Longtop Financial Tech IPO

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.


(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.

A daunting task for QDII & China Invest Co.

No. I'm not kidding. Big money (billions of dollars) usually is a good thing, but not easy if one wants to beat market return in a certain time. You can ask Charlie Munger (Berkshire's vice chairman) and he will tell you Berkshire is going to make a (market+2%) annual return from now on, according to the Q&A of his latest annual conference. For reference, Berkshire (BRK.A) has beat S&P 500 by 10% compound-anually for last 40 years.

Now Mr. Lou Jiwei, head of China Invest Co., will manage a $200 b fund. He can buy half of Exxon Mobile or GE using that money. Or, if Warren agrees, Lou can buy the whole Berkshire.

QDIIs, China AMC, China South, and Havest will each have $3 to $4 billions. Today I heard Shanghai Intl Fund Management Co. 上投摩根 attracted CNY 100 b ($13.5 b) subscription for its QDII focus on Asia pacific. They are both having the problem of "starting big". A problem nice to have, nonetheless it IS a problem. One thing for sure is QDII can not expect to get the return of their sister funds investing in domestic A share, many of which already got +100% year to date (YTD).

This reminds me of one phenomena in the US and Hongkong stock market lately. Many Chinese stocks has gone up significantly, especially those blue (red) chip stocks such as Petro China (PTR, 0857.HK), China Life (LFC, 2628.HK, 601628.SS), ICBC (1398.HK, 601898.SS) etc. Although those Chinese stocks still trade at a discount in Hongkong (and thus NYSE), compared to Shanghai A share market, the gap has been closing.

Maybe some smarter guys are getting those cheaper shares in Hongkong and New York, in anticipation that QDII and China Invest Co. will come and pick up those same shares? Because those companies are familar to QDII guys, thus they will feel comfortable investing the money?

If QDII can not get ahead on Chinese ADRs, where can they find the edge?

Shanghai Composite Index reached 6000

Today is Oct 15, 2007. Shanghai Composites Index continued to defy the gravity, amid the central bank (People's Bank of China) raised bank reserve rate by 0.5 again in the weekend. The composite index closed above 6000 (Sina) for the first time.

Interestingly, history shows the CPC congress is bad for the stock market. Here is one article goes into the details of stock market performance during past CPC conferences. Today marks the opening of 17th CPC congress.

I'm not going to predict the market, either from historical perspective or futuristic view. As a famous investor once said, if history can be used to predict the (future) stock market, all the librarians (assume they read history books in the library) will be rich :-)

What to read from PE ratio?

PE ratio, stands for the stock price vs. earning per share ratio, is the most commonly used (and mis-used) ratio in the investing world. I saw this PE ratio question at trader168 couple days ago, the question goes like this:

BX P/E: 1.97
MSFT P/E: 21.15
JAVA P/E: 46.01
BIDU P/E: 195.95
VMW P/E: 268.98

为什么PE比能差这么远？不同行业之间的PE是不是没得比？
Why the big difference on PEs from difference companies? Is that true that we should not compare PEs from different industries? (my take: that's true)

目前PE还算个有用的指标么？
Is PE a still usable indicator? (my take: yes. If used properly)

I think the thread right below the Question is very good. But I would like to add some of my own thoughts. I think as we get more financial indicators, such as EBITDA, cash flow etc., the good old PE is still revelant. Because at the end of the day, we need to evaluate (whether a stock is expensive or not) by relating to its intrinsic value. Earning is one important factor (if not the most important).

High PE ratio usually means investors are optimistic about the future growth of the companies. Because if the earning holds consistent, it will take 196 years for an investor to get back what he/she paid for BIDU today (assume the currency value does not change, for the sake of simplicity). I believe even the most optimistic investor does not expect he/she live 196 years in today's world. The expectation is Baidu(BIDU) will grow its earning 100% or more year over year, and eventually the PE will come down to normal level (say 50). I think Jim Cramer's simple rule for PE is a good one: Cramer says he would buy a company's PE not exceeding twice its growth rate, e.g., if a company grow 20%, he would buy it if its PE is under 40.

I also like to take one lesson from Peter Lynch, who is a mutual fund legend. In his "One up on Wall Street", Peter says he won't buy the hottest company in the hottest industry. That's usually a company has a high PE, and he used EDS as an example.

If we apply those rules to BIDU, VMW, or HMIN (PE: 200), WX (PE: 100), I think long term investors should stay away from them, for now. For short term investors (or speculators), that's different. They just need to make sure selling it when the bubble burst.

Buffett and PetroChina

These days "Buffett sold PetroChina stocks" are all over the news, especially in the Chinese news media. After all, Warren has the best track record among stock investors in our time. But, what should we, average investor, read from this news? Or (on the other hand) can we simple ignore this news?

First let me correct the news headline. I think we should say "Buffett reduced his stake in PetroChina H shares", from about 11% to 5.5% of floating PetroChina H shares. Second we should not discount Buffett's move here. Unlike Greenspan and many others, he is the guy does real investing, and beat the market (S&P 500) consistently. Of course I'm not saying we should go to another polar: follow him blindly.



I think, the real reason is Buffett felt PetroChina stock (0857.HK, or NYSE:PTR) , closed at about HKD 14.26 and has PE of 18 on Oct 09, is becoming expensive. The stock may continue the uptrend for a while, amid the Haigui of PetroChina, and flood of QDII funds approved lately. But our hero Warren, bought 0857 at around HKD 1.60 in 2003, wanted to lock in his profit. I think this is a smart move: give up some last-leg runs; avoid the potential down side of China stock market (boy, isn't that hot?) or Oil (has been hot since 2005). We should note he has significant amount (11%) of H shares. It takes some time to sell his 0857 postions.

Last but not least, I could like to ask a question: since Petro China is also traded in NYSE as ADR (PTR), why did not Buffett take the trouble (go across the world) bought and sold Petro China stocks in Hongkong?

Recent Chinese IPOs in NYSE and Nasdaq

From the bbs at world famous mit. Thanks to Author: capcase (gotmail). I'm putting my comments at the end.

Here is the original article in Chinese, the original title is "china IPO stocks". For English, cnanalyst.com has a nice table which tracks Chinese ADRs YTD performance. So check out from there.

下面是一个简单的表格，列出了2006年12月20日至今在美国上市的中国企业的名单和大致情况。更详细的情况无法在这里列出，有兴趣的读者可以查询Bloomberg, Yahoo! Finance和China Analyst,即可得到比较详细的英文资料。

橡果国际(ATV), NYSE上市，融资1.19亿美元，IPO总回报9.5%，主承销商为美林、德意志银行；

中国医疗收购公司(CHM)，AMEX上市，融资5100万美元，IPO总回报-6.67%，主承销商为Ferris Baker Watts;

中电光伏(CSUN)，NASDAQ上市，融资9350万美元，IPO总回报-39.90%，主承销商为美林；

易房中国(EJ)，NYSE上市，融资2.01亿美元，IPO总回报53.2%，主承销商为瑞士信贷、美林；

晶澳太阳能(JASO)，NASDAQ上市，融资2.25亿美元，IPO总回报178.3%，主承销商为CIBC, Piper Jaffray;

圣火药业(KUN)，AMEX上市，融资140万美元，IPO总回报8.57%，主承销商为WestPark;

赛维LDK(LDK)， NYSE上市，融资4.7亿美元，IPO总回报142%，主承销商为摩根士丹利、瑞银；

完美世界(PWRD)，NASDAQ上市，融资1.89亿美元， IPO总回报73.7%，主承销商为摩根士丹利、瑞士信贷；

侨兴移动(QXM)，NYSE上市，融资1.6亿美元，IPO总回报-18.4%，主承销商为瑞银；

先声药业(SCR)，NYSE上市，融资2.26亿美元，IPO总回报-3%，主承销商为高盛；

林洋新能源(SOLF)，NASDAQ上市，融资 1.5亿美元，IPO总回报-14.4%，主承销商为高盛；

三生药业(SSRX)，NASDAQ上市，融资1.23亿美元，IPO总回报-10.3%，主承销商为瑞银；

同济堂(TCM)，NYSE上市，融资9900万美元，IPO总回报-1%，主承销商为美林、瑞银；

天合光能(TSL)，NYSE上市，融资9800万美元，IPO总回报160.5%，主承销商为美林；

药明康德(WX)，NYSE上市，融资1.85亿美元，IPO总回报115.1%，主承销商为瑞士信贷、摩根大通；

新华财经(XFML)，NASDAQ上市，融资3亿美元，IPO总回报-52%，主承销商为摩根大通、瑞银；

天威英利 (YGE)，NYSE上市，融资3.19亿美元，IPO总回报93.7%，主承销商为高盛、瑞银。

My take on these IPO stocks: first I have to admit that during this period I have not followed the Chinese IPOs listed in the US market very closely. There are lots of solar stocks. But I don't like them because they are mostly low cost manufacturers, and they enjoy a boom mostly created by the solar-ennergy policy in the Europe. Other companies I know a thing or two.

ATV: their revenue is mostly from selling domestic brand cell phones in TV. I don't see much potential there.

EJ: the largest real estate broker in China, it gets most of its revenue from new home marketing. Its client include Vanke, the best and No. 1 real estate developer in China. I may have under-estimate it in my previous posts.

QXM: the cell phone arm of Qiao Xing (XING), I don't see much upside for domestic cell phone makers. Nokia and Samsung are the king and queen here.

WX: I like its business model (outsourcing). However, we should keep an eye on the competition.

XFML: I really don't want to spend any time on it :-)

The trend of Chinese IPOs: last year the goverment tightened the rules for companies to seek oversea IPOs. Also considering the recent boom of A share and H share market, more and more companies are trying to list Shanghai/Shenzhen, or Hongkong. Alibaba is latest example. But US exchanges NYSE and Nasdaq are not just waiting, especially NYSE.

From company side, I think some companies (EDU, MR) made the right choice to list in NYSE a year ago: not simply from the raise of capital; it also raised the company profile quite a bit in the market.

Crocs, Mindray and QDII

The Crocs (CROX) stock is on a roll lately, as it's closing 3rd quarter and holding two investor conference (link to webcast) in NYC and London. I added some more CROX last week when the escalator accidents is on the news. Another reason is I sold WX. I think both CROX and WX are good long term but I want to bet on "more sure" things.

Mindray (MR) has also done well lately. Incidently it's also holding a conference in the US. At this time the fastest growth will from the US market. Chinese domestic market will also have some growth but the goverment still yet to roll out reforms in the health care (hospital) industry. Notheless I think (for the good or bad) Chinese patients still got to see doctors, so I'm not worried about MR's prospect in China.

Another hot thing in China equity investing is QDII. QDII stands for qualified domestic institutional investors. Basically Chinese investors can buy QDII products offered by the banks, and banks in turn will invest the money in overseas markets (bond, or stocks). Lately this is hot as the "Open H shares to domestic investors", combined with mutual fund getting QDII license (and quota). Those two events raised awareness of QDII.

The rapid rise of Shanghai composites index also encouraged some rational investors to move money overseas. Nobody wants to be the last guy to hold the hot potato. I read in the news Southern Fund oversold its QDII, it raised 49 b Yuan in its first day.

But if we think it more seriously, it will be a daunting task to manage it. It's a $6.5 b fund after all (a large mutual fund in US standard). And they don't have any direct overseas investment experience before that! I won't put my hard earned money to an un-experienced team and hope them to bring back some magic return, will you :-)

My investing journey III: 2004 to 2005

After I got some moderate success on OPSW and GE in early 2004. I got a bit excited.

If I could use one word to summerize what I did my acitivies on stocks in those two years, it's speculation. I did all kinds of speculations, luckily I did not get into really dangerous zone: margin, short and options. So my loss is still limited (a few thousand dollars each year). I did the following speculations:

1) Bet on earning: from PALM, Redhat (RHT), NetEase (NTES) to more speculative plays such as Look Smart (LOOK), the9 (NCTY), I never made a dime on betting ERs. The common scenario is I bought them right before the earning. The stock price already reflected best case scenario. Even if the company came out with a blow out (good) earning, there wouldn't be much upside. But in reality 100% of time they did not beat the estimate by wide margin. So...I had to sell the stocks after earning to limit my loss.

2) Secondly, I bet on IPOs. I bought the following new IPO stocks: 51job, shopping.com, Jamdat, Ninetowns (NINE) and Shanda (SNDA). I had oppertunity to make money on the first three because they all went up after I buy. But I did not hold the 51job and Jamdat long enough (see my stock lesson iv post), held shopping.com too long. As to NINE and SNDA, I did not have any chance, but they were in downward trend ever since I bought them.

3) Pure speculation: IPIX. Does anyone still remember this one? It was a hot stock in a short time in 2004/5. Just like the EFUT we had last year (2006).

4) Another thing I did is "sympathy move". For example, I saw this Netscreen got bought by Jupiter Networks, so I looked for its competitor Rainbow. Unfortunately, this never worked.

5) Get the money back. So I lost money in NTES (bet on earning), I tried to get it back by betting on NCTY's earning. That did not work out either. Because at that quarter online game companies all missed the earning estimates (industry cycle).

These are my speculation stories. I don't think speculation is a sin for investor, but in order to make money, we need to speculate intelligently. Not blindly, or emtionly.

Last but not least, let me quote a word from a Chinese fund manager:

Engage or make friends using your feelings (and emtions); don't invest in stocks purely out of emotion.