20230302-招银国际-中国软件国际-00354.HK-US_is_reviewing_Huawei_export_license_policy_8页_1mb

Chinasoft (354 HK) Summary

Core Content and Key Information

Chinasoft (354 HK) is a Hong Kong-listed company that provides IT services, including software and hardware product development, testing, and life cycle management, primarily to Huawei. The company has a significant revenue contribution from Huawei, which accounted for 54% of total revenue in FY21.

The US is reviewing its export license policy for Huawei, potentially restricting not only 5G technology but also older 4G products. This could impact Huawei's product development and, in turn, Chinasoft's revenue and margin outlook. The Biden administration is considering revoking export licenses for US suppliers like Qualcomm and Intel, which may affect Chinasoft's operations and financial performance.

Chinasoft's current share price is HK$5.97, with a target price of HK$9.14 (unchanged), suggesting a potential upside of 53.1%. The company's market capitalization is HK$17,042.1 million, with a 3-month trailing return of HK$6.7 million. The 52-week high and low are HK$8.17 and HK$4.83, respectively. The company is held by Chen Yuhong (Chairman, 10.8%) and UBS Group AG (10.0%).

Main Points

• US Export Restrictions: The US may restrict exports to Huawei, including 4G products, which could affect Chinasoft's revenue and margin.
• Huawei Dependency: Chinasoft derives 54% of its revenue from Huawei, making it highly sensitive to any changes in Huawei's business environment.
• Financial Performance:
  • Revenue is expected to grow from RMB 14,101 million in FY20 to RMB 27,773 million in FY24, with a CAGR of 15%.
  • Net profit is projected to increase from RMB 955 million in FY20 to RMB 1,674 million in FY24.
  • Operating margin has shown a decline from 6.7% in FY20 to 4.3% in FY22, but is expected to recover to 4.9% in FY24.
• Valuation:
  • The company's current P/E ratio is 14.9x, and the target P/E is 9.7x for FY24.
  • The EV/Sales ratio has been declining, from 1.6x in 2019 to 0.3x in FY24.
  • The analyst recommends a BUY rating with an unchanged target price of HK$9.14.

Revenue and Profit Trends

Margins

Revenue Mix (FY1H22)

• IT Outsourcing: 10,830 RMB mn
• Emerging Cloud Business: 3,271 RMB mn
• Huawei: 8,030 RMB mn
• HSBC: 830 RMB mn
• Tencent: 500 RMB mn
• Alibaba: 400 RMB mn
• Ping An: 450 RMB mn
• Others: 3,891 RMB mn

Analyst Recommendations and Outlook

• Investor Advice: Suggest investors to focus on margin trends in the March results announcement.
• Long-Term Outlook: The analyst is positive on the long-term software localization trend and the recovery of enterprise IT spending post-COVID.
• Earnings Forecast: The analyst has not adjusted the earnings forecast.
• Risk: Concerns about the earnings downside risk due to potential Huawei restrictions on suppliers.

CMBIGM Ratings

• BUY: Stock with potential return of over 15% over the next 12 months.
• OUTPERFORM: Industry expected to outperform the relevant broad market benchmark over the next 12 months.

Disclaimer

• The report is for informational purposes only and not tailored to individual investors.
• CMBIGM is not a registered broker-dealer in the United States and is not subject to U.S. rules regarding the preparation of research reports.
• The information is based on analyses and interpretations of publicly available data and is not guaranteed for accuracy or completeness.
• The analyst confirms no conflicts of interest and no financial interests in the companies covered in the report.