Top Picks for 2010: Longtop Financial (LFT)

Lutts continues, "We've long maintained that watching China's growth in recent decades has been like watching a video of American history ... but played at fast-forward speed.

"The transition from farming to industrial production was accomplished in one generation (in part by following the U.S. road map) and now the country is entering into the software era.

"Longtop Financial Technologies was founded in 1996 as a financial systems integration company, but made the transition to software and solutions in 2001.

"Today it's the #1 developer of banking software in China and the #2 developer of software for the insurance industry. And now it's breaking into the securities industry; Longtop announced its first contract there in November.

"Longtop's main customers are banks; they accounted for 82% of revenue in the latest quarter. And its biggest bank customers (no surprise) are the 'Big Four' banks of China. These are the Industrial and Commercial Bank of China, the Bank of China, the China Construction Bank, and the Agricultural Bank of China.

"These four banks together hold more than 65% of domestic market share. For Longtop, three of them (it's working to get business from the fourth) accounted for 48% of revenues in the latest quarter.

"In China, of course, the banks are healthy -- none have gone bankrupt, or been bailed out by the government. And none are expected to. Yes, business has slowed a little, but the future is still expected to bring great growth. And as the banks grow, Longtop will, too.

"In addition to banks, Longtop serves the insurance industry and the financial departments of major non-financial companies, and there's no reason those won't grow, as well. But banks are the company's bread and butter and will be for the foreseeable future.

"Furthermore, Longtop, which spends 5.8% of revenue on R&D, has new projects starting frequently. Recent announcements include projects on anti-money laundering, e-banking, financial testing solutions, financial risk management and data warehousing.

"And then there are acquisitions. Longtop completed the acquisition of Sysnet in second quarter, and it's currently working on an acquisition that would be its biggest yet.

"Technically, Longtop's stock chart is encouraging. After coming public in October 2007 at 18, it peaked at 35 and then drifted slowly down over the next year (with the market), bottoming at 10 1/2 in November 2008. By late February, it had recovered to 15, and that's when the big move of 2009 began that took the stock to a high of 38.

"Currently, it's digesting that advance; it may pull back as far as 32, where we now find the 50-day moving average. And if it does I recommend that you treat the pullback as a buying opportunity.

"While the American banking industry struggles, the Chinese banking and financial services industries are booming, and Longtop is a great way to benefit from that boom."

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