20210604-招银国际-中国软件国际-00354.HK-Huawei_debut_Harmony_OS_for_smartphone_10页_1mb

CMB International Securities | Equity Research | Company Update Summary

Core Content

This report provides an update on Chinasoft (354 HK), highlighting the company's potential to benefit from Huawei's launch of Harmony OS 2.0 for smartphones. The report also includes financial performance data, earnings revisions, valuation metrics, and key ratios.

Main Points

Huawei's Harmony OS 2.0 Launch

• Launch Date: 2 Jun 2021
• Purpose: Designed for multiple devices, aiming for 300 million devices by 2021, with 200 million being Huawei's consumer products.
• Nature of the OS: Based on Android open source code, not a proprietary OS. It is similar to Android, and apps are Android-based.
• Challenges:
  • Incentivizing developers to port apps to the new OS is difficult due to time and cost.
  • Adoption by other Chinese smartphone brands is unlikely, limiting the market to home appliances and IoT products.

Implications for Chinasoft

• New Revenue Streams:
  • Developing Kits: Chinasoft can help Huawei develop different types of kits on Harmony OS, generating RMB250mn annually if developing 500 kits.
  • Embedded Modules: Providing embedded modules to IoT OEMs, with a potential RMB100mn revenue if taking 10% market share of 100 million non-Huawei smart devices.
  • Co-development: Collaborating with OEMs on IoT product development, which can be charged on a project basis or by fixed fee per device.

Earnings Revision

• Revised FY21E-23E:
  • Sales: FY21E RMB17,905mn (up 3% from previous estimate), FY22E RMB21,197mn (up 4%), FY23E RMB24,069mn (up 2%).
  • Net Profit: FY21E RMB1,189mn (up 3%), FY22E RMB1,433mn (up 4%), FY23E RMB1,673mn (up 2%).
  • EPS: FY21E RMB0.40 (up 3%), FY22E RMB0.48 (up 4%), FY23E RMB0.56 (up 2%).

Valuation

• Target Price: HK$12.00 (up from HK$11.57)
• P/E Ratio: Based on 22x FY22E P/E, reflecting a 50% premium to its five-year mean.
• Rating: Maintain BUY.

Financial Highlights

• Revenue Growth: Expected to grow from RMB12,042mn in FY19A to RMB24,069mn in FY23E.
• Profitability: Net profit is projected to increase from RMB755mn in FY19A to RMB1,673mn in FY23E.
• Margins:
  • Gross margin remains stable at 29.6%–29.8%.
  • Operating margin increases from 6.9% to 7.4%.
  • Net margin rises from 6.3% to 7.0%.

Share Performance

• Market Cap: HK$20,310mn
• Shareholder Yield:
  • Dividend Yield: 0%
  • EPS Growth: 23% in FY21E, 19% in FY22E, 17% in FY23E

Key Ratios

• Growth:
  • Revenue growth: 14% in FY19A, 17% in FY20, 27% in FY21E, 18% in FY22E, 14% in FY23E.
• Profitability:
  • ROE: 12.0% in FY19A, 12.5% in FY20, 12.7% in FY21E, 13.6% in FY22E, 13.9% in FY23E.
  • ROIC: 12.9% in FY19A, 13.5% in FY20, 18.7% in FY21E, 22.7% in FY22E, 24.2% in FY23E.

Balance Sheet

• Total Assets: Rises from RMB10,745mn in FY19A to RMB20,306mn in FY23E.
• Total Liabilities: Increases from RMB4,211mn in FY19A to RMB7,492mn in FY23E.
• Equity: Grows from RMB6,534mn in FY19A to RMB12,814mn in FY23E.

Key Information

• Chinasoft's Relationship with Huawei: Strong, with Chinasoft expected to benefit from the Harmony OS ecosystem development.
• Market Outlook: Chinasoft is expected to benefit from the transition to Harmony OS, despite challenges in app development and market adoption.
• CMBIS Rating: Maintain BUY, with a target price of HK$12.00.
• Risks: The report acknowledges the risks associated with investing in any securities and emphasizes that the information is not tailored for individual investors.

Summary of Financial Metrics

Valuation Comparison

Conclusion

Chinasoft is expected to benefit from Huawei's Harmony OS initiative, despite the challenges in app porting and market adoption. The company's strong relationship with Huawei, along with its diversified client base and growing cloud business, supports its continued growth. CMBIS maintains a BUY rating with a target price of HK$12.00, based on its projected financial performance and valuation.