20220715-招银国际-中国软件国际-00354.HK-Shenzhen_to_provide_subsidies_in_building_Harmony__Euler_ecosystem_10页_1mb

Chinasoft (354 HK) Company Update Summary

Core Content

This report provides an update on Chinasoft (354 HK), a Chinese IT services and cloud computing company, focusing on its performance, market position, and future outlook. The analysis is centered around the company's growth in cloud intelligent services, challenges in the traditional IT services segment, and the impact of Shenzhen's initiatives to support the development of Huawei's Harmony and Euler ecosystems.

Main Points

• Government Support for Harmony/Euler Ecosystem:

  • Shenzhen government released a draft for opinion on 30 June 2022 to support the development of HarmonyOS and Euler OS.
  • Subsidies will be provided to both end users and software developers to encourage the adoption of HarmonyOS and Euler OS products.
  • This initiative is expected to positively impact Chinasoft, which develops kits on HarmonyOS and provides embedded modules for IoT OEMs.

• Cloud Intelligent Services Growth:

  • Chinasoft's share in the managed cloud services market increased to 3.1% in 2H21, up from 2.5% in 1H21.
  • Despite a dampened outlook for the broader China cloud market due to the Omicron variant, Chinasoft is optimistic about new businesses related to HarmonyOS and embedded IoT modules.

• Traditional IT Services:

  • The traditional IT services segment may experience slower growth due to reduced IT spending by internet customers.
  • Alibaba and Tencent accounted for approximately 7% of Chinasoft's revenue, and their contribution is expected to grow at a slower rate compared to previous years.
  • Lockdowns and the spread of Omicron have also delayed project implementations.

• Financial Performance:

  • Chinasoft's FY1H22E revenue is expected to grow by 15% YoY to RMB9.6bn, with a GPM erosion of -1.7 pts to 25.8%.
  • Net profit is projected to increase by 5% YoY to RMB544mn.
  • The report cuts FY22-24E net profit by 1-8% due to lower margins but maintains a "BUY" rating with a new target price of HK$9.87.

• Earnings Revision:

  • The company's earnings for FY22E, FY23E, and FY24E have been revised downward in certain metrics, reflecting lower profit margins.
  • The new estimates are based on 18x FY23E fully diluted EPS and suggest a 30% premium over the past three years' average.

Key Information

• Target Price: HK$9.87 (Prior: HK$10.52)

• Current Price: HK$7.38

• Up/Downside: +33.7%

• Market Cap (HK$ mn): 22,654

• Average 3 Months Turnover (HK$ mn): 92.75

• 52-Week High/Low (HK$): 16.21 / 5.26

• Total Issued Shares (mn): 3,070

• Shareholding Structure:

  • Chen Yuhong (Chairman): 10.8%
  • UBS Group AG: 10.0%
  • ESOP: 6.0%

• Earnings Summary (YE 31 Dec):

  • Revenue (RMB mn): FY20: 14,101; FY21: 18,398; FY22E: 22,124; FY23E: 27,283; FY24E: 32,412
  • Net Profit (RMB mn): FY20: 955; FY21: 1,137; FY22E: 1,249; FY23E: 1,520; FY24E: 1,978
  • EPS (RMB): FY20: 0.32; FY21: 0.36; FY22E: 0.40; FY23E: 0.48; FY24E: 0.63
  • PE (x): FY20: 20.2; FY21: 17.9; FY22E: 16.3; FY23E: 13.4; FY24E: 10.3
  • EV/Sales (x): FY20: 1.2; FY21: 0.8; FY22E: 0.6; FY23E: 0.5; FY24E: 0.4

• Valuation and Financials:

  • Net cash from operating: FY22E: RMB2,030; FY23E: RMB847; FY24E: RMB1,101
  • Cash at the end of the year: FY22E: RMB7,591; FY23E: RMB8,409; FY24E: RMB9,507
  • Total assets: FY22E: RMB18,011; FY23E: RMB20,227; FY24E: RMB23,050
  • Total liabilities: FY22E: RMB5,229; FY23E: RMB6,039; FY24E: RMB7,032
  • Total equity: FY22E: RMB12,782; FY23E: RMB14,188; FY24E: RMB16,019

• Key Ratios:

  • Gross margin: FY20: 29.2%; FY21: 26.7%; FY22E: 25.7%; FY23E: 25.8%; FY24E: 26.2%
  • Operating margin: FY20: 6.7%; FY21: 4.3%; FY22E: 4.1%; FY23E: 4.5%; FY24E: 5.0%
  • Net margin: FY20: 6.8%; FY21: 6.2%; FY22E: 5.6%; FY23E: 5.6%; FY24E: 6.1%
  • ROE (%): FY20: 12.5%; FY21: 11.1%; FY22E: 10.2%; FY23E: 11.3%; FY24E: 13.1%

Strategic Opportunities

• Harmony OS Ecosystem Development:
  • Chinasoft is helping Huawei develop various kits on Harmony OS, which could generate RMB250mn in revenue annually if 500 kits are developed.
  • Chinasoft provides embedded modules to IoT OEMs, with a potential revenue opportunity of RMB100mn if it captures 10% of the non-Huawei smart devices on Harmony OS.
  • Chinasoft can co-develop IoT products with OEMs, charging on a project basis or by fixed fee per device deployed.

Analyst View

• The report maintains a "BUY" rating for Chinasoft, citing its potential for growth in cloud services and the positive impact of Shenzhen's initiatives.
• The new target price of HK$9.87 reflects a revised valuation based on expected margin improvements in FY23-24E.
• The analyst believes that the government's support will incentivize developers and end users to adopt HarmonyOS, which will benefit Chinasoft.

Related Reports

• Chinasoft (354 HK) - "Strong demand despite near-term margin pressure" (30 Mar 2022)
• Chinasoft (354 HK) - "Business outlook read-through from iSoftStone" (11 Mar 2022)

Conclusion

Chinasoft is positioned to benefit from Shenzhen's support for the Harmony and Euler ecosystems, particularly in cloud intelligent services. While the traditional IT services segment may face slower growth due to reduced demand from internet customers, the company's strategic initiatives and government-backed programs are expected to drive long-term growth and profitability. The report maintains a "BUY" rating with a revised target price, reflecting the company's potential to outperform the market despite near-term margin pressures.