Yucheng Technologies Earnings: Must See for China Investors

Jan.31.10 | About: Yucheng Technologies (YTEC)

Yucheng Technologies Inc. (NASDAQ:YTEC) (3.55), saw its stock price cut in half following its dismal earnings report Friday. The provider of IT services and software solutions to the Chinese banking sector missed on both revenues and earnings per share.

The report obviously came as a shock to YTEC investors. However, I found a greater surprise in the comments made by Weidong Hong, Chairman and CEO of YTEC.

In the earnings call, Mr. Hong said,

We believe that the prospective reserve ratio increase by the People's Bank of China (PBOC) and the possibility that non-performing loans (NPLs) may increase in the near future, which would adversely affect the profits of Chinese banks, caused Chinese banks to reevaluate their spending and contract signings ahead of the New Year. As a result, contracts that management had been negotiating in the fourth quarter 2009 have slipped into 2010, and as negotiations progress may become more limited in scope or provide lower margins. We anticipate banks to remain cautious initiating new projects in the near term. Overall, the shifts in the banking market caused us to experience a revenue shortfall in the fourth quarter of 2009.

These cautious remarks should cast a shred of doubt on the China growth theme being propagated by bullish analysts. The potential for a rise in non-performing loans tells me that the Chinese economy may be having some growing pains.

This past week’s selling action saw Chinese company share prices get hit harder than most other stocks. The technical weakness along with these concerns from a firm heavily tied to the country’s financial sector has me reconsidering trying to hunt for bargains just yet in China names. There may be some oversold bounces for traders, but those could fade quickly. The next 12-18 months may be a great time for investors to sit out the Chinese market.

Disclosure: No ownership.