Check on China: VanceInfo Technologies Inc.
Over the last decade or so, large PC makers and Western IT giants have invested heavily in the Middle Kingdom, helping China become a major center of computer manufacturing. But the nation's success in the hardware arena has yet to trickle into the software side of the business. That is destined to change.
China's software and technology services industry revenues grew to nearly $14 billion in 2007, an almost 25% increase over the previous year, according to the Ministry of Information Industry. And the Chinese government and domestic software players are committed to gaining a foothold in global markets.
While no homegrown firms currently poses a real threat to the United States’ and India's dominance in software and tech services, one little-known Chinese technology outfit can’t be ignored.
Meet VanceInfo Technologies Inc. (NYSE:VIT), one of China's leading offshore software development and information technology services companies. The firm, which was incorporated in April 2004 and went public in U.S. markets in December 2007, develops software products and provides a broad range of services for software systems, including research and development, application development and maintenance, enterprise solutions, quality control, and globalization and localization. VanceInfo primarily serves corporations based in China, Japan, the United States and Europe, focusing on high-growth industries such as technology, manufacturing, financial services, telecommunications, retail and distribution. Its clients include Microsoft Corporation (Nasdaq:MSFT), IBM Corp. (NYSE:IBM), Hewlett-Packard Company (NYSE:HPQ), Citibank Inc. (NYSE:C) and Motorola, Inc. (NYSE:MOT).
The company has grown its business through acquisitions. In September 2006, it snapped up Beijing Prosoft Software Technology Co., Ltd., followed by the IT services arm of Beijing SunBridges Technologies Development Co., Ltd. in December 2006. In March 2007, it bought out Beijing Innovation Technology Co., Ltd., an IT service provider specializing in R&D services. In May of last year, it acquired a 75% stake in Shanghai Solutions Software Co., Ltd. and purchased an additional 48.99% of the equity interest of Worksoft Japan Inc. Finally, last July, it acquired Beijing Chosen Technology Co., Ltd., a firm that provides various services similar to VanceInfo's.
On March 10, Huawei Technologies, a leading Chinese telecom firm that reviews and ranks its vendors, gave VanceInfo its highest rating for R&D services vendors, a testament to the acceptance rate, timely delivery and management stability of VanceInfo's projects. As the top-ranked company, VanceInfo will receive a 20% billing rate increase and additional opportunities with Huawei.
VanceInfo announced on March 18 the opening of the China Development Center (CDC) in Shanghai, a state-of-the-art facility designed specifically to serve the needs of 3M China, a major customer. Staffed by VanceInfo IT services team, the new center will provide 3M China with IT services and consulting support that will include eBusiness application development, enterprise solutions, data warehousing and business intelligence.
In a prepared statement, Chris Chen, chairman and chief executive officer of VanceInfo Technologies, said the collaboration represented a milestone for the company's IT outsourcing services for manufacturers that will enhance VanceInfo's technical capabilities and expand their footprint in the sector.
VanceInfo posted a strong fourth-quarter and impressive full-year 2007 results on Feb. 27, reporting a 67% jump in R&D service revenue. Earnings came in at $3.1 million, or $0.07 a share, compared with $1.3 million, or $0.02 a share, in the same period a year earlier. Revenue shot up 96% to $19.3 million. Net fourth-quarter income soared to 136% to $3.1 million. Net revenues for the year totaled $62.7 million, up 115.9% from 2006, while net income for the full year was $9.6 million, up 118.7% from the previous year.
The company's top brass forecasts robust growth that will translate into a strong first-quarter and fiscal 2008 (driven by a Chinese economy that continues to boom despite the U.S. economic slowdown). Vancenfo expects to earn $0.07 a share in the first quarter, on revenue of $18.5 million to $19.5 million. Analysts expect earnings of $0.06 a share on revenue of $17.1 million. The firm expects to earn $0.37 to $0.41 a share in 2008, on revenue ranging between $92 million and $96 million, while the Street anticipates earnings of $0.35 a share on revenue of $91.3 million.
VIT shares closed at $6.40 on Wednesday. Since its Dec. 13, 2007 IPO, the stock has traded between $4.90 and $10.95. Though Kaufman Bros. kicked off coverage of VanceInfo on March 3 with a "hold" rating, analysts on average have a one-year target estimate of $10.16.
Granted, China has inherent disadvantages in the software realm. A lack of high-tech infrastructure, hands-on information technology experience and a workforce with good English-language skills (the predominant language of the global IT industry) has left China playing catch-up — by expert accounts, it still lags about five years behind tech-savvy India. But ambitious little VanceInfo (VIT) provides more than a ray of hope for the future of the burgeoning software industry in China.
Maintain a close eye on this small cap.
