The Info on AsiaInfo

12/02/2005 12:00 am EST

Focus:

Mark Mowrey

Senior Analyst, Al Frank Asset Management

Mark Mowrey is the editor of TechValue Report, a technology focused advisory service from the exceptional Al Frank funds group, which also publishes The Prudent Speculator. Here, he looks at an out-of-favor play, AsiaInfo, that provides IT services in China.

"Given our long-term, buy-and-hold, thick-or-thin, mate-for-life strategy, we rarely swiftly react to major downside moves in our stocks. Take the 39% drop in AsiaInfo Holdings (ASIA NASDAQ) shares since late June. What’s behind the dramatic decline? Investors have been annoyed by recent revenue regression, and reacted particularly negatively to the company's third quarter results. Revenue dropped 7% sequentially, but was up 25% on the year to $25.2 million. Gross margin improved over both periods, to 43% from 41% in the prior quarter and 42% a year ago.

"Operating income, however, fell into the red, as the company integrated Lenovo-AsiaInfo. And Lenovo-Asia's contribution to revenue, at 26% in the quarter, was below the 30% that prior guidance had called for. Management faulted the integration for the miss in that group's input. Further, the company said it was selling its human resources and business intelligence groups, representing about $0.5 to $1.0 million in revenue per quarter, and taking a charge in the current quarter of between $18 million and $23 million to write down.

"It would seem investors looked at the figures, questioned the trend in profitability, worried about what the latest business sales and write-downs meant, feared further asset sales and write-downs, wondered when growth would resume and dumped the shares. They should have listened to the conference call. After the restructuring, management believes revenue could grow in the telecom business 8-10% in 2006, with the security business (Lenovo-AsiaInfo) gaining 25-30%. Full-year 2005 revenue is expected to come in between $86 million and $88 million, of which 65% is expected to be comprised of telecom revenue and 15% to 18% of which is expected to be security-related revenue.

"Two more business sales announced earlier this month reaffirmed management's intention to focus on telecom and security. Though it seems investors still aren't buying the strategy, instead awaiting results that show that it's working. For our part, we believe that efforts to time revivals prove mostly fruitlessif not detrimental and that we'd still rather always be early to a game than miss it entirely, backed up by our 28 years of 20%+ annual gains.

"Meanwhile, the recent activity in ASIA shares has not dramatically altered our take on the company, while recent strategic moves have. Management optimism for 2006 suggests operations for the most part retain positive momentum as the Chinese telecom market continues to expand and AsiaInfo gains a greater share of telecom and security services dollars. For now, we remain buyers of the shares. Of course, we don't overlook the fact that ASIA's balance sheet shows no long-term debt and nearly $3.00 per share in unencumbered cash. For now, our target prices is $8-$9."

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