A major objective of the Chinese government is to improve its technology
infrastructure nationwide to a level comparable with worldwide standards. The
growth of e-government services is expected to be significant as the country
digitalizes and develops further into a major world economic power.
By 2008, the e-government market in China is estimated to reach $9.5 billion,
according to Beijing-based IT research firm Analysis International. To date,
more than 90 government portals have been set up by China's central government.
A major focus of improvement is at the regional and municipal government levels
in which over 10,000 government websites have been established during the past
three years.
China Expert Technology (OTC BB: CXTI) is an emerging Chinese growth play
in the IT network and infrastructure markets in China and Hong Kong. The company
specializes in the design and installation of large-scale information technology
network projects known as e-government solutions for municipalities and city
governments in China. China Expert is the only private enterprise with the
authority to provide technological achievement appraisal services for IT
companies in China.
China Expert also provides large-scale network infrastructure construction with
solutions for enterprise information platform construction, public local area
network (LAN) construction, software development, website planning and
development, workflow management and computer hosting services. The company also
provides business-consulting services through an extensive network of experts
from numerous universities in China, including the Chinese Academy of Sciences
and the Chinese Academy of Engineering.
At present, the company is working on five major municipal e-government projects
with a combined contract value of about $123 million. In 2006, China Expert
Technology won 14 new e-government contracts with a total face value of $251.7
million, which represents an impressive 7.1X its sales in 2005. The company has
won in excess of $360 million in e-government projects in Fujian province. The
potential in this region has plenty of upside as the company has contracts in
only 12 of a possible 82 counties and cities in Fujian. The company's total
backlog is at around $141.5 million based on 14 outstanding contracts as of
December 4, 2006.
For the fiscal year ended December 31, 2005, CXTI recorded revenues of $35.6
million, up 32.6% from $26.8 million in 2004. Net income increased to $4.8
million, up 34.6% from $6.5 million the year before.
Revenues for the third quarter of 2006 increased 115% to $19.5 million, from
$9.0 million a year earlier. Net income increased 147% to $6.1 million, or $0.15
per diluted share, from $2.5 million, or $0.10 per diluted share, for the
comparative quarter in 2005. The company finished the quarter with $22.5 million
in cash, compared with $7.3 million at the end of 2005. Total longterm debt at
the end of the quarter was zero. Gross margins strengthened to 52% in the third
quarter, a vast improvement from 45.3% in the year-ago quarter.
Revenues for the nine months ended September 30 of $48.6 million are up 86.8%
year-over-year versus the comparative period in 2005. Moreover, the results to
date in 2006 have already surpassed the combined results for 2005. Net income
for the period was $8.1 million, up a marginal 1.5% from $7.9 million for the
same period a year ago. On a per-share basis, the $0.23 per diluted share earned
in the period was below the $0.33 per diluted share in 2005 due to a higher
share count.
China Expert is estimated to earn $0.36 per diluted share on revenues of $63
million in 2006, according to a single estimate gathered by Thomson Financial
Network. For 2007, the company is estimated to increase its earnings by 52.8% to
$0.55 per diluted share. The earnings estimate gives the stock an attractive 11X
its estimated 2007 EPS.
We hold shares of China Expert Technology in our Rising Star Stocks portfolio,
and rate shares a Buy with a share price target of $7.00. We arrived at our
share price target applying a pricing multiple of 13X forward year earnings,
conservative by any measure for a firm that enjoys the growth that China Expert
does. This represents price appreciation potential of 40% from the recent price
of $5.00.
Given the growth potential and the goal by all government levels in China, we
see excellent growth opportunities for China Expert Technology. China Expert
Technology remains largely unknown on Wall Street, providing early investors the
opportunity for sizeable returns.
