20180822-中国银河国际证券-中国擎天软件-01297.HK-1H2018_results_in_line_with_expectations,Biding_time_for_are-rating_3页_1mb

Sinosoft Technology Group [1297.HK] 1H 2018 Results Summary

Core Content Overview

Sinosoft Technology Group reported its first-half (1H) 2018 results, which were in line with market expectations. The company achieved a 19.8% YoY revenue growth and an 18.0% YoY net profit growth, with net profit reaching RMB88.8m. The company's revenue for the period was RMB286.5m, showing consistent performance despite a challenging export environment.

The Tax Software and Related Services Division saw a 11.7% YoY revenue increase, while the Carbon Management Solutions Division grew by 15.0% YoY to RMB44.0m. The Government Big Data Software and Related Services Division was the standout performer, with a 25.1% YoY revenue increase to RMB154.6m.

However, the company's results margin decreased slightly from 50.4% in 1H 2017 to 48.8% in 1H 2018, primarily due to an increase in cost of sales. This margin contraction is attributed to the company's ongoing transformation from a product-based to a platform/services-based business model, which is expected to drive top-line growth and improve working capital structure in the medium to long term.

Key Financial Highlights

Growth Drivers

• Government Big Data Software and Related Services remains a key growth driver with strong demand from public sector IT investment.
• Tax Software and Related Services showed resilience despite export challenges.
• Carbon Management Solutions continued to benefit from national policies and third-party services for key industrial enterprises in Shandong and Qingdao.
• The company is promoting SaaS-based product models to enhance client engagement and revenue streams.

Market Position and Valuation

• After a recent share price correction, Sinosoft is currently trading at 11.6x 2018E PER and 9.9x 2019E PER, which are considered reasonably priced relative to peers.
• The concerns about accounts receivable growth have been partially priced in, though some investors may still view this as a risk.
• The company's target price has been adjusted from HK$4.25 to HK$4.09 due to RMB appreciation, with the target PER remaining at 16x.

Investment Highlights

• Public sector IT spending is expected to be a key driver of growth, supported by government policies such as the industrial internet initiative.
• SMEs are likely to benefit from Sinosoft's new financial services initiatives, given the tight liquidity environment.
• The company's Tianshang big data platform is promising, offering credit rating and enterprise financing services based on data analytics.
• Partnerships with industry leaders like Huawei and PingAn Technology are expected to support future growth.

Analyst Views

• The BUY rating is maintained, with a target price increase of 42.8% to HK$4.09.
• The market may remain volatile due to macroeconomic uncertainties, but IT services are expected to outperform due to less exposure to external economic factors and favorable industry trends.

Strategic Transformation

• Sinosoft is transitioning from a product-based to a platform/services-based business model.
• This transformation is expected to enhance working capital structure and drive sustainable top-line growth.

Summary

Sinosoft Technology Group delivered solid 1H 2018 results, with revenue and net profit growth exceeding expectations. The company's diversified service offerings in tax software, carbon management, and government big data are key growth drivers. While results margin declined due to higher costs, the strategic shift towards a platform/services model is expected to improve operational efficiency and financial flexibility in the long run.

The current valuation is considered reasonable, with the target price adjusted for RMB appreciation. Investor concerns about accounts receivable growth are partially addressed, and the public sector's increasing IT spending is expected to benefit Sinosoft significantly. The BUY rating is maintained, reflecting confidence in the company's future growth potential and strategic direction.