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China IPO

Longtop Financial Tech IPO

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I didn’t pay much attention to Chinese IPOs listed in US lately. This spring (March) I got into XFML, which is a big mess. Recently I traded WX (Wuxi Pharma Tech), which I think is the best Chinese IPO this year so far. But I am not a biotech/pharma guy, and I felt WX valuation was not cheap shortly after IPO, so I decided to sell it.

Today I happened to read that Longtop Financial Tech (LFT, 东南融通), an IT and software provider for financial services in Xiameng, China, will be listed in NYSE this week. You can read its prospectus here and listen to its roadshow at IPOHome. I have not got into the financial details, but from my preliminary analysis, this is a solid company in a fast growth industry (financial services in China).

From IPOHome, it will be priced between $14 to 16, and will debut this week. Note Goldman Sachs (Asia) will be the underwriter.

IMG_5086
(Customers line up for ATM machines, China Merchants Bank, Shanghai, 2007)

IT service for financial industry is still very fragmented in China. According to its CFO (roadshow), top three players in China derived revenue in USD 28.3 m, 23.8 m and 21.3 m(that’s Longtop) in year 2006, and has 3.58%, 3%, and 2.70% market share, respectively. Top two players are multinational companies. For reference, Jack&Henry (Nasdaq: JKHY) in Missouri (my current home state), engages in similar business. JKHY has a PE of about 50 and maket cap of $2.5 b.

Domestic competitor include Yucheng Tech (YTEC) in Beijing.

Some more backgound From prospetus:

“We are a leading software developer and information technology, or IT, services provider targeting the financial services industry in China. We develop and deliver a comprehensive range of software solutions with a focus on meeting the rapidly growing IT needs of financial institutions in China. According to IDC, an independent market research company, we were the third largest “banking IT solution provider” in China measured by market share in 2006…

Our clients are primarily leading banks in China. We have extensive client relationships with three of the four largest state-controlled national banks, namely, China Construction Bank, Agricultural Bank of China and Bank of China. We have provided in recent years services to eight of the 13 national commercial banks, China Postal Savings Bank, leading city commercial banks in China, and two of the largest life insurance companies in China, namely, New China Life Insurance and China Pacific Insurance Group.

We operate five delivery centers located in Xiamen, Beijing, Shanghai, Chengdu and Guangzhou, two research centers located in Xiamen and Shanghai and 34 ATM service centers located in 20 out of 31 provinces in China. We have sales offices in Xiamen, Beijing and Shanghai. As of September 25, 2007, we had 1,094 employees in China…

The following diagram illustrates our corporate structure as of the date of this prospectus but does not reflect our outsourcing business which we spun off in July 2007. In February 2006, we established Longtop International Holdings Limited, or LTI, with three other shareholders to provide outsourcing services. We acquired the interest of these other shareholders in January 2007. To expand our outsourcing business, we acquired Minecode LLC through LTI in March 2007. In July 2007, we disposed of our interest in LTI and Minecode LLC for strategic business purposes. Our revenues for the three months ended March 31, 2007 and June 30, 2007 include $1.0 million and $4.5 million in outsourcing revenues.”

Risks: of course one can say its dependency on China red hot financial industry can go both ways. We understand nowadays the banks are spending lots of money to upgrade their IT, in order to handle more transactions and customer data. But at certain point this upgrade will stablize. Another thing is the company made some significant acquisitions this year. How they integrate this remains to be seen.

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