20131205-招银国际-Leading_government_and_enterprise_administrative_software_provider_in_Jiangsu_25页_1mb

Summary of Sinosoft Technology Group (1297 HK)

Core Content

Sinosoft Technology Group (1297 HK) is a leading provider of administrative and enterprise application software in Jiangsu, China. Established in 1998 as Nanjing Skytech, the company has grown into a major player in the software industry, with a focus on export tax software, e-Government solutions, carbon management systems, information integration software, and system integration services. The company was listed on the HKEX Main Board in 2013 and is currently valued at a target price of HK$2.24, which implies a 24.6% upside potential from its current price of HK$1.80.

Main Viewpoints

• Market Leadership: Sinosoft is the sole provider of export tax electronic filing software in Jiangsu from 2010 to 2012, capturing 100% of the market revenue. It also holds the largest market share in the e-Government software market in Jiangsu with 9.3% in 2012.
• Government Relations: The company has strong relationships with local government agencies, which are its largest customer group, accounting for over 65% of revenue during FY10–12. This provides visibility and credibility for its contracts.
• Carbon Management Solutions: Sinosoft is the only provider of carbon management software in Jiangsu from 2011 to 2012, giving it a first-mover advantage in a growing market due to environmental policies.
• Strategic Investment: Alibaba.com acquired 25% of Sinosoft’s shares in 2011, reducing to 14% after the company's HKEX listing. This partnership allows Sinosoft to leverage Alibaba's extensive client base and brand recognition.
• R&D Capabilities: The company has a strong R&D team of 389 engineers, with 108 software copyright registrations and 88 software product registrations. R&D expenses increased significantly, and the company is investing heavily in e-Government and carbon management software development.
• Financial Outlook: Revenue is forecasted to grow by 22.1% and 20.8% in FY13 and FY14, respectively, reaching Rmb276.9mn and Rmb334.4mn. Net income is expected to rise by 24.8% and 26.6% to Rmb95.1mn and Rmb120.4mn. The company is valued at 15.0x FY14 EPS, suggesting potential for higher valuation as it gains recognition.

Key Information

Company Overview

• Founded: 1998 by Xin Yingmei, with a focus on Jiangsu Province.
• Products: Export tax software, e-Government solutions, carbon management solutions, information integration software, and system integration solutions.
• Market Position:
  • Sole provider of export tax software in Jiangsu from 2010–2012.
  • Largest e-Government software provider in Jiangsu with 9.3% market share in 2012.
  • Sole carbon management software provider in Jiangsu from 2011–2012.

Financial Highlights

• Revenue:
  • FY11: Rmb185mn
  • FY12: Rmb227mn
  • FY13E: Rmb276.9mn (+22.1% yoy)
  • FY14E: Rmb334.4mn (+20.8% yoy)
• Net Income:
  • FY11: Rmb59mn
  • FY12: Rmb76mn
  • FY13E: Rmb95.1mn (+24.8% yoy)
  • FY14E: Rmb120.4mn (+26.6% yoy)
• EPS:
  • FY13E: Rmb0.107
  • FY14E: Rmb0.117
  • FY15E: Rmb0.139
• Valuation:
  • Current price: HK$1.80
  • Target price: HK$2.24 (15.0x FY14 EPS)
  • Upside potential: 24.6%

Growth Drivers

• Product Upgrade: The main driver for export tax software business.
• Government Policy: Favorable policies under the 12th Five-Year Plan support the growth of the software industry, especially in e-Government and carbon management.
• Strategic Synergy: Alibaba.com's investment provides access to its client base and enhances brand awareness.
• Market Expansion: The growing export sector and environmental regulations in Jiangsu offer significant opportunities for Sinosoft's software solutions.

Risks

• High Account Receivable Days: A/R days reached 323 in FY12, attributed to the longer payment terms of government agencies. However, no impairment losses were recognized, and operating cash flow remained positive.
• Competition: While the company holds a dominant position in Jiangsu, the broader market may see increased competition as the industry matures.
• Regulatory Changes: Environmental and tax policies may shift, affecting the demand for Sinosoft's products.

Conclusion

Sinosoft Technology Group is well-positioned to benefit from favorable government policies, its market leadership in key software segments, and strategic partnerships. With a strong R&D team and a diversified product portfolio, the company is expected to outperform the industry in the coming years. The strategic investment by Alibaba.com and the potential for growth in the carbon management and e-Government sectors support its long-term value proposition.