20180328-兴业金融证券-中国软件国际-00354.HK-New_Businesses_To_Drive_Future_Growth_10页_416kb

Chinasoft International Summary

Core Content

Chinasoft International is a technology and software services company with a focus on consulting, technology services, and outsourcing. The company has shown strong financial performance with revenue and profit growth exceeding consensus estimates in FY17. It has a significant presence in the IT services sector, with large clients like Huawei contributing a substantial portion of its revenue. Chinasoft has been expanding its new businesses, including cloud, big data, and JointForce, which have shown tripled YoY revenue growth and are expected to continue growing rapidly.

Main Points

• Revenue and Profit Growth: Chinasoft's FY17 revenue grew by 36.3% YoY, and profit grew by 27.9% YoY. The company's performance was in line with expectations and slightly better than consensus.
• New Businesses: Revenue from new businesses (cloud, big data, and JointForce) tripled YoY. These businesses are expected to continue growing rapidly, with cloud-related services projected to double in FY18F, big data to grow by 50%, and JointForce to reach CNY600m in FY18F.
• JointForce Expansion: The JointForce platform was rolled out in 15 software parks in 2017 and is set for expansion to at least 15 more in 2018, supported by the Chinese government.
• Share Option Expenses: These expenses were CNY149m in FY17 and are expected to drop to CNY65m in FY18F, improving earnings.
• Financial Outlook: Chinasoft's recurring net profit is expected to grow at a CAGR of 28% during FY17-20F. The company's P/E ratio is expected to decline from 30.2x in FY17 to 11.1x in FY20F.
• Investment Recommendation: RHB reiterates a Buy recommendation with a higher target price of HKD7.77, up from HKD6.77, based on a FY18F P/E of 22x, implying a FY19F P/E of 16x and a PEG of 0.8x, which is lower than peers' PEG of 0.9x.
• Key Risks: High customer concentration, potential rising labor costs, and uncertainties in the development of JointForce are noted as key risks.

Key Metrics

Key Drivers

• Increase in outsourcing demand from large clients: Chinasoft benefits from the growing need for outsourcing from major clients like Huawei.
• Capturing long-tail customers using JointForce: The platform helps attract more customers by connecting IT service providers with businesses.
• Penetrating overseas markets: The company is expanding its presence in international markets to drive future growth.

Key Risks

• Uncertainties in JointForce's development: The success of this platform is not guaranteed and may affect growth.
• High customer concentration: Reliance on large customers like Huawei could pose a risk if their demand fluctuates.
• Rising labor costs in China: This could impact profitability and margins.

Company Profile

• Founded in 2000, Chinasoft International has extensive experience in IT services and consulting.
• The company serves various industries including government, manufacturing, finance, telecommunications, and high tech.
• It has launched JointForce, an online marketplace for IT services, in 2014.

Share Performance

• Market Cap: USD2,128m
• Bloomberg Ticker: 354 HK
• Avg Daily Turnover (HKD/USD): 94.0m/12.0m
• 52-wk Price Low/High (HKD): 3.94 - 6.95
• Free Float (%): 60
• Shares Outstanding (m): 2,585
• Estimated Return (%): 12%

Shareholders

• Yuhong Chen: 11.0%
• Microsoft: 4.1%
• Huawei: 3.5%

Investment Recommendation

• Recommendation: Buy
• Target Price (HKD): 7.77
• Current Price (HKD): 6.95
• Estimated Return: 12%

SWOT Analysis

Strengths

• Strong vertical experience and IT capability
• Solid reputation among a wide range of customers
• Support from Huawei
• Innovative and capable management
• JointForce is innovative and has high potential

Weaknesses

• Largely reliant on big customers

Opportunities

• Cloud and big data
• Overseas expansion
• China's "Made in China" and "Internet Plus" strategies provide opportunities for domestic IT service providers

Threats

• Competitors are entering the cloud service market
• Labour costs may be on the rise

Investment Research Disclaimers

• RHB has issued this report for information purposes only.
• The report is not an offer or solicitation to buy or sell securities.
• RHB does not guarantee the accuracy or completeness of the information.
• The report is not directed to, or intended for distribution to, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution would be contrary to applicable laws.
• The recipient acknowledges and agrees to be bound by the limitations contained in this report.