CSCI-IT Services-Chinasoft International (354 HK)：Leading the way in China’s IT evolution - 20180327

Leading the way in China’s IT evolution  

• Chinasoft reported a strong set of FY17 headlines, with revenue and recurring net profit ahead of our and market expectations. The company announced a final DPS of HKD0.018 (HKD0.012 for FY16). 
• In 2017, Chinasoft continued to make solid progress in adding new customers, expanding its global reach and upgrading its JointForce online IT service platform, paving the way for sustainable long-term growth.
• We have revised up our FY18/19E revenue and net profit estimates by 10.4%/9.1% and 0.1%/4.6%, respectively, and raised our DCF-based price target to HKD7.50 (from HKD6.20), implying 20.4% potential upside. Maintain Buy.

A strong set of FY17 headlines. Chinasoft reported a strong set of FY17 headlines that beats our and market expectations. Revenue rose 36.3% YoY, driven by Huawei (+34.1% YoY, 52.7% of total revenue), HSBC (+61% YoY, 6.5% of total revenue), Tencent and Ping An (each c.2% of total revenue) and JointForce (2-fold growth, 3% of total revenue). In spite of strong revenue growth, Chinasoft was able to improve gross margin to 29.8% (from 29.7% in FY16). Excluding share option expenses, underlying net profit rose 46.8% YoY. The company announced a final DPS of HKD0.018 (HKD0.012 for FY16).   

Expanding large-customer base. As of end-17, Chinasoft boasted 1,590 (1,465 as of end-16) active customers, including 112 (79 as of end-16) large customers (more than HKD6mn revenue). In addition, Chinasoft continued to expand its global foothold, including Romania, India, Kenya, Singapore, the U.S and Mexico, etc., which would pave the way for Chinasoft to foster long-term growth drivers, in our view. 

Leading the way in China’s IT evolution. Boasting 50,823 employees, Chinasoft is leading the way in China’s IT industry evolution, e.g. moving to cloud, moving to high-end and moving globally. Since the launch in 2014, Chinasoft’s online IT service platform, JointForce, has become increasingly popular among small-to-mid-sized developers and customers. In FY17, the GMV of JointForce reached RMB1.35bn, representing a 6-fold growth, driving tripling revenue.

Still room for re-rating. On the back of a more positive outlook for its large-customer and overseas market, we have revised up our FY18/19E revenue and net profit estimates by 10.4%/9.1% and 0.1%/4.6%, respectively (Incl. share option expenses) and also raised our DCF-based price target to HKD7.50 (from HKD6.20). Chinasoft currently trades at FY18E 17.0x PER and 2.3x PBR, which suggests still ample room for re-rating in view of its strong growth momentum and strengthening leadership position in China’s IT service industry as well as expanding global reach. Maintain Buy.