20230112-招银国际-中国软件国际-00354.HK-Benefiting_from_localization_trend_with_KaihongOS_11页_1mb

Chinasoft (354 HK) Summary

Core Content and Key Takeaways

Chinasoft (354 HK) is positioned to benefit from the ongoing localization trend in China, particularly through its involvement in the development of KaihongOS, a system based on OpenHarmony. This system is being utilized for IoT (Internet of Things) applications, and Chinasoft is collaborating with SZ Kai Hong, a joint venture between Beijing Chinasoft and Shenzhen Capital, with Huawei indirectly holding a 20% stake. The company's new businesses segment is expected to drive growth, fueled by the demand for digitalization across key industries such as manufacturing, transportation, infrastructure, healthcare, finance, and education.

Chinasoft has also been engaged in Kunpeng (ARM) cloud migration and the development of Huawei ERP applications, further enhancing its role in the local IT services market. The company's Traditional IT Outsourcing segment is expected to see steady growth, with revenue projected to increase by +5% in FY22E and +13% in FY23E, as the post-pandemic recovery leads to increased enterprise IT spending.

Revenue and Profit Projections

The company is expected to maintain a BUY rating with a new target price of HK$9.14, up from the previous target of HK$7.79. This reflects the analysts' confidence in the company's ability to capitalize on the reacceleration of enterprise digitalization and IT spending in China as COVID restrictions ease.

Revenue Mix and Growth Drivers

• KaihongOS: Includes IoT product sales and IT outsourcing services, expected to generate RMB2.5bn in FY22E, accounting for 12% of total revenue.
• New Businesses: Expected to grow by 34% in FY22E and 25% in FY23E, driven by the localization trend, which includes:
  1. KaihongOS R&D
  2. Huawei Cloud migration using Kunpeng (ARM) chipsets
  3. ERP application software
  4. IoT devices R&D based on KaihongOS

Operating Model and Financial Performance

The operating model highlights the company's focus on IT outsourcing and emerging cloud services. The revenue breakdown for FY22E includes:

• IT outsourcing: RMB13,716 mn
• Emerging cloud business: RMB7,149 mn
• Huawei-related revenue: RMB9,979 mn
• Others: RMB7,603 mn

The operating margin is expected to remain stable, with a slight increase in FY23E. Net profit is projected to grow from RMB1,171.5 mn in FY22E to RMB1,435.1 mn in FY23E, and RMB1,674.1 mn in FY24E.

Valuation and Market Position

• Current Price: HK$7.12
• Target Price (TP): HK$9.14 (+28.3% upside)
• 15x Fully Diluted FY24E P/E: In-line with the 3-year mean
• EV/Sales (x): Expected to decrease from 0.6 in FY22E to 0.4 in FY24E
• Dividend Yield (%): Expected to rise from 0.5 in FY22E to 0.7 in FY24E

Compared to peers, Chinasoft is expected to have a lower P/E ratio in FY24E (11.4x), suggesting potential undervaluation. The company's ROE is also projected to improve from 9.7% in FY22E to 11.4% in FY24E.

Shareholding and Market Data

• Market Cap (HK$ mn): 21,552.3
• Avg 3 mths t/o (HK$ mn): 6.3
• 52w High/Low (HK$): 8.90/4.83
• Total Issued Shares (mn): 3,027.0

Key shareholders include Chen Yuhong (Chairman) with 10.8% and UBS Group AG with 10.0%.

Share Performance

The 12-month price performance shows a mixed trend, with a +44.1% return in the 3-month period and a -6.8% return in the 6-month period.

Financial Highlights

• Gross profit margin: Expected to decrease from 24.3% in FY22E to 23.6% in FY23E, but increase slightly in FY24E.
• Operating margin: Stable, with an expected increase to 4.9% in FY24E.
• Net margin: Expected to increase from 5.6% in FY22E to 6.0% in FY24E.

Analyst Certification and Disclosure

The analyst certifies that the views expressed in the report accurately reflect their personal views and that they are not involved in trading the stock covered in the report within 30 days prior to its release. The report does not provide individually tailored investment advice and is not a recommendation for any specific investment.

CMBIG Ratings

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

Conclusion

Chinasoft is well-positioned to benefit from the localization trend and post-pandemic digitalization in China. The company's new businesses are expected to drive significant growth, while its traditional IT outsourcing remains a stable revenue source. The BUY rating reflects the analysts' confidence in the company's future performance, with a target price of HK$9.14. The company's valuation appears favorable, with lower P/E ratios and improving ROE, suggesting potential for future value appreciation.