20230331-招银国际-中国软件国际-00354.HK-On_a_slow_road_to_recovery_10页_1mb

Chinasoft (354 HK) Summary

Core Content

Chinasoft (354 HK) reported FY22 results with revenue of RMB20.0bn (+9% YoY) and net profit of RMB759mn (-33% YoY). The performance was impacted by a significant drop in gross profit margin (GPM) to 23.0% (-3.7 ppts YoY), despite better-than-expected operating expense (opex) control (-2% YoY to RMB4bn). The report highlights a slow recovery trajectory, with key factors being reduced reliance on Huawei (from 54% in FY21 to 49% in FY22) and ongoing workforce restructuring (-11% YoY to 82,140 employees).

Main Points

• Revenue Growth: FY22 revenue grew by 9% YoY, but missed expectations by -4% (CMBI) and -9% (consensus).
• GPM Erosion: GPM fell to 23.0%, a 3.7 ppts decrease YoY, mainly due to the impact of the pandemic and increased staff costs.
• Opex Control: Operating expenses decreased by 2% YoY, helping to improve net margin to 3.8% in FY22.
• Profitability: Net profit declined by 33% YoY to RMB759mn, missing both CMBI and consensus estimates.
• Workforce Restructuring: Employee count dropped by 11% YoY, with further reductions expected to 80k by the end of FY23.
• Focus on FY23E: The company will focus on improving profitability and cash flow. Net margin is expected to rise to 4.3% in FY23E, leading to a projected +20% YoY increase in net profit.
• Target Price: The target price was revised to HK$6.08, down from HK$9.14, based on a 15x FY24E P/E multiple.
• Key Catalysts: The launch of Huawei's new MetaERP and Pangu AI model is expected to drive recovery, as Chinasoft provides IT services for these projects.

Key Financials

Revenue Mix

• Cloud Intelligent Services: Grew by +24% YoY to RMB6.62bn.
• Traditional IT Services: Only increased by +2% YoY to RMB13.4bn.
• Huawei Revenue Contribution: Decreased to 49% in FY22 from 54% in FY21, expected to fall further to 35% by FY25E.
• SOE Growth: China Mobile and China Telecom showed strong growth in FY22, at +25% and +39% respectively.

Earnings Revisions

• FY23E: Sales are expected to be RMB21,069mn, a -14% revision from previous estimates. Gross profit is revised to RMB4,564mn (-21% from previous estimate), operating profit to RMB715mn (-39%), and net profit to RMB910mn (-37%).
• FY24E: Sales are expected to be RMB23,264mn (-16% from previous estimate). Gross profit is revised to RMB4,862mn (-27%), operating profit to RMB910mn (-34%), and net profit to RMB1,100mn (-34%).

Valuation and Performance

• Target Price: HK$6.08, with a 19.5% upside from the current price of HK$5.09.
• P/E Ratio: Maintained at 15x FY24E P/E, in line with the 3-year mean.
• Share Performance:
  • 1-month: -9.6%
  • 3-months: -25.0%
  • 6-months: +5.4%
• Market Capitalization: HK$15,407.5mn.
• Shareholding Structure:
  • Chen Yuhong (Chairman): 10.8%
  • UBS Group AG: 9.0%

Operating Model

• Gross Profit: Declined to RMB4,600mn (-6% YoY), with GPM at 23.0%.
• Operating Profit: RMB586mn (-26% YoY), with OPM at 2.9%.
• Net Profit: RMB759mn (-33% YoY), with NPM at 3.8%.
• EPS: RMB0.26 (-36% YoY).
• Workforce Reduction: Expected to continue with a target of 80k by end of FY23.

Key Catalysts

• Huawei's New Products: Launch of MetaERP and Pangu AI model is expected to drive recovery.
• Customer Diversification: Continued focus on expanding beyond Huawei, with SOE clients like China Mobile and China Telecom showing growth.

Analyst Rating

• Maintain BUY: Based on improved margin recovery and potential catalysts.
• Rationale: Gradual improvement in net margin and the impact of Huawei's new product launches are expected to drive re-rating.

Financial Highlights

• Cash and Equivalents: Increased to RMB5,005mn in FY22.
• Net Cash from Operations: RMB1,693mn in FY22, with expectations for continued improvement.
• Capital Expenditure: Maintained at RMB150mn annually.
• Net Debt to Equity: Increased to -0.3 in FY22.

Conclusion

Chinasoft is on a slow recovery path due to GPM erosion, but the company is expected to benefit from reduced Huawei dependency and improved opex control. The focus on profitability and cash flow improvement in FY23E, along with the anticipated new product launches from Huawei, is expected to drive a gradual recovery in net margin and overall performance. The analyst maintains a BUY rating with a revised target price of HK$6.08, reflecting the company's potential for improvement.