So the market cap of Geong is £11m at these levels. The GBP is crashing against most currencies putting foreign currency earning companies into the spotlight. GNG is no exception... with 6.5p forecast eps for 2008-2009 without the latest falls in the pound taken into account Geong was already getting cheap, but now we could be looking at a 15% kicker to earnings just from currency translation effects.
Geong is not as cheap as some Asian AIM listed companies, but it has an extremely strong blue chip client base (Air China, Sony, Hitachi, Adidas, Lenovo, Volkswagen, Shanghai Telecom, Dell amongst others) and a large proportion (40-50%) recurring revenues.
There are 2 main products in the business... the bespoke 'Portal Age' CMS software used by most the biggest banks and securities firms in China, and the SmartBox CMS range for small and mid sized companies providing an out of the box solution. This is seen as a major growth driver currently being marketed to several hundred thousand small and medium sized enterprises (SMEs) in the Shanghai area alone, although the recent pre-interim statement indicated that SmartBox sales are slowing due to the general business downturn. International sales are also being pursued with editions in English.
There are some significant contracts being won with their larger clients with Lenovo especially, and it looks a very durable business model, with many small cap investors hushing the tones of ' another Sage' perhaps rather dreamily.
But Geong certainly remains a high quality company, starting from a very small base... Elephants don't gallop, and GNG is beginning to compound it's sales growth rather impressively. The directors have been buying significant chunks of shares lately, and the results are to be inline with expectations for the 6 months to September.
I thought i'd start a space for us to discuss GNG's prospects... contributions are welcome from all.
but do you know where to look?
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Geong International Ltd (Geong) is a Jersey-based company, providing Internet software solutions for companies in China. The Company’s main products are IaaS (Information as a Service) and SaaS (Software/Solutions AS A Service). IaaS is a project based business by contract which includes: consulting services, such as online business, digital marketing and Information Technology (IT) strategy consulting to clients; software and business solutions, such as GEONG, GEONG-IBM and GEONG-Oracle Smart Internet Platform; implementation and deployment, which includes software application customization and deployment services, such as business analysis, customization and systems integration, and Application Management Service (AMS) for product, application and system maintenance. SaaS is engaged in the design, development and implementation of web sites for clients, through which they build their online businesses. more »
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If their clients are heavily weighted towards banks and brokers, then won't the current financial crunch impact GNG quite negatively.
Actually, there's a trading statement here - http://www.rttnews.com/ArticleView.aspx?Id=738713&SMap=1. Based on half year results to 30 September, the company expects full-year results to be in line with expectations despite the global financial downturn. The PortalAge software seems to be selling well in China.
First chance to post since the results were released.
My observations fall into the following categories:
1. Cash Management
I am perplexed that some highly regarded posters on other bulletin boards are surprised by GEONG cash management and the time it takes large Chinese companies to pay after receipt of an invoice.
GEONG’s comment – 2nd Dec 08: “Externally, a common factor of doing business in China, which the Company cannot change, is the relatively slow pace of payment practiced by large organizations.
Internally, cash collection has improved monthly since July 2008 and is expected to continue to improve going forward. Having implemented cash collection targets and improved the Company's general cash collection management system has resulted in a general improvement in cash resources.
The cash position as of 31 October is approximately £0.77 million.
Accordingly the Board is confident of further improvement of cash collection and an increase in cash balances by the year end.”
We have been previously forewarned about this.
GEONG’s comment – 22nd Nov 07 - “As at 30 September, trade receivables were US$6.88 million (H1 FY2007: US$3.63million) and Debtor Days were at a comparable level as for the same period last year.
The relative slowness in receiving payments is mainly due to the contracts payment schedules adopted by the large organisations we have signed contracts with.
Whilst slightly frustrating, slow payment is a common factor of dealing with large organisations in China, but the high level of surety surrounding these debtors goes someway towards overcoming the slowness of receiving payment.
Going forward, as SmartBoxTM and SmartExpress sales increase as a percentage of overall sales, our cash flow position will improve, as the payment times on these products is considerably shorter.”
Just because we investors would like something different, it does not mean that GEONG are in a position to change common payment practice in China. Had the % of sales coming from SmartBox been higher then our cash would have marginally improved as highlighted above. Alternatively, I guess you could have deliberately slowed growth and not invested in all their different growth activities.
I took the opportunity to do personal research to find out if this was true and satisfied myself that was indeed the case (by talking to industry professionals who have experience of Chinese co’s).
Finally, I have always wondered why GEONG originally wanted to list on AIM and then the 2nd cash call with the share placing in June 2007. The conclusion I now draw is that they needed the cash to continue their rapid growth because of this slow payment culture within China.
I appreciate that this represents a perceived extra risk but I don’t yet accept that the conditions have worsened. I may be proved wrong over time but you can’t complain about Chinese business practice when we have been previously warned.
2. Contract Wins
I was worried by the lack of an update on contract wins but am really comforted with the latest announcement.
"Signed a number of contracts within the Chinese financial services, telecommunications and automotive sectors worth a total of approximately £3.3 million."
"Approximately £2.3 million of the contract wins and extensions will occur in the current financial year."
I am completely surprised by the overall lack of enthusiasm for just what is being achieved!
3. Order Book
A strengthened position since the Trading Update on the 13 Oct 08 especially if you consider we now have £5m of recurring revenue.
4. Product Development
Built an E-Learning system based on the PortalAgeTM platform. “The new E-Learning system will be used by the bank to train its 50,000 employees. This is the first E-Learning system GEONG has developed and will now be offered to existing customers.”
“We have again proved that our "go-deep-and-broad" approach”
I am continually impressed by their ability to find new opportunities and look forward to future sales to their existing customers
5. Market Sectors
"During the period the Company also made a major breakthrough in the telecommunications sector and is now working with China Mobile, China Telecom, China National Communications and Huawei.”
Two of China’s top three telecom providers in China Telecom and China Mobile: http://www.cn-c114.net/583/a361162.html
Also China Mobile - Rated as one of the “top 10 Chinese firms that will challenge the West”. http://business.timesonline.co.uk/tol/business/economics/article3510632.ece
Huawei – Very interesting company was also mentioned as a potential candidate and Lenovo already a customer was also featured in the top 10!
6. Consultancy
Another new revenue stream arises from consultancy. A great addition and natural next step which compliments their core product offering of PortalAge TM.
"Launched GEONG UxD Consulting Services during the first quarter of the year and, at the period end, had won four new clients. These are China Construction Bank, Everbright Bank of China, China Unionpay and China National Communications."
Should have a positive impact upon gross margins over the long term.
7. Their general confidence
“... we are confident that GEONG will continue to grow, despite the current difficult global economic conditions."
No signs yet that they are slowing down!
8. General comments
Good luck to all holders
It has to be said though buetowa, that there is a risk in their business model.. Their major clients are brokers and banks in China right? As we've seen, the stock market has collapsed there, and surely there are financial difficulties for companies participating in that. Are Geong covered if one of their big contracts isn't paid? That has to be a worry with a small company like this, especially when they seem to be running out of liquid resources.
Admittedly it's a great little company, and I do think they'll be able to raise some extra cash if the need arose. Thanks for that highly informative update - Much appreciated.
Stockhound, Certainly agree that there is risk with the business model but I worry less on the point you highlight. Their customer base is quite extraordinary for such a small company and should be able to pay as the Chinese market is still growing. They hadn't expanded into the maufacturing setor were most of the pain is currently being felt.. Ulitimately they could factor their debt if it started to curtail their growth plans.
Firstly the banks do not have the same profile of high risk lending and liquidity problems that western banks have had. The Chinese are one of the highest saving populations which results from the limited state help provided for retirement and health care. They aren't highly leveraged with debt compared with someone living in the west. I am sure there will be isolated problems but I doubt it will be endemic as has been in the USA and UK.
GEONG routinely move into new market sectors as is evidenced by the penetration into the telecoms market. The teleocm market is currently still expanding and profitable. They also generate business through three of the largest consultancy and applications providers with Oracle, IBM and SAP. Finally they now self generate business through their own consultancy arm which should generate higher margins in the middle term. So reveneue generating opportunities should continue to flow through to the bottom line.
They constantly innovate their product portfolio and then cross sell these new applications back into their customer base. This is the philosophy of wide and deep. The western view is termed as “maximising share of wallet”. The great thing about this policy is that you have an anchor customer who predominately covers the development costs and then the additional sales should deliver much improved margins.
The worry that I have is that their applications could be superseded by another software supplier. This would slow growth but it would take sometime to replace given how the have integrated their capabilities within some of their existing customers business models. Also, rapid growth presents problems with quality and service excellence. To date we have not seen either but these are signals that I look out for.
Being brutally honest though, I do think GNG is too expensive. Admittedly it's a very strong franchise business, and therefore due a premium rating, but if you compare it to other notable Chinese AIM stocks, you start to wonder.
I've been reading that Taihua - which has a comparable market cap to GNG - has more cash on it's balance sheet than it's market cap, and is generating a third of it's market cap in cashflow annually.
And RCG is trading on a p/e of 1 once you strip out the cash.
They both make GNG seem pretty expensive trading on 7 times or so!
Buetowa, good & comprehensive post. I agree with you that not enough attention is being paid to the recent string of contract wins including China Construction Bank (CCB), the Bank of Communications, Everbright Bank of China, Industry Bank of China and the Bank of Shandong. These are serious and prestigious clients. As the CEO, Weidong Wang, himself said - “Even in these difficult times, Geong is continuing to sign new customers, extend contracts with existing customers and develop innovative new products and services in new and existing sectors.”
In these days, cash is king and they need to what they can to improve collections but business practice is different in China and the Olympics will have disrupted payment terms further - you can see this effect in other sectors within China in 2008.
Good update today... http://www.stockopedia.co.uk/news/announcement/GNG/090106gng711f.htm
GNG announced new contracts in the banking and auto sectors (the former is very reassuring) worth about £1.2m.
They also announced that the cash balance has risen to £1.49m from £0.47m at September... this is extremely positive news and indicates that cash collection is improving which has been one of the most worrying traits in recent months.
Trading update today... http://www.stockopedia.co.uk/news/announcement/GNG/090403gng2d83.htm
Guidance for PBT for the year to March 2009 has been dropped by £.6m to £1.6m which is very substantial - although growth will still be 45% yoy. Delayed orders in the manufacturing and auto sectors. Surprisingly the financial services clients proved remarkably resilient... and GNG has received substantial new business from this sector in the last year.
What is worrying are these phrases....
There are other tech providers such as RCG in China which could be suffering from a similar recent slowdown... i.e. the back end of 08 may have been ok (as witnessed in RCG's results) but how is H109?
Nonetheless, these companies are still showing growth and are trading on paltry multiples... where would you rather keep your funds? Unfortunately the market will continue to trade on momentum and severely punish companies reducing guidance such as this.
Trading statement out today.....
http://www.moneyam.com/action/news/showArticle?id=3841913
Enterprise content management software and solutions provider Geong's pre-tax profits will be moderately ahead of market expectations at around £2.3m - 35% up on last year.
The firm said the cash position has improved strongly and the group ended the financial year with net cash of £6.3m compared to £3.6m in FY2009.
Financial results out today: http://www.investegate.co.uk/article.aspx?id=201007010700145951O&fe=1
· Turnover down 15% to £12.5 million (2009: £14.7 million)
· Gross margin up 500 basis points to 46% (2009: 40%)
· Profit before tax up 34% to £2.3 million (2009: £1.7 million)
· Underlying profit before tax* up 30% to £2.6million (2009: £2.0 million)
· Basic earnings per share up 21% to 5.2 pence (2009: 4.3 pence)
· Adjusted fully diluted earnings per share* up 17% to 6.2 pence (2009: 5.3 pence)
· Cash up 78% to £6.4 million (2009: £ 3.6 million)
and http://www.investegate.co.uk/article.aspx?id=201007010700145952O&fe=1 on the new 3yr equity financing
Latest trading statement....
http://www.investegate.co.uk/article.aspx?id=20101101070000P79F3&fe=1
Positives:
- confident about meeting market expectations at minimum only halfway through the year
- margins improving
- SaaS usage evidently increasing strongly
- order book and cash flow also strong
- strengthening relationships with IBM and Oracle
Apparently EVO reiterates the buy recommendation and 50p TP
All looks pretty good to me...still hoping for a lower entry point, 30-31.5.Missed the last one as funds weren't available..