For the past several years, investors have only had one choice when it comes to a major technology investment serving the China telecom market.  AsiaInfo Holdings (ASIA) has been the only major technology provider in the sector trading on US markets, and the stock has had a tremendous run over the last several quarters.   Investors are betting that the emerging middle class in China will drive growth in both  land line and mobile telecommunications and in turn increase the business available to ASIA.

AsiaInfo is actually broken into two separate divisions which meet different needs of institutional clients.  The first division is AsiaInfo Technologies which provides software and solutions to voice and data carriers.  The Chinese government recently combined the six major telecom players into three and has implemented measures designed to inspire competition and in turn drive demand for their services.  ASIA stands to benefit from the rapid integration as these three firms consolidate operations and struggle to create an efficient technology framework.

The second division is Lenovo-AsiaInfo which specializes in IT security, antivirus and network protection technologies.  Similar to Mcafee (MFE) or Symantec (SYMC), the division offers subscription based services to protect against malware.  The division has several government contracts which not only provide stable revenue, but also gives the company credibility and helps prove the legitimacy of their products.

But while ASIA has been a strong competitor, there is a new player which will likely issue a US based IPO in the next couple of weeks.  Lincage Technologies is expected to offer shares between $13 and $15 sometime near December 9th.  The ticker, ironically, will be BOSS and the shares will be sold through the underwriting branches of Citigroup and Barclays Capital.  Linkage receives most of its revenue through software development, and the software helps clients properly manage customer accounts, manage network issues, and generate helpful data for future planning.

Unlike many of the technology IPOs in the US over the past decade, Linkage is actually a profitable company with revenue of $66.6 million during the first half of the year and net income of $15.1 million.  Despite hefty competition in the market (including domestic rivals that are not traded on US exchanges), the company appears to be growing rapidly and winning significant contracts from the three major telecom providers.

The IPO transaction is expected to net the company roughly $129 million although this could vary depending on what price is received for the shares.  Linkage will set aside $30 million for research and development and use the remainder for “general corporate purposes.”  It’s encouraging that the company will actually be receiving capital from the transaction instead of the capital going to a private investment firm or directly to previous shareholders.  The additional capital should be able to fund growth and allow the Linkage to compete against rivals in this attractive growth market.

For the time being, ASIA still looks like an attractive investment although possibly a bit pricey.  The company is expected to earn $1.20 per share in 2010 which means that the stock is trading at roughly 20 times forward earnings.  That is a reasonable multiple given the growth assumptions, but does imply a bit of risk as any disappointment would likely cause the stock to drop quite a bit.

Buying BOSS on the IPO could be very profitable but also encompasses a decent amount of risk.  It is too early to tell how the deal is shaping up and whether there is sufficient buying interest to support the share price.  Usually when an IPO begins trading, the first few months are driven much more by perceived value and the supply and demand is centered around how much interest the underwriters are able to generate.  After that time, the stock will settle into a more predictable pattern based on the fundamentals of the company and the opportunities within the sector.

I would be willing to take a small position in BOSS and participate in the IPO unless there is a significant dislocation in the market between now and the actual transaction.  It appears equity markets are shrugging off the Dubai news and liquidity still continues to be strong.  While this can quickly change, under the current environment the prospects for this IPO remain very strong.

FD: Author does not have a position in ASIA

Enjoy this article? Sign up for the ZachStocks Newsletter,
Your source for Sound Market Commentary, Growth Stock Analysis and Successful Investment Strategies