Jefferies & Co. initiated coverage of AsiaInfo-Linkage, Inc. (NASDAQ: ASIA) with a buy rating and a price target of $27, implying 41 percent upside.

We expect AsiaInfo-Linkage's addressable market to grow by 15 percent and revenue to increase by 18 percent in 2011-2013 on market share gain in China Unicom’s BI (Business Intelligence), China Telecom’s CRM (customer relationship management) and broadband. Opportunities in overseas could contribute in the long term. AsiaInfo-Linkage's valuation looks attractive based on price-to-earnings (PE) multiples, said Anita Chen, an analyst at Jefferies.

China’s IT spending has seen strong growth in past few years, on the back China’s economic growth. Chen expects the total IT spending for the Chinese telecom industry to grow at a compound annual growth rate (CAGR) of 11 percent.

Driven by competition in the Chinese telecom market, Chen expects AsiaInfo-Linkage's addressable market, software and IT services spending to be the fastest growing segment in terms of total IT spending. She expects software and IT services spending to grow at a CAGR of 15 percent for 2011-2013. In her view, software procurement is still not feasible.

Chen expects 2011-2013 revenue CAGR of 18 percent for AsiaInfo-Linakge, based on market share gain, thus surpassing the total software and IT service spend of 15 percent.

Although the current market is stable and operators are reluctant to replace software vendors, Chen believes AsiaInfo-Linkage still has room to expand in vendor consolidation, and in China Unicom’s BI and China Telecom’s CRM markets, where AsiaInfo-Linkage still has lower market shares, as well as new product opportunities due to AsiaInfo-Linkage’s continued investment in research and development (R&D).

In addition, Chen believes the merger of Linkage benefits the company in terms of increased bargaining power, creating cost synergies and improving the strength in OSS before operators begin to invest heavily in broadband.

AsiaInfo-Linkage has been operating in the overseas market for over a year, with many achievements since year-end 2010. Chen expects 2011-2015 overseas revenue CAGR of 157 percent. Overseas revenue contribution expected to be 4 percent in 2013 and 8 percent by 2015.

Chen believes mobile number portability (MNP) can be a long-term catalyst, benefiting vendors such as AsiaInfo-Linkage which has a high market share. Although nationwide 3C convergence is still a long-term story, she thinks the merger with Zhongbo is a good strategy in terms of entering the CableCo market. AsiaInfo-Linkage has already made solid progress in the cable market by signing contracts with 20 operators, with the latest one being with Jiangsu Cable.

Chen expects the launch of MNP and 3C convergence to benefit AsiaInfo-Linkage in the long-term. She believes AsiaInfo-Linkage’s margins would be under pressure in 2011 due to overseas market expansion as well as signing of new contracts with domestic customers. However, margins should stabilize starting 2012 after the overseas market take-up and synergies from Linkage merger begin to materialise.

During first quarter of 2011, AsiaInfo-Linkage continues to sign and roll out NG-BOSS 3.0 and NG-BI 3.0 as well as the design of NG BOSS 3.5 and NG-BI 3.5 for China Mobile. In addition, the company also works on several e-channel projects for China Mobile and China Unicom.

Chen said AsiaInfo-Linkage also finished the testing of Billing 2.8 in China Telecom and expected to sign contracts in second quarter-third quarter of 2011. The company also passed phase I testing in first quarter of 2011 and expect to finish phase II testing in second quarter of 2011 for CRM2.0 in China Telecom. AsiaInfo-Linkage also won two OSS contracts in Hubei and Wuhan provinces.

Domestic contract signing is well on process in first quarter of 2011 as we expected. We expect second half of 2011 revenue growth to be 19 percent, higher than full year growth estimate, as the revenue for China Unicom Northern 6 provinces, China Telecom Billing and CRM upgrading, and new overseas contract are all expected to recognize in the second half, said Chen.

The brokerage maintained its 2011 EPS estimate for AsiaInfo-Linkage of $1.67 on revenue of $498.8 million, its 2012 estimate of $1.95 on revenue of $591.5 million, and its 2013 estimate of $2.19 on revenue of $692.4 million.

AsiaInfo-Linkage stock closed Wednesday's regular trading up 4.87 percent at $20.04 on the NASDAQ Stock Market.

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