Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

Geong International, little IBM in big China-it looks a great story!

I recently had a very interesting meeting with the senior management of Geong International (AIM:GNG), a market leader in China in providing Enterprise Content Management (‘ECM’) solutions. I know it’s a tough one for most of us to understand!

It’s not your usual offering from China where manufacturing related activity is more the norm but the growth potential for this business appears to be phenomenal. I know that applies to many Chinese businesses but this is a little different!

Geong floated on AIM in June 2006 raising just £750,000 to cover float costs (yes, they can be that high). Unfortunately due to the errant ways of its first ‘supporting’ broker it saw its share price initially fall c20% from the float price (30p) in a matter of weeks. Since then it hasn’t disappointed and the shares have risen to the current level c70p with a current market capitalisation of c£22m. Thankfully it has also changed broker!

Geong focuses on the development, implementation and maintenance of Enterprise Content Management software solutions in China. It sells two products – PortalAge and SmartBox – to a wide spectrum of clients, and in addition supplies consultancy services.

Management possess excellent experience with a number having been with IBM China.

I met Henry Tse (Executive Chairman) and Weidong Wang (CEO) both of whom have been with the company since its founding.

Mr Tse (aged 60 but a youthful 60) worked for IBM for 30 years and his last position was General Manager of Personal Computer Group of IBM China/Hong Kong. From 1997 to 1999 he also served as the Managing Director of Compaq China. He was named The Man of Honour of Chinese Software Industry by the China Centre for Information Industry Development, China Software Industry Association, and Software World Magazine in 2006.

Mr Wang (aged 40 and also youthful!) was one of the founders of Geong and previously worked for the Peoples’ Bank of China, which he joined after graduating from the University.

Directors and staff currently hold 55% of the shares with the balance seemingly spread across numerous private client accounts in nominee names i.e. there don’t appear to be many real institutional holders, although that could change following the recent placing.

Almost 40% of Geong’s revenue is recurring with the other 60% from one-off customised contracts.

Blue-chip clients include the top 5 Chinese banks and 3 out of the top 4 futures exchanges in China. The top 10 clients generate 65% of the revenue with a dominance of blue chip names such as IBM China, Motorola, Air China, Shanghai Bank

Twelve months ago, Geong’s revenue stream was dominated by the financial sector. Over the last six months, Geong has not only increased its presence in the financial industry but has developed a presence in the automotive, transportation and technology industries.

Geong’s growth is looking assured as Chinese companies make enormous strides to catch up with western organisations in terms of systems and processes. The house broker is of the view that the 20% pa profit growth should begin to look ‘timid’ (interesting turn of phrase!) as Geong begins to expand within China.

Currently it generates all its revenue from Beijing and Shanghai and there are significant opportunities for Geong to expand in the new cities springing up in China. Broker’s forecasts currently assume no such growth, and they are taking an extremely prudent view in terms of cash conversion.

The 2007 full year results highlight the increased expenditure on R&D – from $95k a year ago to $181k this year. It is likely that such expenditure will be maintained as Geong begins to roll out new products over the next twelve months.

The headcount also increased from 240 to 304 within twelve months and this is likely to grow by another 20% over the next year.

Whilst the valuation looks fairly rich for a business of this type, especially relative to a UK peer group, one has to consider how fast this market is growing, largely from blue chip clients.

If one simply adds back the exceptional costs of cUS$400,000 incurred in 2007 in respect of the flotation I calculate a PEG for 2007 of .62 and based in the broker’s estimates a forward PEG for 2008 of 0.79. Ok, you can never really trust estimates but it still looks encouraging!

For 2008 the house broker is currently forecasting revenue of US$11.44m, operating profit of US$2.63m and earnings per share of 7.3 cents. This is after prudently allowing for a 15% tax rate although realistically it’s likely to be a lot less than this.

With the speed of change in this market I think it’s irrelevant to look further ahead than 2008.

The house broker’s full year forecast looks all the more achievable since Geong secured a contract with Lenovo Group to design, build, deploy and operate a bespoke dealer management and communications systems, based on PortalAge. The contract is to be completed within one year and the value is in the region of $2m.

Investor’s Champion Opinion

Geong has done fantastically well since floating in June 2006, having extricated itself from a potentially disastrous relationship with its first broker. It also effectively raised no new money, other than something to cover the exorbitant broker costs, to support the business and has managed things well given the rapid expansion experienced during the period.

The current shareholder base with Directors and 30 senior staff holding 55% of equity surely gives confidence to UK shareholders. Relative to UK peers one can also assume that salaries are extremely fair-to say the least!

More cash is needed to help with research and development, expand the sales force and market SmartBox so the recent placing which raised £3.4million will support this. Surely the sky’s the limit if this business can really make the most of all the potential in the Chinese SME market and keep a tight rein on increasing working capital demands.

Please send me an email if you would like to receive the full note on Geong.


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