CSCI-IT Services-Chinasoft International (354 HK)：“Trade war” concern likely overdone - 20180829

“Trade war” concern likely overdone

• Chinasoft continued to triumph in China’s IT service industry, as evident from a strong set of 1H18 results.
• While the China-US “trade war” poses a threat in the near term, Chinasoft’s strong long-term growth prospects are intact, in our view. On the flip side, Chinasoft is poised to benefit from potential deals between China and the U.S. which could lead to bigger U.S. IT exports to China.
• We trimmed our FY18E/19E revenue and earnings estimates by 5.2%/6.9% and 5.1%/6.7% respectively and lowered our DCF-based price target to HKD7.30.

Cementing industry-leading position securing sustainable long-term growth. Boasting 54,663 employees as of Jun-2018, Chinasoft has continued to cement its industry leading position, evident from the strong set of 1H18 results (+16.1% YoY in revenue and +46.2% YoY in net profit). Though growth is likely to slow down, Chinasoft appears to have built a foundation for more sustainable long-term growth, underpinned by 1) reducing reliance on top-five clients (revenue share down from 73.3% in 1H17 to 67.7% in 1H18), 2) rising share of new businesses (including JointForce, cloud and big data) from 9.2% in 1H17 to 15.4% in 1H18. We expect new businesses to contribute over one-third of Chinasoft’s revenue in three years’ time.

“Trade war” risk remains, but concern likely overdone. Our post-interim NDR with management suggests continued market concern over the China-US trade war, which poses uncertainties on Chinasoft’s biggest customer, Huawei. On the flip side, however, we see potential benefit for Chinasoft in that any trade resolution between China and the U.S. may lead to rising U.S. IT exports to China. Even though a full-blown trade war starts, Chinasoft could weather it well given its trivial direct exposure to the U.S. market as well as the fact that Huawei could be more reliant on Chinasoft for the sake of cost efficiency, in our view.

Compelling entry opportunity at current valuation. We trimmed our FY18E/19E revenue by 5.2%/6.9% and earnings estimates by 5.1%/6.7% respectively, to reflect our more conservative assumption on revenue from Huawei. We lowered our DCF-based price target to HKD7.30 for end-2019 (from HKD7.50 for end-2018). Trading at 12.9x FY19E PER and 1.8x FY19E PBR, Chinasoft’s current valuation suggests a compelling entry opportunity given its strong growth prospects with a CAGR of 25.5% for FY17E-FY20E, in our estimates. Maintain Buy.