20220311-招银国际-中国软件国际-00354.HK-Business_outlook_read-through_from_iSoftStone_10页_1mb

Chinasoft (354 HK) Summary

Core Content

Chinasoft is a leading third-party IT service provider in China, with a significant portion of its revenue coming from Huawei. The company's business outlook is closely tied to Huawei's strategic transformation and expansion into new areas such as cloud services, HarmonyOS, and autonomous driving.

Main Points

• Revenue Growth: Chinasoft is expected to achieve a +29% YoY revenue growth in FY21 to RMB18.2bn, similar to its competitor iSoftStone's +28% YoY revenue growth to RMB16.6bn.
• Margin Concerns: iSoftStone experienced a 2.5 ppts decline in GPM to 24.7% due to increased staff costs and special incentive schemes for Huawei projects. Chinasoft is expected to face similar margin pressure, with a GPM of 29.1% (vs. consensus of 29.3%).
• Share Price Performance: Chinasoft's share price has dropped 39% YTD, trading at 12.7x diluted FY22E P/E, which is below the 3-year mean. The analysts believe the price may still be under pressure due to margin concerns and potential disruptions from the Omicron variant.
• Business Model: Both Chinasoft and iSoftStone have similar business models and customer structures, with >55% of revenue from Huawei.
• Employee Costs: Chinasoft has seen a significant increase in employee costs due to the expansion of Huawei's business, which could continue to affect gross margins.

Key Information

• Earnings Summary:

  • FY19: Revenue RMB12,042m, Net profit RMB755m, EPS RMB0.28
  • FY20: Revenue RMB14,101m, Net profit RMB955m, EPS RMB0.32
  • FY21E: Revenue RMB18,166m, Net profit RMB1,143m, EPS RMB0.36
  • FY22E: Revenue RMB22,352m, Net profit RMB1,356m, EPS RMB0.43
  • FY23E: Revenue RMB26,825m, Net profit RMB1,696m, EPS RMB0.54

• Valuation:

  • Target Price: HK$11.26
  • Current Price: HK$6.23
  • 12-month forward P/E: 12.7x (FY22E)
  • Valuation Multiple: Based on 23x FY22E fully diluted EPS, in-line with peers.

• Financial Highlights:

  • Gross Margin: Expected to remain at 29.1% for FY21, with a slight decline in subsequent years.
  • Operating Margin: Expected to be 5.5% in FY21, with a slight improvement in FY22E to 5.9%.
  • Net Margin: Expected to be 6.3% in FY21, with a slight decline to 6.1% in FY22E.
  • ROE: Expected to increase to 12.9% in FY22E and 14.1% in FY23E.

• Shareholding Structure:

  • Chen Yuhong (Chairman): 12.4%
  • UBS Group AG: 10.2%
  • ESOP: 6.0%

• Stock Data:

  • Market Cap: HK$19,275m
  • Avg 3 mths t/o: HK$167.84m
  • 52w High/Low: HK$16.28 / HK$5.94
  • Total Issued Shares: 3,094m

• Share Performance:

  • 1-month: -24.6%
  • 3-month: -51.2%
  • 6-month: -54.2%

• 12-month Price Performance: As per the provided chart.

Analyst Ratings

• Rating: BUY (Maintain)
• Target Price: HK$11.26
• Up/Downside: +80.7%

Related Reports

• "Huawei worsening balance sheet adds uncertainty" - 10 Jan 2022
• "Strong demand but labour cost weighs on margins" - 25 Aug 2021

Key Ratios

• Revenue Mix:

  • Emerging cloud business: 15% in FY19, 23% in FY21E, 29% in FY22E
  • Traditional IT outsourcing: 85% in FY19, 77% in FY21E, 71% in FY22E

• Growth:

  • Revenue: 14% in FY19, 17% in FY20, 29% in FY21E, 23% in FY22E, 20% in FY23E
  • Gross profit: 10% in FY19, 15% in FY20, 28% in FY21E, 23% in FY22E, 20% in FY23E

• Profitability:

  • ROE: 12.0% in FY19, 12.5% in FY20, 12.2% in FY21E, 12.9% in FY22E, 14.1% in FY23E
  • ROIC: 12.9% in FY19, 13.5% in FY20, 13.8% in FY21E, 17.7% in FY22E, 20.7% in FY23E

• Per Share Data:

  • EPS: RMB0.28 in FY19, RMB0.32 in FY20, RMB0.36 in FY21E, RMB0.43 in FY22E, RMB0.54 in FY23E
  • DPS: RMB0.02 in FY19, RMB0.03 in FY20, RMB0.02 in FY21E, RMB0.03 in FY22E, RMB0.03 in FY23E
  • BVPS: RMB2.45 in FY19, RMB2.93 in FY20, RMB3.14 in FY21E, RMB3.54 in FY22E, RMB4.05 in FY23E

Auditor

• Auditor: Deloitte

Financial Summary

• Income Statement:

  • Revenue: Increasing annually with growth rates ranging from 14% to 29%
  • Gross Profit: Also increasing with growth rates ranging from 10% to 28%
  • Operating Profit: Expected to grow with a slight decline in FY21E
  • Net Profit: Expected to increase with a slight decline in FY22E

• Cash Flow Summary:

  • Net Cash from Operating: Increasing annually with growth rates ranging from 754m to 1,327m
  • Net Cash from Investing: Declining annually with negative values
  • Net Cash from Financing: Increasing in FY21E to 919m

• Balance Sheet:

  • Total Assets: Increasing annually with growth from 10,745m to 20,398m
  • Total Liabilities: Increasing annually with growth from 4,211m to 7,616m
  • Total Equity: Increasing annually with growth from 6,534m to 12,782m

Conclusion

Chinasoft is experiencing strong revenue growth driven by Huawei's expansion into new areas, but faces margin pressures due to increased costs associated with Huawei's strategic transformation. Despite these challenges, the company's long-term growth outlook remains intact. The analysts maintain a BUY rating with a target price of HK$11.26, suggesting that the current share price may still have room for growth, although short-term risks such as margin decline and macroeconomic uncertainty could affect the stock.