03-03-2008 YTEC - Yucheng Technologies Limited
CURRENT PRICE: $16.44
TYPE OF PLAY: SECTOR MOMENTUM /GROWTH / FUTURE PROSPECTS /VALUE
Yucheng (NASDAQ: YTEC) provides a comprehensive suite of IT solutions and services to Chinese banks including web banking, call centers, core banking systems, foreign exchange and treasury management, and other management-related IT solutions. It is also a leading third party provider of "Point of Sale" (POS) merchant acquiring services in partnership with banks in China. Point-of-Sale terminals are machines that accept credit card purchases at the merchant locations.
In their most recent quarter, YTEC reported record consolidated revenue of US$23.5 million, an increase of 57% quarter-over-quarter and 89% year-over-year with NON-GAAP Net Income for Q4 2007 increasing 88% sequentially and 72% Year-over-Year. They commented that the growth was robust in ALL segments. They have guided consolidated revenue for 2008 to be between US$71.5 million to US$74.5 million, and NON-GAAP net income to be in the range of US$14.7 million to US$15.2 million, which translates to approximately 0.90 EPS.
The most compelling and we feel unseen part of this business going forward is their Point-of-Sale merchant terminals. They began rolling them out last year with just under 9,000 and have recently increased their forecast to have 25,000 total terminals this year. YTEC gets a percentage of each purchase paid for on these machines. In the USA and Europe it is considered the norm and credit card machines are in every store, but China is just starting to come into its own area. YTEC has partnered with China Merchants Bank (The largest credit card issuer; market share: 40%) on this endeavor. Obviously this is going well as the terminals continue to gain wide acceptance at a very rapid pace. Furthermore, the fact that they won the 2007 MOST OUTSTANDING PERFORMANCE Award from China Merchants Bank is evidence that this partnership is strong.
We liken the potential for these Point-of-Sale terminals to that of MasterCard (NYSE: MA) or Visa (soon to IPO). They get small fees as a percentage of each transaction as well. These carry 0 debt or consumer risk and will continue to grow as China's economy and financial system revolution moves forward. It is important to also consider how many of these merchants will have larger than normal credit card purchases in their store from tourists and visitors in the upcoming Olympics. As they move from the rollout phase to the promotion phase later this year, they expect the Point-of-Sale terminals to be a contributor to earnings going forward.
While growing their business at a rapid pace, YTEC has also forged strong relationships with key contract wins at many large banks and have continued to build on those. Here is a customer list
In the conference call they stated that they see tremendous opportunity in the small banks and rural credit unions. They also are seeing higher margins in these areas because of the fact that smaller banks are more likely to purchase "out of the box" complete solutions that don't require the vast level of customization and integration that larger banks do.
Just last Friday the market showed its appetite for the financial sector in China by rewarding China Online Finance Company (NASDAQ: JRJC) with a 24% one-day gain after their earnings.
YTEC management has aligned its own interest with the shareholders. 46 senior and middle management are currently holding approximately 34% of total outstanding shares. There is also a growing presence of other institutional holders as seen here .
We recommend taking a look at this presentation by YTEC as a part of your further due diligence process: Click Here
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Links for further reading:
YTEC homepage
SEC filings for YTEC
General YTEC statistics
