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China IPO

Two more questions for Longtop

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1) Why it quit the outsourcing biz?
We know outsourcing is a typically low margin business. Interested readers can look at the VanceInfo (formerly WorkSoft), the first Chinese IT outsourcing company listed in Nasdaq. It did IPO recently.

Longtop should not get into the oursourcing business to begin with. I suspect the VCs suggested the company to quit the outsourcing business, and the company did so early this year. This move will improve the profit margin and it will look good on the finanial statement. More importantly, it will save the company resources and focus on its main business: the software and service for China financial industry.

As a side note, by quiting outsourcing Longtop may have avoided the effect of “slowdown” of US financial sector (depends on the type of customers they serve). From I heard from Cisco conference call a while back, the US financial indutry is cutting back on IT spending now.

2) Effect of tightening monetary policy
For example, the raise of bank reserve rate by People’s bank of China. The move was to make sure economy not overheat, and banks should be prudent on its lendings. This will not have effect on banks’ IT spending. Because the bank IT budget is separately from its bank reserve. As I said in my previous post, banks are increasingly rely on sophiscated IT systems for customer relations, marketing and sales, internal management, etc.

I noticed the stock (NYSE:LFT) has not done well at all. It appears to me there is little institutional support at this time. This is understandable considering the weak stock market and credit crisis in financial institutions. Chinese financial institutions larged dodged the “sub-prime” bullet because the Chinese financial market is not open to the world to a large extent.

Keep in mind the stock is not cheap at current price either. At $20, the market cap is about $ 1 billion. The company is expected to have sales of $58 million in fiscal 2007, and $80 million in fiscal 2008. So the forward Price/Sales ratio is about 12.5.

For comparison purpose, Yucheng Tech (YTEC) is the closest competitor in the China financial IT services industry. Here is the long case for Yecheng Tech by Nawar. Good reading.

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