Interactive Q&A: Simon Fu, CFO of China Expert Technology (CXTI.OB)

by: SA Editors June 13, 2007 | about stocks: CXTI.OB    
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This is the latest in Seeking Alpha's series of interviews with leading companies of interest to our readers. Ours are interviews with a twist: the respondent has agreed to answer questions and respond to comments not from a single interviewer, but rather from our community of readers and contributors.

china expert

This interactive Q&A is with Simon Fu, CFO of China Expert Technology, Inc. (CXTI.OB). China Expert Technology, Inc. specializes in providing IT network and infrastructure consulting services primarily to municipalities and cities within the People's Republic of China. Over the last several years, China Expert has emerged as one of the leaders in designing and implementing e-government systems for municipalities and city governments in China. The Company's software and services enable improved workflow processes between different entities to facilitate the seamless transfer of important information and data with the intent of increasing overall efficiency and transparency. China Expert was formed in 1998 and is headquartered in Hong Kong. (See the latest CXTI.OB earnings call transcript for more background on the company.)

China Expert Technology has sponsored this interview, which works like this:

  • Simon briefly introduces himself and the issues he's focused on below.
  • Readers and contributors can immediately start to post questions and remarks using the comment box below (Note: you need to sign up for free registration and be logged in to do so).
  • Seeking Alpha editors will not filter or edit the questions and comments from readers, except to delete profane or hostile language.
  • Simon will respond to the questions and remarks beginning Tuesday, June 12th. Readers can track his answers and respond to them during that period.

Yahoo Finance readers may join the Q&A by following this link.

Over to Simon:

• • •

simon fuMy name is Simon Fu and I'm Chief Financial Officer of China Expert Technology (CXTI.OB). Thanks to Seeking Alpha for providing this opportunity to chat with you.

I'm happy to discuss a range of topics with Seeking Alpha readers, including:

1. Our focus on e-Government solutions in China -- including both intranets for officials and employees to communicate internally and Internet access to service residents with a multitude of functionality including business applications, healthcare benefits, social security type services etc.

2. Key Chinese government drivers in place which are making cities and government customers adopt our services.

3. The status of e-government strategies in 2nd and 3rd tier cities in China.

4. Recent large contracts outside of the Fujian province which presents a very large growth opportunity for us.

5. The competitive landscape.

6. Plans to move from the bulletin board to a national exchange.

Please leave your questions by using the comment box below.

Thank you!

-- Simon

This Q&A represents the opinion of China Expert Technology, Inc. management and is not intended to be a forecast of future events, a guarantee of future results nor investment advice. Except for the statements of historical fact, information presented herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include general economic and business conditions, the ability to fund operations, the ability to forge partnerships required for deployment, changes in buying habits, the rapid pace of change in the technology industry and other factors over which China Expert Technology, Inc. has little or no control. China Expert Technology, Inc. assumes no obligation to publicly update or revise any forward-looking statements provided in this Q&A, or to correct any erroneous information presented in any investor questions herein.

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This article has 22 comments:

  •  
    • SeekingAlpha Editors
    Jun 12 11:12 AM
    Simon,

    Thanks for doing this interview.

    I know that China’s 11th Five Year Plan emphasizes the need to expand the use of IT systems and communication technologies in government networks. How do you expect China Expert to benefit from this policy?

    Thanks.
    Darren
    Reply | Link to Comment
  •  
    Jun 12 10:16 PM
    Darren,

    The deployment of e-government systems is under the Chinese central government's directives. According to the plan, central government expects by 2010, 50% of the government administrative work will be processed on-line and electronically. We believe this is a mid term target and eventually all such work will be required to be processed through e-government systems.

    China Expert is fully focused on the implementation of e-government systems and solutions for city and county governments in China, and we believe such policy will be an important driver for our business in future.

    Thanks & regards,

    Simon
    Reply | Link to Comment
  •  
    Jun 12 11:50 AM
    Hi Simon,

    Interesting preamble. I look forward to seeing your responses to the various questions that are sure to pop up.

    Can you talk about the size and potential of China’s e-government market? What is CXTI’s current market share, and how do you plan to expand it?
    Reply | Link to Comment
  •  
    Jun 12 10:34 PM
    Eli,

    According to external source, the e-government market in China reached US$6 billion in 2005 and expected to grow by 16% annually for the next few years. As for China Expert, our revenues for 2006 reached US$66 million and it was comparatively small to the overall market.

    Recently, we have explored to other provinces outside Fujian where we have a strong foothold, and such move will diversify our customer base and further expand our business opportunities.

    Thanks & regards,

    Simon
    Reply | Link to Comment
  •  
    Jun 12 12:24 PM
    Hello Simon,

    Thanks for this interview. What does the competitive landscape look like in the areas where you plan to be active during the next 24 months?
    Reply | Link to Comment
  •  
    Jun 12 10:51 PM
    Hi Ken,

    We do expect to encounter more competitions as we move outside Fujian province. As what we have done in Fujian, we will try our best to establish a reference site in these new provinces through successful implementations.

    Thanks & regards,

    Simon
    Reply | Link to Comment
  •  
    Jun 12 12:25 PM
    Simon,

    Can you talk about the decision process around giving consultants cash or stock compensation and your plans for it going forward. I noticed your Xi'an city contract broke from a trend of cash payment sand paid 323,000 shares.
    Reply | Link to Comment
  •  
    Jun 12 11:11 PM
    Ryan,

    In the past, China Expert is not quite accessible to the capital market and we have to preserve our cash for future project commencement, that's why we issued stock as compensation instead of paying cash.

    Recently, the situation changed and we have built up a substantial cash balance for future working capital requirement. We also aware of the dilution effect of granting stock as compensation. In future, cash will prevail over stock compensation. Nevertheless, the payment method of compensation is subject to negotiation and agreement with the consultants.

    Thanks & regards,

    Simon
    Reply | Link to Comment
  •  
    Jun 12 12:33 PM
    Simon,

    First, congratulations on a few very successful years. I have several questions, and to the extent you can answer them I would greatly appreciate it:

    1. CXTI has landed numerous substantial e-government contracts in the Fujian province. At some point, I imagine that most of the larger governments will have at least a basic level of e-government services in place and the contracts will shift from larger implementation projects to smaller maintenance and improvement contracts. Is this assumption correct, and if so when do you see the market in Fujian maturing?

    2. CXTI has recently announced contracts outside Fujian province. Looking out three to five years, what percentage of new revenues would you expect to see from non-Fujian contracts? How important has the consultant CXTI retained been in landing these contracts?

    3. Now that CXTI has cleared up the debentures, what steps does it intend to take to upgrade its listing to Amex or (preferably) Nasdaq smallcap?

    4. Are there any changes likely in the tax rates paid by CXTI in coming years?

    Thank you for your consideration of these issues.

    The Microcap Speculator
    my articles on CXTI
    Reply | Link to Comment
  •  
    Jun 13 01:20 AM
    Thanks for your comment.

    1. In Fujian, there are 82 cities and counties, and approximately 30% of these cities and counties are our target customers. At the moment, we have contracts with 12 of them and we believe there are substantial business opportunities in Fujian, in addition to possible future system upgrades and maintenance services opportunities.

    2. Recently, we have adopted a balanced business development strategy and we will explore new business within and outside Fujian province. In three to five years time, we expect at least half of our revenues generated outside Fujian. We will work with different consultants to explore new prospects but hopefully we can have less reliance on them in future once we have more credible references and successful cases.

    3. We have make an application to Nasdaq for listing on GM recently but it takes time and subject to their approval. We are working on getting an effective registration statement and several compliance issues to facilitate such listing.

    4. At the moment, we are subject to PRC corporation income tax at 15% on the net income derived in China. According to the latest PRC tax reform, such tax rate will be raised to 25% with effective from January 2008 though some kind of transitional arrangement is generally expected, but no details have been released by the State Council of PRC government yet.

    Thanks & regards,

    Simon
    Reply | Link to Comment
  •  
    Jun 12 01:03 PM
    Simon,
    You mentioned in your recent conf call that by year end 2010, 50% of Chinese Government Administrative approvals have to be processed through online systems/ electronically. What percent is currently being processed through online systems/ electronically?

    Thank you
    Reply | Link to Comment
  •  
    Jun 13 01:26 AM
    Michael,

    Unfortunately we do not have this figure, but different cities may have different levels of e-government applications and automation.

    Thanks & regards,

    Simon
    Reply | Link to Comment
  •  
    Jun 12 01:08 PM
    Simon,

    Do you feel that your current cash + future cash flow from operations will be able to satisfy your working capital needs for the jump in business expected in FY08? Is there any chance that your DSOs will improve next year or should we still expect long lag times for A/R's to be paid? If you do see issues with cash flow, how do you plan to address them (bank financing? issue more stock?)

    I would also like to hear your answer regarding the cash vs. shares paid to consultants that help secure new contracts. Is there a certain stock price at which you would not consider issuing stock for compensation?

    Last question: when are company insider shares due to come off their lock-up?

    Thanks.
    Reply | Link to Comment
  •  
    Jun 13 02:46 AM
    BH,

    We are building up our cash level for the future commencement of new projects in later part of this year. Hopefully, we will have sufficient working capital and if not, we will consider various ways to obtain additional financing, maybe through short term bank loan if possible.

    Though we do not have a specific stock price at which we will not issue stock for compensation, we do aware of the dilution effect of granting excessive stock when the stock price is on the low side.

    The lock up of the insider or affiliated shares under the convertible debentures will be lifted once the debentures matured or converted to the company's common stock. As all debentures have been converted before maturity (April 30, 2007), such lock up has been released.

    Thanks & regards,

    Simon
    Reply | Link to Comment
  •  
    Jun 13 11:19 AM
    Simon -

    Your stock price appears undervalued. What are your thoughts on this. Would the company ever entertain buying back stock (even through borrowings) to enhance the stock value?
    Reply | Link to Comment
  •  
    Jun 13 10:21 PM
    As usual, we do not make comment on the stock price, especially on those short term fluctuations. We put our focus on exploring new business opportunities and executing the existing backlog contracts, at the moment we have no plan for stock buyback.

    Thanks for your questions.

    Simon
    Reply | Link to Comment
  •  
    Jun 13 11:17 PM
    Simon,

    I think this forum is great and I commend your for participating in this. The forum is helpful given the lack of information and research available on your company.

    While CXTI's experience may be a key attribute, are there any other barriers to entry that might exist in your business? Can you please describe the competitive landscape in your business (Are there a lot of smaller companies? Are there larger companies?) Has CXTI ever thought about doing an acquisition?

    To your knowledge, has any U.S. based IT consultancies made significant inroads in China?
    Reply | Link to Comment
  •  
    Jun 14 04:17 AM
    Philip,

    Thanks for your comment and it's our pleasure to participate in this forum also.

    One of our business development strategy is to focus on exploring 2nd or 3rd tier cities which have not invested too much (time and money wise) on their existing systems or platforms, as we always promote a whole new platform rather than integrating their existing systems (which are separately developed and isolated with each other). However, these greenfields may be reduced as time goes by and we may have to shift to systems integrations, where most of the smaller competitors are doing.

    In China, there are thousands of IT service providers, most of them are small in scale and larger ones like Digital China, Chinasoft and Beida Jade Bird, etc. At the moment, we do not have any acquisition plan but we will not rule this out in future.

    Regarding US based IT consultancy and service providers' business development in China, unfortunately we do not have much information on this aspect.

    Thanks & regards,

    Simon
    Reply | Link to Comment
  •  
    • SeekingAlpha Editors
    Jun 15 12:16 AM
    This Seeking Alpha interactive Q & A is now closed for further questions. Thank you very much to Simon Fu of China Expert Technology and to our readers who participated.

    ~ The Seeking Alpha Team
    Reply | Link to Comment
  •  
    Feb 01 05:30 PM
    Where are you hiding CXTI? Some day you will be caught for violating the trust and interest of the shareholders.
    Reply | Link to Comment
  •  
    Feb 01 05:32 PM
    Seeking Alpha should redeem themselves for publishing the CXTI lies. Print the truth now- The CXTI fraud is now to be settled in the courts.
    Reply | Link to Comment
  •  
    Jun 25 01:04 AM
    Freakin crooks
    Reply | Link to Comment
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