China and India Tech Plays: An S&P Roundup

Analysts appraise three stocks from each emerging Asian market, where IT and Internet services are key growth areas

From Standard & Poor's Equity Research Services

Despite recent turmoil in global markets, investor interest remains high in finding ways to play the rapidly growing economies of China and India—especially in the information technology sector. Two key themes that have emerged in those countries: the growth of IT outsourcing and consulting concerns in India, and the rising popularity of Internet-services offerings in China.

How can U.S. investors participate? Many Chinese and Indian IT and Internet outfits have listed American Depositary Receipts (ADRs)—each ADR represents a specified number of company shares—that trade on the NYSE or Nasdaq. (ADS—American Depositary Share— is one share in the company.) Depositary Shares.)

Standard & Poor's maintains analytical coverage on a number of these issues. We've highlighted six below:



Recent price: 19.64

S&P Rank: 4 STARS (buy)

Analyst: Michael Jaffe

What it does: 51JOB provides integrated human resource services in China, with a strong focus on recruitment-related services. The company's recruitment-related services are delivered in both print and online formats.

S&P's take: We reiterated our buy opinion on the ADRs on May 12 after the company reported first-quarter earnings per ADS of 12 cents, vs. 4 cents one year earlier, 5 cents above our forecast on a 53% rise in online recruitment revenues, a 14% increase in print ad revenues, and much wider gross margin, all exceeding our forecasts.

We raised our 2006 earnings per ADS estimate by 15 cents, to 52 cents, based on our higher forecast of the company's online growth; we initiated our 2007 forecast at 70 cents. Our 12-month target price rises by $8 to $36, based on a forward p-e ratio of 70, well above the company's peers. We think 51JOB's April, 2006, alliance with Recruit Co. will aid growth, and also view the company as an attractive takeover candidate.

China Finance Online (JRJC)

Recent price: 5.29

S&P Rank: 3 STARS (hold)

Analyst: Richard Stice

What it does: This outfit provides online financial and listed company data and information in China. It offers subscription-based services based on a single platform that integrates data and information from multiple sources with features such as data and information search, retrieval, delivery, and storage.

S&P's take: We initiated coverage on the ADRs of China Finance on July 11 with a hold recommendation. We believe the company is well-positioned to benefit from the expanding economy and investor class in China. In addition, we are encouraged by its financial structure, which is generating free cash flow and has no long-term debt. However, we are concerned by the limited barriers to entry in this space, as well as our view of onerous legal and regulatory requirements.

We anticipate 2006 earnings per ADS of 3 cents, rising to 6 cents in 2007. Based on an average historical p-e and trailing 12-month earnings per ADS, our 12-month target price is $6.

Shanda Interactive (SNDA)

Recent price: 13.26

S&P Rank: 2 STARS (sell)

Analyst: Scott Kessler

What it does: Shanda offers a portfolio of online games that users play over the Internet, and it plans to offer additional content such as music and movies through its operating platform while also exploring new channels to deliver its expanded content offerings to end users.

S&P's take: On June 21, we downgraded the ADRs to sell from hold. We believe Shanda's efforts to both transition to a business model more focused on sales of in-game items, and to sell EZ-branded hardware offerings have increased the company's risk profile and will hurt earnings per ADS in 2006 and 2007.

We also believe competition in the Chinese online-games market remains intense, and related regulatory issues are a concern.

We lowered our estimates for 2006 to 22 cents from 60 cents, and for 2007 to 46 cents from 86 cents. Based on our revised forecasts, and on peer and discounted cash-flow valuation analyses, we also cut our 12-month target price to $10 from $13.


Cognizant Technology Solutions (CTSH)

Recent Price: 61.05

S&P Rank: 3 STARS (hold)

Analyst: Dylan Cathers

What it does: Cognizant, which is domiciled in the U.S. and has its shares listed on the Nasdaq, has most of its operations in India. The company provides custom IT consulting and technology services, as well as outsourcing services, for companies located in North America, Europe, and Asia. The company tailors services to specific industries, using an integrated on-site/offshore business model, with offshore IT development centers in India.

S&P's take: Overall, we like Cognizant, but think that it is fully valued. We reiterated our hold opinion on the shares on May 3 after Cognizant posted first-quarter EPS of 32 cents, vs. 18 cents one year earlier, after stock option expense, 3 cents ahead of our estimate. Cognizant added 32 clients in the first quarter. We expect it to continue this momentum, with particular strength in the financial-services and health-care vertical markets. We see Cognizant making strides in new verticals such as telecom and media.

We lifted our full-year 2006 EPS estimate by 8 cents to $1.40, on our expectation for revenue growth of more than 50%. We also raised our target price by $15 to $72, on a peer-based p-e-to-growth ratio of 1.5 times applied to our 2006 EPS estimate.

Infosys Technologies (INFY)

Recent Price: 38.18

S&P Rank: 3 STARS (hold)

Analyst: Dylan Cathers

What it does: This company provides comprehensive end-to-end business solutions that leverage technology for its clients, including consulting, design, development, software re-engineering, maintenance, systems integration, package evaluation and implementation, and infrastructure management services.

S&P's take: We downgraded our opinion on Infosys ADRs from 5 STARS (strong buy) to 3 STARS on July 12, based on valuation. The company posted June-quarter earnings per ADR of 62 cents, vs. 43 cents, 4 cents ahead of our estimate, reflecting new client additions and a favorable U.S. dollar-Indian rupee exchange rate.

We raised our fiscal 2007 (ending March) earnings per ADR estimate by 13 cents, to $2.70, based on our expectation of rapid revenue growth, offset somewhat by rising wage and training expenses. We also boosted our 12-month target price by $5, to $90, based on p-e-to-growth of about 1.1 times using our calendar 2006 estimate of $2.52. So why the downgrade? We lowered the STARS ranking because the July 12 gains lifted the ADRs near what we view as an appropriate valuation.

Wipro (WIT)

Recent Price: 11.30

S&P Rank: 3 STARS (hold)

Analyst: Dylan Cathers

What it does: Wipro provides IT services in India, as well as research and development services and software solutions to companies worldwide. The company also maintains a presence in the Indian market segments of consumer products and lighting.

S&P's take: After the company posted first-quarter earnings per ADS of 9 cents on July 19, up from 7 cents one year earlier and in line with our estimate, we reiterated our hold ranking. We look for revenues to increase 26% in fiscal 2007 (ending March), reflecting client additions, acquisitions, and rising demand for outsourcing in general.

We think operating margins will widen slightly, as higher utilization rates, stable pricing, and greater use of offshore workers will be partially offset by integration costs of recent acquisitions and rising wages.

Our estimate of fiscal 2007 earnings per ADS remains 40 cents. We lowered our target price on July 19 by $3, to $13, based on a peer-based p-e ratio of 34 times our calendar 2006 estimate of 38 cents.

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