk and emerging-market exposure, AsiaInfo can get the money it needs. It should start asking for it.

Long AsiaInfo Holdings in fund; no personal position