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Friday July 30, 2010
Longtop (LFT): Invest in China's financial services
by Timothy Lutts, Cabot Stock of the Month  Longtop Financial (LFT), which was the first Chinese software company to be listed on the NYSE, is a major provider of software and services for the Chinese financial services industry. It serves three of the big four state-controlled banks, namely China Construction Bank, Agricultural Bank of China and Bank of China. It provides services to most of the 13 national commercial banks. Longtop also serves two of the largest life insurance companies in China, New China Life Insurance and China Pacific Insurance Group. Historically, much of Longtop’s growth has been achieved via acquisitions; there were nine in the past four years, and there’s been one this year. But even if there are no more acquisitions, we believe the company’s growth is ensured, simply because it’s connected so closely to the centers of the Chinese economy. 
Headquartered in Beijing, Longtop has six solution delivery centers, three R&D centers, and 84 ATM service centers in 27 of the 31 Chinese provinces. For its banking customers, Longtop has a wide range of software products, from the most basic, which perform core functions like accounts management and cash management, to the most exotic, like decision-making support systems, credit risk analysis systems and anti-money-laundering systems. For its insurance customers, it offers a full range of insurance product lines, as well as data concentration and integration software. And for growing numbers of companies outside the banking and insurance sectors, Longtop offers management software, customer relationship management (CRM) software and business processes software that can help an enterprise be managed more productively. Longtop was founded in 2000 and has grown revenues every year since. It’s grown earnings every year since 2006. In the quarter ended March 31, which was the final fiscal quarter of 2010, revenues grew 66% to $43.1 million, while earnings grew 33%, to $0.28 per share. Like most successful software companies, Longtop’s profit margins are high. Over the past two years, they’ve averaged 45.3%, and they were 37.8% in the latest quarter. As a result of this, plus the expectations for the company’s growth, the stock’s valuation might be considered high, too. Its price/earnings ratio is 26, while its price/sales ratio is 12. But the chart tells us investment risk is low today, and that’s a big reason we chose to feature the stock today. First, LFT began trading in late 2007, so it’s not yet well known, which is good; it means there are more potential buyers than sellers. Second, the stock is no higher than it was at the start of the year, which means it’s a much better value. And third, the market weakness has just pushed LFT below its uptrending 200-day moving average for the third time this year, which presents a great opportunity to buy low and hold on, as Longtop evolves into the king of the Chinese financial software industry. Learn more about this financial newsletter at Timothy Lutts' Cabot Stock of the Month. |
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