20180822-兴业金融证券-中国软件国际-00354.HK-Margin_Improvement_To_Continue_9页_421kb

Chinasoft International Summary

Core Content and Overview

Chinasoft International, a technology and software services company established in 2000, has been recognized for its strong vertical experience, IT capabilities, and solid reputation among customers. The company is primarily involved in consulting, technology services, and outsourcing, with a focus on sectors such as government, manufacturing, finance, and telecommunications. It has also expanded into cloud services and launched JointForce, an online marketplace that connects programmers and businesses.

The company's performance in 1H18 showed a 45% increase in net profit, exceeding its guidance of 20-30% growth. This was driven by the expansion of its high-margin businesses and a shift in revenue mix, despite a 4.3% YoY growth in revenue from Huawei, which contributes to 52% of the full-year estimates. The company's new businesses saw a 95% YoY revenue growth, contributing 15.4% of total revenue compared to 9.2% a year ago.

The company's GPM (Gross Margin Percentage) improved in 1H18 due to the higher margins from new businesses. Analysts maintain a Buy recommendation with an unchanged target price of HKD7.77, based on a 16x 2019F P/E. The estimated upside is 29% from the current price of HKD6.04.

Main Points and Key Information

Revenue and Profit Growth

• 1H18 net profit increased by 45%, surpassing guidance.
• New businesses grew by 95% YoY in 1H18, contributing 15.4% of total revenue.
• Recurring net profit is expected to grow by 35% in 2018F and 27% in 2019F, with a 29% CAGR in earnings from 2017 to 2020F.

Financial Outlook

• 2018F revenue growth is expected to be 22%, with 2019F at 19.5%.
• Recurring EPS is projected to grow from CNY0.18 (Dec-16) to CNY0.50 (Dec-20F).
• P/E ratio is expected to decline from 28.6 (Dec-16) to 10.5 (Dec-20F), while P/B (Price to Book) is projected to fall from 2.69 (Dec-16) to 1.59 (Dec-20F).

Key Drivers of Growth

• Increase in outsourcing demand from large clients.
• Capturing long-tail customers through the JointForce platform.
• Penetration of overseas markets, especially supported by the Chinese government's "Made in China" and "Internet Plus" strategies.

Key Risks

• High customer concentration, particularly on Huawei and Microsoft.
• Potential rising labor costs in China.
• Uncertainties in the development of JointForce.

Financial Metrics

• Total turnover is projected to grow from CNY6,783m (Dec-16) to CNY15,806m (Dec-20F).
• Gross profit is expected to increase from CNY2,016m (Dec-16) to CNY4,852m (Dec-20F).
• EBITDA is forecasted to rise from CNY720m (Dec-16) to CNY1,618m (Dec-20F).
• Net debt to equity is expected to decrease from 1.4 (Dec-16) to 0.9 (Dec-19F), and net cash by Dec-20F.

Shareholder and Market Data

• Market Cap: USD1,870m.
• Shares outstanding: 2,585m.
• Free float: 60%.
• Shareholders:
  • Yuhong Chen: 11.0%
  • Microsoft: 4.1%
  • Huawei: 3.5%

Investment Rating and Target Price

• Investment recommendation: Buy (unchanged).
• Target price: HKD7.77.
• Estimated return: 29%.
• RHB's rating: Indicates that the share price may exceed 10% over the next 12 months.

Conclusion

Chinasoft International is positioned for continued margin improvement and revenue growth, driven by its high-margin businesses and the expansion of its new ventures. The company is actively building the JointForce platform into a software ecosystem, which is expected to provide additional revenue and profit in the short to medium term. Despite the challenges of high customer concentration and rising labor costs, the company's financial outlook remains positive, with recurring EPS growing significantly over the forecast period. The Buy recommendation reflects the analysts' confidence in the company's ability to deliver strong performance and a solid return to investors.