Tuesday, December 14, 2010

Get a Chance to Invest in China's Wipro! iSoftStone Holdings (ISS) IPO off to Hot Start

Ok ok getting the chance to invest in the Chinese version of Indian outsource name Wipro (WIP) does not have quite the sex appeal of investing in China's Amazon.com or China's Hulu+Netflix+Youtube, but we have another hot Chinese IPO fresh off the presses.  ISoftStoneHoldings (ISS) is up some 35% from IPO price creating another day of 'mad money' for the "smart money" who receives these IPO shares and can flip them to the retail segment for a no brainer gain in 10 minutes.   The company has some excellent growth characteristics but is actually not that unique - we highlighted a similar company called VanceInfo Technologies (VIT) in February [Feb 15, 2010: VanceInfo Technologies - China's Version of Infosys Technologies?]  The company has doubled in value since I highlighted it - frankly I lost track of the name in a sea of other positions; it is now worth $1.5 billion.

For comparison VIT is targeting about $209M in revenue for 2010, while ISS has $135M through the first 3 quarters of 2010 - on pace for about $180M.  But VIT appears much more profitable with 80 cents of EPS estimated for '10.

At current price ISS is about a $1 BILLION market cap, which is not too shabby for a company with 200 people and almost no profits - ain't capitalism grand?
  • Ordinary shareholders swung to a per-share loss of 2 cents from a profit of 1 cent.

Probably the more interesting story is the battle shaping up between the Chinese and Indians to take over the back office and IT services of Western companies... India has a huge lead but due to salary inflation in this space over the past decade, China is going to be able to undercut on pricing ... assuming they can provide any similar level of technological prowess.

TheStreet.com did a quick overview of ISS yesterday:

  • There is no escaping the outsourcing trend, especially for IT services. However, what is considered offshore for U.S.-based companies translates into growth opportunities for China. Amidst this global shift, iSoftStone Holdings has emerged as leading IT services provider, assisting both domestic clients in greater China and global clients, primarily in the U.S., Europe and Japan. 
  • ISS generates revenues through IT services, which is its largest segment, followed by its higher margin consulting and solutions segment and its newest line of business process outsourcing, or BPO services.
  • Typically, ISS works with its clients on a non-exclusive, project-by-project basis, serving four target industry verticals that include technology; communications; banking, financial services and insurance, or BFSI; and energy, transportation and public sector.
  • Although ISS does not lock its customers into long-term commitments, it has built strong relationships, currently serving 71 Fortune 500 companies, including 23 located in China.
  • Clearly ISS has been able to build a global customer base; unfortunately, it remains dependent on a small number of major clients, such as Huawei and Microsoft(MSFT), which each continue to supply more than 10% of total revenues.
  • Going forward investors will expect more variety, but these relationships contributed 38.1% and were the driving force behind the 50.2% year-over-year increase in top-line results for the first nine months of 2010.
  • Significant growth in its headcount has allowed it to keep pace with these developing relationships and new client activity, as ISS remains committed to recruiting, training and retaining human capital.
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