20180424-信达国际控股-中国擎天软件-01297.HK-Business_transformation_paves_way_for_the_future_9页_655kb

Sinosoft Technology (1297.HK) Summary

Core Content

Sinosoft Technology (1297.HK) is a leading provider of application software products and solutions in China, with a focus on export tax software, government big data solutions, and low-carbon and ecology software. The company has been actively transforming its business model from product-based to a platform and services-based model, emphasizing cloud and big data services.

Main Business Segments

• Export Tax Software & Related Services:

  • Sinosoft offers comprehensive export tax rebate risk control solutions for large foreign trade integrated service providers.
  • In 2017, they partnered with financial institutions in Jiangsu to provide financing services based on export tax rebate data, aiding small export companies in securing banking facilities more quickly.
  • This segment has shown consistent growth, with segment revenue increasing at a CAGR of 19.0% to 24.2% from FY16A to FY20E.

• Government Big Data Software & Related Services:

  • Sinosoft has been providing e-Government solutions since 2002, used by government agencies at various administrative levels.
  • The company is expanding its cloud platform from the provincial to the municipal level and is also targeting new cities outside Jiangsu.
  • It has a leading position in the judiciary sector, having won 4 tenders since September 2017.
  • This segment is expected to outperform the industry, with a CAGR of ~17% to RMB340bn in 2018.

• Low Carbon & Ecology Software & Related Services:

  • Sinosoft launched provincial low carbon ecology cloud platforms and related products such as environmental rights trading platforms and low carbon transportation software.
  • These products are currently sold in Jiangsu, Inner Mongolia, Jilin, and Heilongjiang.
  • The company has partnered with Huawei Cloud and Alibaba Cloud to promote these products, with Huawei Cloud being its sole partner in this segment.
  • Sinosoft is also developing a carbon asset management system through SaaS platforms.

Financial Highlights

• Trading Information:

  • Current price: HK$3.13
  • Target price: HK$3.93
  • Upside: 25.7%
  • Trading at 12.4x FY18E PE, which is 60% discount to peers.
  • 52-Week Range: HK$3.78/1.96
  • Market Cap: HK$3,966.6m
  • Major Shareholders: Xin Yingmei (46.3%), Alibaba (13.32%), Fidelity (7.95%)

• Financial Performance (FY16A–FY20E):

  • Revenue is expected to grow at a CAGR of 19.6% to 19.4%.
  • Net profit is projected to increase at a CAGR of 8.9% to 21.2%.
  • EBITDA growth is anticipated at a CAGR of 11.8% to 21.2%.
  • Net margin is expected to remain stable at 34.8% to 35.5%.

• Segment Revenue (FY16A–FY20E):

  • Tax software and related services: RMB135m (FY16A) to RMB242m (FY20E)
  • Govt & big-data software and services: RMB236m (FY16A) to RMB569m (FY20E)
  • Low carbon & ecology software and related services: RMB99m (FY16A) to RMB170m (FY20E)
  • Group Revenue: RMB519m (FY16A) to RMB1,020m (FY20E)

• Segment Results (FY16A–FY20E):

  • Tax software and related services: RMB119m (FY16A) to RMB198m (FY20E)
  • Govt & big-data software and services: RMB118m (FY16A) to RMB296m (FY20E)
  • Low carbon & ecology software and related services: RMB43m (FY16A) to RMB88m (FY20E)
  • Group Results: RMB279m (FY16A) to RMB584m (FY20E)

• Segment Margins (FY16A–FY20E):

  • Tax software and related services: Gross margin ~65.8% to ~63.0%
  • Govt & big-data software and services: Gross margin ~43.6% to ~40.9%
  • Low carbon & ecology software and related services: Gross margin ~39.2% to ~40.0%
  • Group Margins: Net margin ~36.9% to ~35.5%

Strategic Partnerships

• Sinosoft has formed strategic partnerships with Huawei Cloud and Alibaba Cloud to enhance its low carbon and ecology product offerings.
• In 2017, it launched a joint venture with Focus Technology (002315 CH) and Sample Technology (1708.HK) to provide trade-related services.
• The joint venture aims to serve import and export enterprises, foreign trade integrated service providers, and financial institutions.

Share Buybacks and Market Confidence

• Sinosoft has carried out 4 share buybacks since April 4, accounting for 0.73% of issued share capital, reflecting management's confidence in the company's future performance.
• Despite sector-wide concerns over U.S. trade restrictions, Sinosoft's revenue is entirely sourced from China, thus not affected by these issues.

Valuation and Re-rating Opportunity

• Sinosoft is currently valued at HK$3.93, implying a FY18E 17.1x PE, which is 55% discount to peers.
• The company is expected to deliver solid revenue and EPS growth at 23% and 24% CAGR respectively in FY17-FY20E.
• With upside catalysts including deeper cooperation with cloud providers, expansion beyond Jiangsu, and a solid 1H18 result, Sinosoft is considered a re-rating opportunity.

Key Catalysts for Growth

• Deeper cooperation with Huawei Cloud and Alibaba Cloud
• Successful expansion of new businesses outside Jiangsu
• Solid 1H18 results
• Share buybacks

Conclusion

Sinosoft Technology is undergoing a significant business transformation, moving from a product-based model to a services and platform-based model. With strong growth in its core segments, strategic partnerships, and a re-rating opportunity due to its undervaluation, the company is well-positioned for future success. Its leadership in the judiciary and government big data sectors, combined with its expansion into cloud and big data services, supports its potential for continued growth and improved financial performance.