Monday, February 15, 2010

VanceInfo Technologies (VIT) - China's Version of Infosys Technologies (INFY)?

I've had VanceInfo Technologies (VIT) in my pool of "up and coming companies to keep an eye on" for about 4 months now; last week Investors Business Daily did their (as usual) excellent summary of a company, so this would seem a good time to introduce the stock to the website.  This is quite an interesting concept, as its a similar niche to the Indian outsourcing companies that broke onto the scene the past decade - led by powerhouses such as Infosys Technologies (INFY).  While comparing the 2 companies is a huge stretch (INFY $5B in annual revenue, VIT $150M), anyone who invested in INFY in 1999 when it was (split adjusted) $5-$6 has made a pretty penny since.   From an economics perspective I will be interested to see if the Indian outsourcers face the same sort of global wage / cost arbitrage in the next 10 years, that we are seeing in the US, as the Chinese undercut them on price / labor.

Technically, the stock is not in a place to be buying so for now it remains on the 'watch' list; VanceInfo Technologies reports Friday.  With a longer term projected growth rate of 30%, and earnings projected for the year at 51 cents, the price of $17 has accounted for much of that growth; the stock is quite rich up here.  But it was even richer just a month ago north of $21.

Via IBD:
  • Over its six-year history, VanceInfo has made more than a dozen buys, most recently Hong Kong-based TP Corp. in July. As a result, it's now the leading player in China's IT services field
  • .... much of the purpose of buyouts is to build human capital. The company's workers develop and maintain software for Microsoft (MSFT), IBM (IBM) and a host of other clients, so brainpower is its most precious resource.
  • Getting that in China is a competitive business. The education system there has expanded rapidly but is just now catching up in quality, Huang says. Another issue is that so many Chinese seek their fortune abroad. But that may be changing, says Jefferies analyst Joseph Vafi.  "Anecdotally, we're starting to hear about Chinese nationals who had long careers in the U.S. moving back to China," said Vafi, who owns a position in VanceInfo's stock. "That's the same behavior we saw in India four or five years ago."  (I am also reading a lot of stories about this situation re: Chinese educated in US or working in US now seeing more opportunities at home and moving back.)
  • On Jan. 14, Susquehanna Financial Group reported the firm had put 750 postings on China's job boards, which would lead to a 32% increase in its head count. That means that VanceInfo is growing even faster than the estimated 15.5% annual rate for the Chinese IT services industry as a whole.
  • The industry can ramp up this fast partly because it's starting from a small base. VanceInfo's 2009 revenue, which the company will formally report on Feb. 25, was around $145 million by analysts' estimates. And yet it's the biggest player in the field.  That's because China is only just now entering an industry long dominated by India. Players like Wipro (WIT) and Infosys (INFY) are decades old and rake in billions annually. But here, as in so many other fields, China is attracting ever more interest and investment.

  • "Companies doing business in China want a local vendor in China," Huang said. "Some customers have actually tried to bring a global vendor into China, but the Indian firms' Chinese subsidiaries do not function as well."
  • On top of that, domestic Chinese companies are starting to see the logic of outsourcing. VanceInfo does IT work for several major Chinese banks, and telecom Huawei is one of its biggest customers. When Western tech spending hit the skids after the 2008 bank crisis, Chinese customers drove much of VanceInfo's growth.
  • In the third quarter, sales jumped 45% from a year earlier to $40.2 million, while profit climbed 27% to 14 cents a share. Analysts polled by Thomson Reuters estimate that full-year revenue rose 42% while profit grew 27% to 51 cents a share.
  • On average, analysts expect profit to rise 27% this year to 65 cents a share. Next year they see a 29% gain to 84 cents.
  • Vafi believes that VanceInfo's domestic market is entering a "hypergrowth" phase, due to the rollout of third-generation (3G) telecom technology there. But foreign business is also picking up. In September, the company launched an offshore development center with U.S. travel company Expedia (EXPE). Shortly afterward, it announced a deal to build a similar center for Patsystems, a British maker of financial trading software.
  • Europe provides a relatively small part of VanceInfo's revenue, so the Patsystems deal is especially interesting, Vafi says.  "Europeans are always a bit later to embrace offshore outsourcing than Americans are," he said. "And the U.K. has a strong affinity for India."
No position

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