20220830-招银国际-中国软件国际-00354.HK-FY1H22_beat,_workforce_restructuring_in_progress_9页_1mb

Chinasoft (354 HK) Company Update Summary

Core Content Overview

Chinasoft, listed on the Hong Kong Stock Exchange (ticker: 354 HK), delivered strong FY1H22 results with revenue and net profit growth of +20% and +10% YoY, respectively, reaching RMB10.025 billion and RMB572 million. However, the gross profit margin (GPM) declined by 2.8 percentage points YoY to 24.8%, primarily due to the large-scale resurgence of the pandemic, increased investment in mid-to high-end technical staff, and rising labor costs. Operating profit increased by +15% YoY to RMB485 million, driven by a reduction in operating expenses (opex) ratio to 19.9%, with 45% of the cost savings attributed to lower share-based compensation.

Main Points and Key Information

Revenue Growth and Diversification

• Revenue: RMB10.025 billion (+20% YoY), in line with estimates.
• Cloud Intelligent Services: Grew by +51% YoY to RMB3.21 billion.
• Non-Huawei Revenue: Increased by +29% YoY to RMB4.76 billion.
• Huawei Revenue: Rose by +14% YoY to RMB5.26 billion, representing 52.5% of total FY1H22 revenue.

Workforce and Guidance

• Employee Count: 91,114 (-1.0% HoH), up 9.5% YoY.
• FY22E Guidance: Maintained with revenue growth of +20-30% YoY and net profit growth of +10-20% YoY.
• FY23E Growth: Expected to slow due to reduced workforce, with net profit revised down by 8-16% due to conservative estimates on Huawei business.

Earnings and Valuation

• Net Profit: RMB572 million (+10% YoY), beating consensus by 9%.
• EPS: RMB0.196 (+4% YoY).
• Target Price: Revised to HK$7.79 (from HK$9.87), based on a 15x fully diluted FY23E EPS, in line with the three-year mean.
• Forward P/E Band: Reflects the valuation relative to peers, showing a range that is competitive with industry benchmarks.

Financial Highlights

Earnings Summary

Revenue Breakdown (FY1H22)

• Cloud Business: RMB3.21 billion (+51% YoY)
• Traditional IT Services: RMB6.81 billion (+10% YoY)
• Huawei: RMB5.26 billion (+14% YoY)
• Non-Huawei: RMB4.76 billion (+29% YoY)

Operating Model

• Gross Margin: 24.8% (vs. 26.2% consensus), declined by 2.8 ppts YoY.
• Operating Margin: 4.8% (vs. 4.1% consensus), improved by 0.3 ppts YoY.
• Net Margin: 5.7% (vs. 5.2% consensus), improved by 0.6 ppts YoY.

Strategic Initiatives

• Cloud Business Expansion: Chinasoft aims to sign RMB2 billion in cloud-related contracts in FY22, targeting 10% of Huawei's managed cloud service (MCS) market share.
• Workforce Restructuring: Ongoing to improve efficiency and reduce labor costs, with employee count down by 925 compared to the end of 2021.

Analyst Ratings and Recommendations

• Ratings: Maintain BUY.
• Target Price: HK$7.79 (up/downside +25.5% from current price of HK$6.21).
• Reasoning: Positive on revenue diversification, despite margin pressure, with a conservative outlook on Huawei business.

Shareholding and Stock Data

• Market Cap: HK$18,885 million.
• Avg 3-Month Turnover: HK$92.07 million.
• 52-Week High/Low: HK$14.71 / HK$5.26.
• Total Issued Shares: 3,066 million.
• Key Shareholders: Chen Yuhong (Chairman) - 10.8%, UBS Group AG - 10.0%.

Valuation Comparison with Peers

Key Ratios

Conclusion

Chinasoft demonstrated resilience in FY1H22 with strong revenue growth, supported by its expanding cloud and non-Huawei businesses. However, margin pressures persist due to the pandemic, increased labor costs, and higher technical staffing. Despite these challenges, the company maintains a BUY rating with a revised target price of HK$7.79, reflecting a more conservative outlook on future earnings. The firm is focusing on workforce restructuring and revenue diversification to sustain growth in the long term.