20220628-招银国际-China_Software___IT_Services_Higher_visibility_in_SaaS_along_China_cloud_value_chain_12页

China Software & IT Services Sector Update Summary

Core Content

This report provides an analysis of the China Software & IT Services sector, focusing on the impact of the Omicron spread and lockdown measures on cloud services, particularly in the areas of IDC, IaaS/PaaS, and SaaS. It highlights the performance of key companies and outlines the research team's investment recommendations and updated target prices.

Main Points

1. Impact of Omicron and Lockdowns on Cloud Growth

• IDC: Growth was disrupted in FY2Q22 due to lockdowns, which caused delays in capacity move-in and extra operating costs. Recovery in 2H22 is expected to be mild.
• IaaS/PaaS: Demand has shifted from internet companies to traditional enterprises such as financial institutions and SOEs. Telecom operators are becoming more aggressive in the cloud market, with strong growth of ~30% YoY in FY1Q22.
• SaaS: Limited impact from lockdowns due to the subscription-based model. Earnings visibility is less affected by economic cycles compared to IaaS/PaaS and IDC.

2. Sector Outlook and Investment Preference

• The research team prefers SaaS companies over upstream players in the cloud value chain (IDC and IaaS/PaaS) due to their more stable revenue streams and resilience to economic downturns.
• Glonon (002410 CH) and Kingdee (268 HK) are highlighted as top picks due to their strong market positions and growth potential.

3. Key Companies and Performance

• IDC Operators:
  • GDS (002410 CH): Maintained a BUY rating with a new target price of RMB85.00 (up from RMB72.03).
  • 21Vianet (9698 HK): Maintained a BUY rating with a new target price of HK$24.37 (up from HK$18.31).
• IaaS/PaaS Providers:
  • Alibaba Cloud: Strong growth in telecommunications and financial services, but declined in online education and entertainment.
  • Tencent: Reduced loss-making activities and increased self-developed PaaS revenue.
  • China Telecom, China Mobile, China Unicom: Demonstrated strong growth in cloud-related services (IDC, DICT, IoT).
• SaaS Providers:
  • Glodon: Maintained BUY rating with a new target price of RMB85.00.
  • Kingdee: Maintained BUY rating with a new target price of HK$24.37.
  • Yonyou (600588 CH) and MYC (909 HK) received HOLD ratings.
  • Kingsoft Cloud (KC US) and Chinasoft (354 HK) also received BUY ratings.

Key Information

1. IDC Market Outlook

• Demand: Mainly driven by internet cloud service providers.
• Challenges: Lower utilization rates in western regions, higher capex plans, and regulatory requirements for power/land quotas.
• Performance: GDS and 21Vianet showed mixed performance with margin declines in FY2Q22.

2. IaaS/PaaS Market Outlook

• Shift in Demand: From internet to traditional enterprises.
• CSP Adjustments: Companies like Tencent and Kingsoft Cloud have downsized CDN business and focused on profitability.
• Growth: Telecom operators remain strong with ~30% YoY growth in FY1Q22.

3. SaaS Market Outlook

• Resilience: Minimal impact from lockdowns due to subscription model.
• Enterprise Acceptance: SMEs show higher acceptance of SaaS, while large enterprises prefer customized solutions.
• Growth Drivers: Critical software needs (e.g., ERP, construction costing) ensure continued demand.

4. Valuation and Target Prices

• Glodon: Target price increased to RMB85.00 from RMB72.03 based on a revised EV/sales multiple of 12x FY23E.
• Kingdee: Target price increased to HK$24.37 from HK$18.31 based on a revised EV/sales multiple of 11x FY23E.

5. Earnings Revisions

• Glodon: Earnings remained stable with slight improvements in margins.
• Kingdee: Earnings were revised upwards, with improved profitability expectations.

Summary Table of Key Companies

Conclusion

The report suggests that while the cloud market in China faces short-term disruptions due to the Omicron outbreak and lockdowns, SaaS is seen as a more resilient segment. Companies like Glodon and Kingdee are recommended due to their strong fundamentals and growth prospects. The research team also highlights the potential for sector re-rating due to supportive government policies on software localization and the ongoing shift towards more profitable cloud operations.