According to MarketWatch Longtop Financial Technologies Ltd. (LFT) initially priced at $17.50, up from the revised range of $14-$16, and up substantially from the earlier reported range of $12-$14. The stock closed today at $32.40, up 85%.

According to the story:

The resulting market activity sent shares of Chinese software maker Longtop Financial Technologies Ltd. (LFT) up 85% Wednesday, the second-best IPO debut of the year, after athenahealth Inc.’s (ATHN) top 97% gain. Meanwhile, Vanguard Natural Resources LLC’s (VNR) stock fell below its IPO price.

On Tuesday, a similar theme played out: Chinese jeweler Fuqi International Inc. (FUQI) rose 16% on its first day of trading, while Kansas petroleum refinery CVR Energy inc. (CVI) gained 7%.

Longtop, based in Xiamen, China, closed at $32.40 a share on the New York Stock Exchange, up from its IPO price of $17.50. It sold 10.4 million American depository shares at a price above its expected range of $14 to $16, which had already been raised by $2 last week.

Based in Xiamen, China, Longtop is a software developer and technology services provider that focuses on financial institutions in that country. It provides technology services and creates both standardized and custom-designed software for banks in China, including three of the four largest state-controlled banks: China Construction Bank, Agricultural Bank of China, and Bank of China.

I am just speechless.  I do have some tulip bulbs and an eCompany’s assets to sell if anyone is interested.

Technorati Tags:  China, China Outsourcing

I continue to be a bit stunned by how quickly China has gone from being “the mysterious threat in the east” to being just another opportunity to do business.  While I’m not one hundred percent on board with Mr. Friedman’s flat world utopia, I do believe that China’s economic ascent will benefit a lot of people.  Nevertheless, I am more than a little surprised by some of the people that are jumping on the bandwagon.  I noticed the following blurb in the September 28, 2007 print edition of the Silicon Valley / San Jose Business Journal, at the bottom of page 33.

Chamber plans China trip

The Salinas Valley Camber of Commerce is sponsoring a trade mission to China from March 10-18. Cities to be visited include Beijing, Hangzhou, Suzhou and Shanghai.

An orientation session will be held on Oct. 4 at 4:30 p.m. in the Laurel Inn’s community room.

I lived in Carmel for nearly two years, and I think that Monterey County is truly one of the most wonderful spots on our planet.  It’s great that these folks are going to get a chance to experience China first hand.  However, one can’t help but wonder whether the “China Opportunity” story has gotten a bit overdone when the fine people of the Salinas Valley Chamber of Commerce are dispatching a trade mission to the Middle Kingdom.

It has been a very long time since the agricultural industry paid my salary, but I find it hard to believe that shipping fresh spinach to China is economically viable (although I guess that one could view it as a sort of potential retaliation).  While I applaud their moxie, I’m skeptical that they will have an opportunity to meet with high-level government officials, let alone actually trade directly with China.  The last time that I visited, Fisherman’s Wharf in Monterey did not appear to be set up as an international port.  Unfortunately, I think that dealing with China is still something that needs to be left to professionals who understand how to operate within that environment.

Technorati Tags:  China, China Outsourcing

I saw this blurb in EE Times today.

Texas residents drop contamination suit against TI
Loring Wirbel

EE Times
(10/18/2007 9:34 AM EDT)

DALLAS — Attorneys representing the Hamilton Park neighborhood, southeast of Texas Instruments Inc.’s headquarters, in North Dallas, have decided to drop a civil lawsuit claiming contamination of residents’ groundwater. Three successive tests of toxic plumes have failed to show plume migration into the neighborhood.

When the suit was filed in June, both the U.S. Environmental Protection Agency and the Texas Commission on Environmental Quality said they failed to spot significant migration of tricholorethane or trichloroethylene into the area.

TI does not dispute the existence of the plumes on its own campus and nearby areas. But the legal firm of Ted Lyon & Associates decided to dismiss the suit, after three rounds of testing failed to indicate any migration of the plume into the neighborhood, a representative of Ted Lyon told the Dallas Business Journal.

Let me see if I understand this.  They filed the suit in June, apparently without verifying that the contamination actually existed in the neighborhood…?  Apparently Mr. Lyon and his associates think that they are Erin Brockovich.  With legal geniuses like this working our legal system, we’re clearly positioning our domestic industries to compete with China.

It’s kind of ironic.  Billions of bytes have been consumed writing about the environmental woes in China.  Sadly, in many cases, the local residents are powerless to do anything about the contamination.  On the other hand, in the U.S., we haul one of our leading technology companies to court for environmental issues that cannot be shown to actually exist.  Perhaps I’m going to have to rethink some of my positions on which country is going to be the dominant economic superpower in the 21st century.

Technorati Tags:  China, China Outsourcing

The Wall Street Journal had a great story on the explosion of the Chinese equities market (sorry, subscription required).

WUHAN, China — China is in the throes of a stock-market frenzy that looks increasingly unsustainable. Chinese stocks have nearly sextupled in value in just two years and set yet another record yesterday, when the benchmark Shanghai Composite Index catapulted above 6000 for the first time.

Of course, what goes up may come down…

Big unknowns loom over the market, starting with whether China is in a bubble that’s in danger of popping. But there is strong evidence that even if the boom ends with a crash, China’s investing frenzy will also leave behind much lasting good, because it is helping build a modern, market-driven financial system.

I thought that some of these statistics covered in the article were particularly interesting.

The $3.7 trillion value of stock listed on China’s Shanghai and Shenzhen exchanges at least equals the size of the country’s annual economic output, a ratio historically seen in the U.S. This year, China’s markets have had the world’s highest volume of shares traded, and are on track to raise the most money of any exchanges through stock offerings.

and

Stock markets in China are dominated by as many as 50 million individual investors, who are responsible for about 70% of the trading. That is the reverse of Western nations, where big firms set the tone.

This last tidbit certainly suggests that the game isn’t being played by professionals. I guess that there are people who would argue that the pros can be wrong, but when the stakes are this high, I would prefer that some seasoned people who are actually paid for expertise, rather than for luck, were driving things.

As one can see from my previous posts, I’m very nervous about investing in China.  Sometimes it’s hard for me to reconcile this unease with the fact that I’ve made working with China the primary theme of my career for several years.  Like everyone else, I truly appreciate the opportunities and the possibilities in China.  I’ve put a lot of my own time and money into building up businesses around China, but I’ve always tried to maintain, at least the illusion of control.

I’m sure that investment firms that are able to cultivate insider relationships within China, that have the resources to distribute their risks broadly and that can support a lot of “feet on the street” over their to look after their investments will be very successful.  I just wonder how much chance the average individual investor has of actually investing - as opposed to flat out gambling in China.

Technorati Tags:  China, China Outsourcing

I noticed an article in The Globe and Mail, a newspaper in Toronto, describing the efforts in Vancouver to become a Gateway to China.  The article is well written, and contains several interesting bits of information, including:

“But it is impossible not to see the growing gap as a symptom of the kind of complacency that Mr. Woo decries. Consider also the disturbing fact that Canada is losing ground in Asia. Two decades ago, Canadian business had a market share of 2.5 per cent, a robust amount considering the size of this country’s economy. Ten years later, Canada’s market share had fallen to 1.7 per cent. And today, as opportunities in China mushroom, Canadian business has less than 1 per cent of the market, and is fading to the point of irrelevancy.”

I wonder why Canada’s market share of China exports is shrinking by so much.  I also wonder who is benefiting.

Anyway, the globalization aspect that hit closest to home for me was the following:

“Times are good in booming B.C., so it’s easy enough to let that long-term peril, however serious, slip off this quarter’s to-do list. There are exceptions, one of the most notable being Next Level Games Inc., a Vancouver video game developer that has made expansion into China a cornerstone of its strategy for dealing with the overheating labour market in B.C., the threat of a rising Canadian dollar and the increasing demands of the newest gaming platforms.

The company has set up a 12-person operation in Beijing to produce the art for its video games, the animation that meshes with computer programming. After a year, CEO Douglas Tronsgard says his firm sees it as an unqualified success. The firm’s latest video game for Nintendo, Mario Strikers Charged, is a bestseller in Japan. And the relatively cheap salaries of the Chinese artists - half the cost of their Canadian counterparts, even though they’re being paid top wages in China - means that the dollar’s surge past parity is of no great concern to Next Level.”

While I was happy to see that they were successful, it does poke a hole in part of my story that western companies will find significant challenges in setting up small captive labs in China.  Normally, I would strongly advise someone like Mr. Tronsgard to consider outsourcing to one of the excellent game development art studios in China.

I continue to be stunned by Longtop’s announcement.  According to the latest news, they expect to raise approximately $136M from this offering.

Before I go any further, I should take a moment to distinguish between investing, which I define as buying an asset, or a portion of an asset, with the expectation that it’s value will increase over time, and gambling.  Gamblers put their money on the table and hope that chance will favor them.  Investor’s buy an asset with value and expect that market forces (and sometimes hard work) will increase the value of the asset.  I respectfully submit that westerners who buy the ADS based offering from Longtop are playing the lottery. They are not investors.  They are not leveraging their resources to create more value.  Here’s why…

When you’re buying into a software outsourcing company, and you remove all of the good will, you’re basically left with four primary asset categories:

• Real estate
• People
• Client lists / Books of business
• Processes & reusable IP

Let’s think about each of these within the context of Longtop Group / Longtop Financial Technologies.  We need to carefully consider what we’re actually buying when we pick up these shares:

• Real Estate - While they talk about using some of the investment to purchase commercial real estate, let’s not forget that property rights in China are quite different from what we are accustomed to in the west.  There was a time, not too long ago, when the government simply took all of the real property.  The government is currently promising to respect property rights, but it is a risk, so the value must be discounted for the risk.  Finally, it will be important to verify that title to the land and buildings actually remains with Longtop Financial Technologies, rather than getting registered with one of the other group companies.
• People - While well run Chinese outsourcing companies are able to control attrition, one would need to have access to insider level HR data to really know whether the current staff are likely to stay.  I do not want to be plunking down my portion of $136M for staff that will happily go to work for a competitor offering fifty cents more per hour.  Another unknown is the actual staffing level within Longtop Financial Technologies.  Many of the outsourcing organizations that are subsidiaries of established Chinese companies take massive liberties when it comes to counting employees.  It’s not uncommon for them to claim to have thousands of engineers, because they count the engineers in the parent company and any sister companies.  The, admittedly weak, rationale goes something like, “Well, those people would be available to us if we needed them for projects…” Unh-hunh.  I would want to look carefully into any headcount numbers that they claim.  Early in my dealings with Chinese software outsourcing companies, I tried to represent a subsidiary of a large Chinese software outsourcing company that claimed to have 5K employees.  Strangely, they never seemed to be able to respond to RFI’s/RFP’s, and they never seemed to have people available for interviews.  A couple of years later I found out that the division actually had no engineering staff - 0.  They had management and marketing, with an agreement that the parent company would “put the resource in” after they won some projects.
• Client lists / Existing business - I recognize that there are costs associated with switching vendors, but clients aren’t endlessly patient.  They can switch to other vendors, especially if service deteriorates, or costs increase.  High turnover can also push clients into looking for an alternative.  While existing business is good for cash flow projections, I would want to have very good insight into the company’s current client satisfaction and the degree to which clients are actually “locked in” before I relied too much on future projections.
• Processes - We all claim to have state of the art processes, as verified by our ISO and/or CMMI certifications.  I would want to ask Longtop’s clients about the company’s adherence to strict process discipline.  I would also want to find out whether all of the delivery teams, as well as the internal project teams, followed some sort of process discipline.  I’ve seen many organizations that have convinced the examiners to certify them for very high levels of process maturity, while concealing the fact that most of their delivery teams operate with very little process.  I’m afraid that this is one of the consequences of the current state of the industry in China, where many of the companies are competing as low cost suppliers.

Of course, the largest questions are:

• When I buy an ADS, what percentage am I getting of which exact legal entity?  How much equity does the parent company retain?  How carefully separated are the legal, business and asset issues from the parent company, as well as the other sister companies within the Longtop Group?
• Who are my co-owners?  Many established Chinese companies like the Longtop Group have very close ties to the state.  Even if there is not direct ownership by the state, it might be very interesting to see which current, and former, government officials are among the owners of Longtop and will subsequently become my new business partners?  Do you care to hazard a guess regarding who will prevail in any disputes?
• What kind of transparency, reliable reporting and recourse can I expect as an owner of an ADS?  Remember that American Depositary Shares represent indirect ownership.  While theoretically you’ll have “full rights of ownership”, the underlying security is actually traded on the Shanghai stock exchange and is governed by the rules there.  I don’t know enough about the regulations and policies affecting registrations on the Shanghai exchange to even have the illusion that I have an edge there.  Further, I suspect that we won’t see very many westerners prevailing in legal action for securities fraud in Shanghai listed companies, at least not in this decade.
• How do I feel about the money that I invest being used to “pay a previously declared dividend?”  I can’t help but wonder how much control an owner of an ADS will be able to exert if the company decides to use the money raised for something really inappropriate.

I am not claiming to have any underlying insight into Longtop Financial Technologies’ actual business and operations.  They could very well be a great company.  I’m just urging caution and consideration before we put real money into this.  I know that investing in China is all the rage right now.  I read about a time when investing in tulips was the big thing.  I was working in Silicon Valley at a time when plowing money into Internet companies with no business plan, no revenue and some vague notion about “aggregating eyeballs” was the brilliant investment thesis (”eThis” & “iThat”).  I’m ashamed to even it, but I wrote business plans that stated our objective was to drive page views and monetize site visits by… Sigh…

Technorati Tags:  China, China Outsourcing

I guess that I shouldn’t be surprised, but the list of today’s biggest stock price gainers on the NYSE caught my attention.  Seven of the top ten are China oriented companies.  Six of them have “China” in their names.  The top gainer, Global-Tech Appliances Inc. (GAI), is a Hong Kong based company that develops and sells small household appliances to developing countries.  It also sells CMOS camera modules to device manufacturers in the P.R. China.

   Issue            Vol(K) Price  Chg  %Chg
1  GlblTch(GAI)       883  $4.93  0.84 20.54
2  ChinaDgtTV(STV)* 8,540  49.13  6.86 16.23
3  PtroChna(PTR)*   2,451 216.13 22.85 11.82
4  ChinaAir(ZNH)*     479  75.15  7.82 11.61
5  RogersCp(ROG)      764  46.96  4.67 11.04
6  ChinaTele(CHA)     690  89.03  7.34  8.99
7  ChinaEAir(CEA)      74 103.00  8.26  8.72
8  ExcelMr (EXM)    1,099  70.58  5.45  8.37
9  TerraInd(TRA)    3,154  33.96  2.46  7.81
10 AluCpChina(ACH)  1,403  79.58  5.51  7.44

* - ADS
Source:  The Wall Street Journal

Some of the trading volumes are relatively modest, and I recognize that GAI’s share price is low, so a small increase in price results in a relatively large percentage gain.  However, even taking those factors into consideration, this is worth paying attention to.  I can’t help but wonder what to make of this.

Does this performance suggest that we should all be investing in China, or does it tell us that the bubble there is inflating dangerously?  Either way, I look forward to the region taking the world’s economy on a wild ride for the next several years!

Technorati Tags:  China, China Outsourcing

A number of news sources are reporting that NBC is going to develop a sitcom based on the movie “Outsourcing.”  According to the coverage in Variety,

“Indie feature ‘Outsourced’ is being developed into a TV comedy by helmer Ken Kwapis (’The Office’).

NBC has made a premium script commitment to the half-hour, with Kwapis attached to direct a pilot if one is greenlit.  George Wing (’50 First Dates’) and John Jeffcoat, who wrote the feature, are set to adapt their work for TV.

Like the movie, ‘Outsourced’ will revolve around a customer service manager from Seattle who is sent to India to train a ragtag group of call-center employees.”

I can’t help but wonder whether anyone would watch a movie about a software testing lab in China.  I’m afraid that it doesn’t have the same emotional resonance with NBC’s audience.  Will you watch the “Outsourcing” show on NBC?

Technorati Tags:  China, China Outsourcing

Several news sources picked up a press release from Longtop Financial Technologies (LFT).  Apparently this entity is a subsidiary of Longtop Group, one of China’s leading providers of software & system solutions to the financial industry, and a sister company to Longtop International, one of the recent upstarts in IT outsourcing.

A couple of things to note about this announcement:

• I’m told that the Longtop Group is already listed on the Shanghai exchange, so, for all practical purposes, the organization has already done a public offering.  This announcement covers the issuance of American Depositary Shares, not a new offering of stock.
• More importantly, I’m stunned by what they plan to do with the money, “Longtop Financial plans to use proceeds from the offering to acquire an office building, pay a previously declared dividend and for general corporate purposes.“

Am I going nuts? They plan to take money from U.S. investors and pay a dividend to their current owners!  Can this possibly be true?  It’s not quite as outrageous, but they also intend to use some of the funds to buy a building - how does this build value in their business?  For prospective western investors, there are probably more efficient ways to buy commercial real estate in China.

Remember that this is for a company that saw a year over year decline in revenue for the most recently reported quarter.  Their revenue for the first half of 2007 was $16.1M, but they believe that they can raise as much as $200M from this offering of ADS.

We’re all shaking our heads and wondering about what this means.  Are Chinese companies so hot now that westerners will pour money into them regardless of the underlying value?  I don’t mean to be Chicken Little, but these are the sorts of behaviors that help form bubbles.

Will you run out and buy a bundle of these shares?

UPDATED: 2007.10.12

Reuters reports on the terms of the offering:

Oct 9 (Reuters) - China’s Longtop Financial Technologies Ltd on Tuesday registered its initial public offering of 10.4 million American Depositary Shares at an estimated price of $12 to $14 per ADS.

In an amended filing with the U.S Securities and Exchange Commission, the software developer said it plans to sell 8.5 million ADSs while stockholders will sell an additional 1.9 million ADSs.

The company said it applied for a New York Stock Exchange listing under the symbol “LFT.” (Reporting by Sayantani Ghosh in Bangalore)

I read another source that puts the actual number at 10.43 M ADS, so let’s pick the middle of the range $13.00 per ADS. That would suggest that Longtop expects to raise somewhere in the neighborhood of $135.6M.

Technorati Tags:  China, China Outsourcing

The NY Times got the headline right, “Outsourcing Works, So India Is Exporting Jobs” (registration may be required), unfortunately, they seem to go off track later in the article when they state that, “India is outsourcing outsourcing.”  Statements like this get everyone excited, and feed lots of chatter on blogs, but the statement is not consistent with the information in the story.  Indian companies aren’t “outsourcing.”  They are continuing to expand as truly global multi-national organizations that have the need to locate resources where it makes the most sense.

As with all multi-nationals, there can be many factors that influence the location of staff members, including proximity (both geographical & cultural) to clients, availability of specialized talent and, of course, cost.  The employees of Infosys, Wipro & TCS in the U.S, Mexico, the Philippines, and China are still employees of each company.  To claim otherwise is to suggest that direct employees of GE, who happen to be located in France are somehow outsourced.

The article goes further off the rails when it suggests that something is askew in a situation where, “A company in the United States pays an Indian vendor 7,000 miles away to supply it with Mexican engineers working 150 miles south of the United States border.”  The American bank isn’t just getting the Spanish speaking engineers located in Mexico.  It’s leveraging the processes, global delivery capabilities and (probably) the existing vendor relationship of the Indian company.  If the bank thought that they would get the same level of service & discipline by working more directly with the resources in Mexico, they could have worked with a local vendor, like SoftTek, or any of the smaller outsourcing firms based exclusively in Latin America.

The point is, the Indian companies are executing well, and doing the right things for their businesses and their clients.  Their global expansion is neither ironic, nor unexpected. I don’t understand why this story got so much attention. The leading Chinese outsourcing companies are doing the same thing.  You have to be where your clients are and you have to leverage global resources to be competitive.

Technorati Tags:  China, China Outsourcing