These days the expression “buy local” has taken on a whole new meaning for the software and computer services industry in China, where homegrown companies backed by the government are trying to squeeze global stalwarts such as Microsoft Corporation (MSFT).
Investors with faith in the future of this localization campaign in China should consider complementing their shares in Microsoft, Oracle Corporation (ORCL) and other western companies with stock in Hong Kong-listed Inspur International Limited (0596.HK, INPRF), a mainframe server builder and software developer that’s best known as China’s leading cloud services provider. (The company’s stock also trades on the Shanghai and Shenzhen exchanges, which are closed to non-Chinese retail investors.)
In mid-October, in an unaudited financial statement for Shenzhen shareholders, Inspur reported a $28 million net profit for the three quarters ending Sept. 30, up 80% from the same period last year. The company earlier said it earned $16 million in 2013 on a 43% year-on-year increase in operating revenues to $467 million.
Inspur has been expanding in recent years into a wide range of corporate and government computer services after building a successful business on contracts with China’s state-controlled aerospace concerns, including military aircraft and space program suppliers. The Chinese government buys about 80% of its mainframes. The company also develops and tests software at its China facilities for overseas clients, including big American corporations, according to Inspur’s website.
Inspur is poised to benefit from several recent Chinese government decisions that will likely have a deep, long-term impact on China’s computer services sector.
In late May, for example, domestic software developers got a boost when the Chinese government decided to stop buying computers pre-installed with Microsoft’s Windows 8 operating system. The government is separately probing Microsoft for allegedly breaking antitrust rules.
The government has also set a goal of phasing out all Windows XP operating systems and phasing in domestic counterparts, such as the Linux-based Kylin system made in China, by fall 2016, according to a Chinese Academy of Engineering official quoted in the 21st Century Business Herald newspaper Sept. 28.
In addition, against a backdrop of diplomatic friction between Beijing and Washington over cyber security, the Chinese government last spring told its state-run banks to phase out International Business Machines Corp (IBM) mainframes, Oracle software and other American computer products. That move may have helped Inspur cut a deal with IBM, announced in August, through which the American company will provide key software for the Chinese company’s mainframes.
Inspur shares in Hong Kong were trading October 23 at HK$2 (25 U.S. cents) per share, up 42% from a nearly all-time low set in mid-May, just before the government started targeting Windows 8 and IBM servers. The company’s Shanghai and Shenzhen shares rose sharply on news of the government’s decision in late May. Inspur’s shares in Hong Kong, however, stayed flat for a few weeks after the news but then took off in mid-June.
Considering recent industry developments in China and historical trading levels for Inspur stock, the current share price seems temptingly low. The stock was worth about HK$ 8 ($1.03) in early 2008 but plunged with the global financial crisis later that year and never fully recovered. Now, it’s reached a level not seen since July 2011.
As of this writing, Eric Johnson did not hold a position in any of the aforementioned securities.