Friday, January 29, 2010

Bookkeeping: Selling AsiaInfo Holdings (ASIA) on the Open After Guidance Disappoints Street

I will be selling the last of our AsiaInfo Holdings (ASIA) on the open as the stock will be gapping down after tepid guidance.  The price is irrelevant as we only kept about $1000 worth (0.05%) of exposure, simply to keep it on our sheets so we keep a closer eye on it.   Quick history - we began the current position about half a year ago, and it briefly became our largest position just as one of its competitors was about to IPO in American markets in early December.  In a surprise move, the companies merged the day before the IPO and ASIA jumped 25% overnight where we sold half the position in the low $30s. 

The stock then went sideways for a month, peaking in the $32s, and was consolidating the huge move it made so there were no issues technically other than a massive 'gap' in the chart created by the overnight surge from the merger.  If you are new to technical analysis, and want to see what a "double top" looks like see the chart below - ASIA made a perfect double top with mid December and Jan 1 intraday highs, and it has been all downhill from there. [double tops are bearish] 

We were willing to buy back some exposure we sold off as the stock drifted back down near the 50 day moving average - taking a chance the stock would bounce. But it obviously did not and about a week and a half ago, our stop loss in the $27.30s took us out of almost the entire position.  Here is what we wrote on January 20th.

This morning a stop loss that had been placed in the $27.30s - which would indicate that thisthe 50 day had been penetrated - triggered... and now there is a a good chance to fill the "gap" around $26.00.

The problem with buying the stock around $26.00 is the chart is much more troublesome so we'll keep our smaller position and monitor it from here. As a buyer of relative strength I would probably be far more interested in adding back to the position north of $28/$29 rather than $26...

Obviously the stock never jumped back up to a position of strength on the chart, so we had no reason to "catch a falling knife".  And our discipline to cut back sharply on a stock that broke support saved us a good amount of money as ASIA looks to be opening in the mid $22s area if last night's after hours action is a good reflection.  This would push the stock right against the 200 day moving average which should provide some support.

Last night AsiaInfo Holdings reported earnings and the stock's recent weakness can now be explained as "those in the know" knew before us that guidance would be relatively tepid. (ASIA had been weak for a few weeks before the rest of the Chinese small/mid cap stocks broke down)  I still find the company very attractive for the long run and the merger helped it become a dominant player in various niches it plays in.  However, the chart is a disaster and aside from an oversold bounce along the way, it's going to take some time to repair the damage.  There are many other companies right now who have far less issues so we'll revisit ASIA perhaps in 60-75 days; there is no reason to keep an extra close eye on it, so we'll exit the entire position and retain that slot in the portfolio for something else.

I thought results were pretty darn solid, and for those with a 3 year time horizon today's selloff should proivde an attractive entry.  While not particulary cheap the company has some excellent growth metrics and the merger creates a powerhouse in its niche(s).

  • Total revenues for the fourth quarter of 2009 were US$76.3 million, an increase of 42.1% year-over-year and 20.0% sequentially. Exceeding guidance, net revenue (non-GAAP) for the fourth quarter of 2009 was US$72.3 million, an increase of 41.8% year-over-year and 18.7% sequentially. The year-over-year and sequential increases were primarily driven by the strong demand from all three of China's major telecom carriers.
  • In the fourth quarter of 2009, the AsiaInfo Technologies business unit, which focuses on telecommunications software and services, contributed 80.4% and 80.0% to total revenue and net revenue (non-GAAP), respectively.  Total revenues for the AsiaInfo Technologies business unit increased 46.9% year-over-year and 16.7% sequentially to US$61.3 million.
  • In the fourth quarter of 2009, the Lenovo-AsiaInfo business unit, which focuses on IT security products and services, contributed 19.6% to total revenues and 20.0% to net revenue (non-GAAP). Total revenues for the Lenovo-AsiaInfo business unit increased 25.1% year-over-year and 35.9% sequentially to US$14.9 million.
Both business lines are performing well.

Gross Margins:
  • Gross margin for the quarter was 57.7%, compared to 53.5% in the year-ago period and 54.6% in the previous quarter. The year-over-year and sequential increases in gross margin were primarily due to a strong contribution from higher-margin software solutions and services. Gross profit as a percentage of net revenue (non-GAAP) was 60.9% in the fourth quarter of 2009, compared to 56.4% in the year-ago period and 57.0% in the previous quarter.
  • Total operating expenses for the fourth quarter of 2009 increased 41.5% year-over-year and 21.1% sequentially to US$29.7 million.
  • (1) Sales and marketing expenses for the fourth quarter of 2009 increased 18.2% year-over-year and 11.2% sequentially to US$12.5 million. The year-over-year and sequential increases were mainly due to higher sales commission expenses incurred upon signing new contracts.
  • (2) General and administrative expenses for the fourth quarter of 2009 increased 25.4% year-over-year and 21.8% sequentially to US$4.6 million. The year-over-year increase was largely the result of increases in share-based compensation related to the performance stock unit awards granted to key employees on March 16, 2009 and the non-recurring merger transaction related fee of US$2.1 million.
  • (3) Research and development expenses increased 86.5% year-over-year and 16.2% sequentially to US$12.6 million. This increase primarily reflects a US$3.3 million R&D expense in the fourth quarter related to a government contract from the Company's Lenovo-AsiaInfo business unit and R&D expenses related to the development of Next Generation Business Operation Support Systems and Next Generation Business Intelligence systems.
Net income:
  • In the fourth quarter of 2009, net income attributable to AsiaInfo Holdings, Inc. (non-GAAP)(4) was US$18.4 million or US$0.38 per basic share. Net income attributable to AsiaInfo Holdings, Inc. (non-GAAP) in the year-ago period was US$10.2 million or US$0.23 per basic share. Net income attributable to AsiaInfo Holdings, Inc. (non-GAAP) in the previous quarter was US$13.0 million or US$0.29 per basic share.
  • Net income attributable to AsiaInfo Holdings, Inc. (non-GAAP) increased 80.4% year-over-year and 41.5% sequentially.
Management comments:
  • "We recorded 42% year-over-year non-GAAP net revenue growth in the fourth quarter and 47% year-over-year non-GAAP net revenue growth for the year. This is especially noteworthy as it comes on top of nearly 40% full-year non-GAAP net revenue growth in 2008. Additionally, in the fourth quarter we announced a merger agreement with Linkage that upon closing will create a market leader in the IT software and solutions space in China, providing a more comprehensive product and service offering to the telecom operators."
Guidance (this is what is causing the stock to sell off as people seem to be expecting continued sequential growth, whereas seasonality will kick in)
  • AsiaInfo expects first quarter 2010 net income from continuing operations per basic share to be in the range of US$0.19 to US$0.20, an increase of 46% to 54% year-over-year.
  • The Company expects first quarter 2010 net revenue (non-GAAP) to be in the range of US$61 million to US$63 million, an increase of 28% to 32% year-over-year. The Company noted that this guidance includes an estimated US$2.7 million merger-related expense.
Analysts had a median estimate of 22 cents, with a range of 19 to 24 cents so the guidance is a bit light on EPS, as it is on revenue ($63.8M on revenue estimated).  With that said, the selloff is in my opinion extremely overdone as 2-3 cents for a company that will be earning roughly $1.20 on the year should not cost so much market capitalization (and this can simply be conservative guidance they plan to beat) but I am not going to argue with the market.  These type of reactions are exactly why I find earnings season to be bemusing / annoying.  The stock will need time to fix the damage done but the fundamental story remains compelling.

[Aug 11, 2009: Bookkeeping - Beginning Placeholder Stake in AsiaInfo Holdings]
[Aug 7, 2009: Niche Play on China Telecom - AsiaInfo Holdings]

No position (within the hour)

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