Check on China: AsiaInfo Holdings, Inc.

Shannon Roxborough | Apr 03, 2008 6:20am EDT | Comment

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The information technology sector is coming of age in China, growing leaps and bounds as the nation's low costs and huge markets help make the Middle Kingdom an important hub for IT services.

One standout in the industry is AsiaInfo Holdings, Inc. (Nasdaq:ASIA), a top provider of telecommunications software solutions and IT security products and services in mainland China. AsiaInfo was founded in the United States in 1993, and moved most of its operations to China in 1995. The company operates in two divisions: AsiaInfo Technologies and Lenovo-AsiaInfo.

AsiaInfo Technologies provides software and IT solutions to all of China's national telecommunications carriers — including China Telecom Corporation Limited (NYSE:CHA), China Unicom Limited (NYSE:CHU), China Netcom Group Corp. (NYSE:CN) and China Mobile Ltd. (NYSE:CHL), the world's largest mobile operator. The company designs and provides infrastructure applications that enable telecom operators and service providers to offer services like mobile email, entertainment, and e-commerce technology and short message service. Lenovo-AsiaInfo focuses on providing information technology security products and services primarily to small and medium-sized businesses. The Lenovo segment's offerings focus mainly on firewall, remotely operated virtual private network technologies and denial of service protection.

In the last quarter of 2007, AsiaInfo inked several major agreements with China's telecom giants. The firm signed contracts to develop a customer relations management (CRM) system for Xinjiang Telecom, a provincial subsidiary of China Telecom; develop a mobile e-commerce platform for CMPak, a subsidiary of China Mobile in Pakistan; upgrade the business intelligence (BI) systems for China Mobile's Qinghai operations; expand China Mobile's business operation support systems (BOSS) in Shanghai, Gansu and Zhejiang; and expand the CRM system of Jiangsu Netcom, a subsidiary of China Netcom.

AsiaInfo has kicked off 2008 much like it ended 2007, with a string of high-profile deals. So far this year, it has signed a contract to optimize China Mobile's BI system in Beijing; entered into an agreement with China Mobile to develop its BOSS in Henan, China's most populous province; won an order to expand the capacity of Shanghai Mobile's BOSS; and signed a contract with China Mobile to integrate and expand its existing BOSS in Inner Mongolia, an expansive autonomous region in the northernmost reaches of the county.

Fourth-quarter and full-year results for the period ended Dec. 31, 2007 reflected the company's recent successes. AsiaInfo beat expectations, reporting a 27% year-over-year and 26% quarterly increase in total revenue, which stood at $40.8 million (analysts' consensus expectations were $35.30 million). Fourth-quarter net revenue increased 38% from the year before and 19% sequentially, while income from operations soared 253% over the the same period in 2006. Quarterly net income skyrocketed 305% from the previous year. Full-year net revenue, operations income, and net income rose 32%, 585%, and 307%, respectively. The company expects first-quarter 2008 revenues in the range of $29 million to $31 million, while the Street anticipates $31.59 million. AsiaInfo projects first-quarter EPS to be $0.07 to $0.08, below the consensus of $0.09.

AsiaInfo appears to be in just the right line of business: telecom software and IT security. A recent survey by The Computing Technology Industry Association found that three-quarters of IT managers surveyed rated security (including firewalls and data protection) as the most important skill for IT professionals. And more than half (55%) of respondents said mobile, wireless and radio frequency identification (RFID) skills will become the most important skills to have within five years.

China's emerging information technology sector has a large security gap that AsiaInfo could help fill. And the telecom software solutions side of the business should reap rewards as the IT industry develops in China and more companies seek to bolster their capabilities and expand their range of high-tech offerings.

Analysts have expressed bullish sentiment on AsiaInfo. On March 4, Kaufman Bros. initiated coverage with a "buy" rating and $15 price target, saying it believes the company has solidified its position as the leading provider of software to Chinese telecom companies. The firm noted Chinese telecom companies are increasing spending to upgrade outdated billing and customer service systems. Roth Capital followed suit on March 7, beginning coverage of AsiaInfo with a "buy."

China's telecom industry is growing rapidly as domestic carriers seek to differentiate themselves from peers in a highly competitive marketplace, according to Steve Zhang, AsiaInfo's president and chief executive officer. Zhang is confident that the company's established leadership position, technical know-how and "deep understanding" of the market in China will make 2008 another stellar year for AsiaInfo. Indeed, the company’s innovative products, best-in-class service and solid relationships with major industry players make it destined to be an ongoing part of the evolution of China's telecom industry.

AsiaInfo shares closed at $11.30 on Wednesday. The stock has traded between $5.77 and $13.42 in the past 52 weeks. Analysts' consensus one-year target estimate is $14.80.