Having raised $182.6 million from its inaugural share sale, Longtop Financial Technologies jumped more than 70% above the IPO price when it started trading on the New York Stock Exchange yesterday. And while it retreated from there fairly quickly, in response to a decline in the broader market, the Chinese provider of banking software and IT solutions was still up 52% at $26.60 after five hours of trading.
At the same time, the Dow Jones Industrial Average was down about 1% largely in response to Merrill LynchÆs $7.9 billion write-off due to subprime-related losses. The write-off, which was announced after the US market closed on Tuesday and had already taken a toll on Asian markets, was well above the $5 billion that the US investment bank had flagged earlier. Merrill Lynch fell 8% in early trading and five hours into the trading session it was still down 7%.
LongtopÆs secondary market progress, meanwhile, came as no real surprise after the company had lifted its initial IPO price range by 14.3% at the top end to $14-$16 during the 1.5-week roadshow and then priced the deal at $17.50.
The pattern was very similar to China Digital TV a couple of weeks earlier. That company too raised its initial price range once, priced the offering above the new range and then went on to gain 219% in its first two trading sessions. It has since fallen back somewhat, but still trades 145% above its IPO price of $16.
ôThere is a big buy on China in the US at the moment,ö says one observer, referring to the demand for Longtop.
Like China Digital TV and several other Chinese companies before it (like drug research and development outsourcing company WuXi PharmaTech, real estate brokerage firm e-House Holdings and insurance agency and brokerage CNinsure Inc), Longtop is the first Chinese company from its particular sector to seek a listing in the US û or anywhere outside of China for that matter.
The company focuses primarily on providing IT solutions and software to banks with offerings including solutions that enable banks to interact with their customers through ATMs, call centres and online banking; solutions for executing banking transactions such as payments, settlements and credit card operations; and support for the bankÆs internal functions, including the management of resources, work-flow and risk management.
According to International Data Corp, Longtop is the third largest ôbanking IT solution providerö in China, competing primarily with IBM and IndiaÆs Tata Consultancy Services as well as other international platform providers.
ChinaÆs banking IT solutions market remains highly fragmented, though, and based on 2006 numbers, the top three players had market shares of only 3.6%, 3.0% and 2.7% respectively. The top 10 players accounted for a combined 21.4% of market share in 2006. In addition, the professional players also face competition from the in-house development departments of their customers.
International Data Corp says spending by ChinaÆs banking industry on banking software and IT services will grow at a compound annual growth rate of about 22% between 2007 and 2011. ChinaÆs total bank spending on IT, including hardware, amounted to Rmb36.6 billion ($4.8 billion in 2006. Hardware spending growth is expected to grow at a slower pace of about 8% until 2011, the research firm says.
LongtopÆs clients include three of ChinaÆs big four state lenders û China Construction Bank, Agricultural Bank of China and Bank of China. In recent years it has also provided services to eight of ChinaÆs 13 national commercial banks, several leading city commercial banks, the China Postal Savings Bank as well as to China Life Insurance and China Pacific Insurance Group.
According to a source, LongtopÆs IPO attracted more than 450 accounts and ended up being 40 times covered. The high subscription ratio was partly a result of the smallish size, but more importantly the offering aroused interest from a wide range of investor types, including China funds, technology focused funds and IT services specialists. About 60% of the demand came from the US, 25% from Asia and the remaining 15% from Europe.
ôThe IT services space has a global following, but nobody has had a chance to buy China yet, so the interest isnÆt that surprising,ö the source says, noting that the tech sector in general is also in favour after AppleÆs strong fourth quarter earnings on Monday and its higher-than-expected guidance for the current quarter.
And while the projected growth rates arenÆt as high within ChinaÆs IT solutions industry as in the connectivity access systems industry where China Digital TV operates or in the medical research outsourcing industry where Wuxi PharmaTech is active, Longtop is still expected to generate higher revenue and net profit growth than many of its non-Chinese peers.
This obviously helped support the increase of the price range, which brought LongtopÆs valuation on par with that of its international peers such as US-listed Jack Henry Corp and IndiaÆs i-flex solutions. The final pricing pushed it to a premium. The $17.50 IPO price translates into 24.2 times the companyÆs 2008 earnings, based on US GAAP and pre-shoe numbers, which compares with 22 times for the Indian IT services companies and 21 times for the financial IT services companies in the US.
After the gains made during the first half of last nightÆs trading session, Longtop was trading at a 2008 P/E multiple of 35 times, or at a premium of 59%-67% versus its Indian and US peers.
The company, which was brought to market by joint bookrunners Deutsche Bank and Goldman Sachs, sold 10.43 million American Depositary Shares, or 21.2% of its enlarged share capital. Some 8.53 million of the shares were new, while the remaining 1.91 million were sold by companies controlled by Jia Xiaogong, the groupÆs co-founder and chairman, and by the people behind integration services provider Advanced Business Services (Beijing) who received the shares as part payment when Longtop acquired this company in 2006.
There is also a 15% greenshoe of 1.57 million shares that may boost the total proceeds to $210 million, or 25% more than its initial target. At launch, the shares were offered in a range between $12 and $14, which would have resulted in a maximum deal size of $168 million post-shoe.
LongtopÆs bottom line has been rising steadily to $8.3 million in 2006 from $6.6 million in 2004. In the three months to March 31 this year, it recorded a net profit of $768,000, which was followed by a profit of $4.9 million in the three months to June 30.
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