Being Chinese and being in the financial sector are two factors that have generally counted against companies in the last six months. But that hasn't stopped Longtop Financial Technologies (LFT), China's leading supplier of homegrown financial software, from growing explosively anyway.

"We don't see any lasting impact on customer spending" because of the crisis, said Charles Zhang, Longtop's investor relations director. "We don't see any delay or cancellation of products."

The financial software sector has been doing better than you might think, scoring No. 11 in IBD's industry group rankings. But the business is especially strong in China, where banks are still catching up to the West in the tech department.

"The banking industry in China is woefully underinvested in IT," said Jefferies analyst Joseph Vafi. "In retail banking, a lot of customers don't even have online access to their accounts."

Repeating History

Because of its newness, the financial software industry in China looks like America's did 10 or 15 years ago: highly fragmented. Longtop's market share is in single digits, but nobody else has significantly more, even giants like IBM (IBM).

Analysts say that a native company has a considerable advantage in China, with its unique language, writing system and ways of doing business. The banking industry there is dominated by the Big Four: Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China. Longtop has a strong relationship with three members of the Big Four, which supplied the majority of its software revenue in the past.

Longtop, in fact, risked too much customer concentration from this in the past, with more than 80% of its 2007 software revenue coming from the Big Four. But last year that figure dropped to 50%, and in the most recent quarter it was below 40%.

That's not because Big Four revenue is shrinking. It's just that total sales have been growing so fast. In the fiscal third quarter, which ended Dec. 31, sales jumped 79% from the year before to $33 million. Profit rose 52% to 32 cents a share.

Longtop can compete in its crowded field partly on price. Analyst Karl Keirstead of Kaufman Bros. says the fact that it's headquartered in provincial Xiamen, rather than Beijing or Shanghai, keeps its operating costs down. He says that despite its small size by U.S. standards, Longtop has an advantage in scale over other homegrown developers. This lets it keep up multiple delivery centers, while making the occasional buyout to expand its offerings.

For instance, Longtop in January announced that it would buy Jactus Labs, a provider of software testing and quality management. The firm said the deal wouldn't do much for Longtop's financial results, but it more than doubled the firm's staff of testing engineers.

Zhang says this helps Longtop offer a more comprehensive solution, which is what customers want. It also added an important new customer in the Shanghai Stock Exchange and expanded business with the Bank of Communications.

New-customer acquisition is an important part of Longtop's buyout strategy. Zhang says the firm is on the lookout for plays in the insurance sector, where Longtop has historically limited exposure. The firm doesn't offer software specific to insurance, but its customer-relations solution and some of its banking software can be adapted for the purpose.

Longtop also looks for talent outside the private sector. In January, it teamed with Peking University to create a Financial Risk Management Laboratory, which will study risk-management models and help Longtop develop new software in that field.

But Longtop's bread and butter remains the basic banking IT functions: managing ATMs, online banking, call centers, credit cards and so on. It continues to draw new business by fine-tuning its offerings on those fronts. In December, it launched its E@able online banking solution, handling such core services as account management, payments and transfers.

Zhang says this fills a gap in previous offerings, which were more focused on ATMs and customer service.

"E-banking is another area where we see huge potential as Chinese Internet users increase," he said.

Meltdown Worries

Despite all this growth, Keirstead says the global financial meltdown remains the No. 1 concern among investors. Such fears have dragged down Longtop's stock, which first went public in October 2007 and kept sliding all the way to the market bottom last November.

Since then, however, the share price has doubled. That reflects some regained confidence in the Chinese economy, says Keirstead. Zhang says government policies should also help Longtop by spurring bank lending for infrastructure projects. The government's stimulus also bolsters IT specifically through tax breaks.

Still, the consensus is that Longtop won't be able to maintain its earnings at past levels. Last year's pretax margin topped 50%, which Keirstead calls "unsustainable." Both the company and analysts expect margins this year to run somewhere in the 40s.

Analysts estimate that profit in fiscal 2009, which ended March 31, grew 30% to 96 cents a share. They expect that rate to slow to 17% in fiscal 2010, then to just 7% the following year.