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1 November 26, 2015 Sinosoft Technology Group [1297.HK] A beneficiary of establishing carbon trading platform. BUY The development of the sales tax refund system for overseas visitors is in line with Sinosoft Technology (SInosoft) management s expectations. The number of merchants connected to system increased from about 20 in Jul 2015 to 170 in Nov Central government is likely to extend the coverage of the sales tax refund for overseas visitors to other provinces which offers growth potential to Sinosoft. China is likely to establish carbon trading platform in 2017 and Sinosoft is one of the potential beneficiaries as the company is a leading carbon management solutions provider. HK-listed IT sector has been gaining market attention recently due to: improvement in sentiment on A-share listed IT names and supportive government policy. We still like Sinosoft and we maintain the view that there are multiple catalysts for the stock going forward including: i) Sinosoft potentially winning the contracts for installation of sales tax refund systems for overseas visitors in other provinces, ii) more favourable policies on environmental protection and carbon emission control, iii) potential co-operation with other financial institutions and iv) potential M&A opportunity. Sinosoft should deliver solid earnings growth of 29.3%/29.9%/25.4% in 2015E/2016E/2017E. We believe the current valuation of 23.4x 2015E still looks reasonable comparing with its peers. Maintain BUY with a target price of HK$6.27 (based on 30x 2015E PER, higher than historical average but still discount to it s A-share listed peers). TMT Sector-Software BUY Close: HK$4.94 (Nov 25, 2015) Target Price: HK$6.27 (+26.9%) Share Price Performance Investment Highlights Update on sales tax refund system. Development of the sales tax refund system for overseas visitors is line with management s expectations. The number of merchants connected to the systems increased from about 20 in Jul 2015 to 170 in Nov The total number of merchants connected to the system will increase to 300 by end of Sinosoft is now in discussion with local governments such as Jiangsu and Yuannan for supplying the systems and solutions. As one of the leading solution providers and we expect Sinosoft to have contract wins in near future and the tax refund system business will make more meaningful contribution in Market Cap US$658m Increasing attention on Paris Climate Conference. Paris Climate Conference will be held as scheduled from Nov 30, 2015 to Dec 11, Sinosoft jointed the UN climate conference in the US earlier this year and we believe that Sinosoft is likely to participate in the Paris Climate Conference for sharing the experience in China. If participants of the Paris Climate Conference manage to reach an agreement on a 2 C ceiling on global warming which could lay a key foundation for the launch of China s carbon emission trading market and implementation of polices regarding energy saving and emission reduction activities. SInosoft is now developing an online reporting system with NDRC for enterprises in China for disclosure of carbon emission figures. Sinosoft is one of the beneficiaries of launching carbon trading market in China as the company has first mover advantage of providing carbon management solutions to local governments and private sectors in China. Management remains positive on outlook. Sinosoft s management remains positive on the company s outlook. The new business development and geographically expansion is for supporting growth in 2H 2016 and Shares Outstanding Auditor Mark Po, CFA Senior Analyst (852) ,032.3m Deloitte Free Float 54.1% 52W range 3M average daily T/O Major Shareholding HK$ US$1.8m Founders & Management (47.9%) Key Financials (in RMB m) E 2016E 2017E markpo@chinastock.com.hk Rev enue Change (y oy %) Gross Prof it Gross Margin % Net Prof it Net Margin % EPS (Basic) Change (y oy %) Wong Chi Man, CFA Head of Research (852) cmwong@chinastock.com.hk DPS $0.015 $0.019 $0.034 $0.044 $0.055 ROE (%) Div idend Yield (%) PER (x) PBR (x) FCF Yield (%) 3.96% 3.22% 4.47% 5.94% 7.91% Capex (m) Free cash f low per sh Net Gearing (%) net cash net cash net cash net cash net cash 1

2 Figure 1: Key Assumptions for Sinosoft F 2016F 2017F Turnover (Rmbm) Export tax softw are and related services e-government solutions Carbon management solutions Information integration softw are YoY Change (%) Export tax softw are and related services (23.2) e-government solutions (16.7) Carbon management solutions n.a (22.8) Information integration softw are (16.0) (16.7) Gross margin (%) Net margin (%) Cost (Rmbm) S,G&A (24.9) (28.1) (35.7) (48.2) (60.2) (73.5) (88.6) (102.6) R&D Expenses (5.02) (15.94) (20.67) (28.46) (33.49) (43.27) (53.90) (62.41) Financial Expenses (1.2) (2.9) (2.7) (1.7) - (1.0) (1.0) (1.0) YoY Change (%) S,G&A R&D Expenses Financial Expenses (4.9) (36.9) (100.0) n.a. - - Export tax software and related services Number of paying customers, accumulative 29, , , , , , , ,439.4 No. of new customers - 5, , , , , , ,107.8 ASP (RMB) - 1, , , , , , ,400.0 Sales of softw are (RMBm) YoY Change (%) Consultation (annual membership fee) No. of customers 22, , , , , , , ,444.9 ARPU (RMB) , , , ,606.0 Consultation Revenue (RMBm) YoY Change (%) 57.1 (4.4) Training (RMBm) Carbon management No. of client (government) Average contract size (RMBm) No. of industries No. of clients Average contract size (RMBm) No. of enterprise clients Average contract size (RMBm) Sources: Company, CGIHK Research 2

3 Figure 2: Earnings projection Income Statement (RMB m) FY2013 FY2014 FY2015F FY2016F FY2017F Cash Flow Statement (RMB m) FY2013 FY2014 FY2015F FY2016F FY2017F Revenue Net Income Growth yoy% 26.4% 23.2% 29.2% 24.6% 15.8% Depreciation & Amort Gross Profit Change in Working Capital (4) (47) (40) (38) (15) Growth yoy% 23.4% 20.3% 30.4% 27.8% 20.9% Cash from Ops Selling General & Admin Exp. (77) (94) (117) (142) (165) Capital Expenditure (2) (3) (4) (4) (4) Others Operating Expenses/Items (9) 3 (0) (1) (2) Sale of Property, Plant, and Equipment Operating Income Change in Investing Acitivities (87) (303) (158) (71) (85) Growth yoy% n.a. n.a. n.a. n.a. n.a. Cash from Investing (90) (306) (161) (74) (90) Interest Expense (1.7) 0 (1.0) (1.0) (1.0) Net increase in bank borrowings (82) Interest and Invest. Income Income/(Loss) from Affiliates Issuance of Common Stock Other Non-Operating Inc. (Exp.) Common Dividends Paid (20) (15) (20) (35) (45) Impairment of Goodwill Special Dividend Paid Gain (Loss) On Sale Of Invest Other Financing Activities (22) (3) (7) (10) (8) Gain (Loss) On Sale Of Assets Cash from Financing 184 (19) (26) (45) (53) Income Tax Expense (11) (23) (29) (38) (47) Minority Int. in Earnings Net Change in Cash 237 (188) Net Income Growth yoy% n.a. 32.4% 33.3% 29.3% 29.9% Balance Sheet (RMB m) FY2013 FY2014 FY2015F FY2016F FY2017F Ratios FY2013 FY2014 FY2015F FY2016F FY2017F ASSETS Sources: Company, CGIHK Research Profitability Cash And Equivalents Return on Assets % 17.9% 17.9% 17.6% 19.2% 20.6% Receivables Return on Capital % 21.9% 21.9% 19.7% 21.4% 22.9% Inventory Return on Equity % 23.6% 23.6% 19.7% 21.3% 22.8% Other Current Assets Total Current Assets ,026 1,281 Margin Analysis Net Property, Plant & Equipment Gross Margin % 66.2% 64.6% 65.1% 66.9% 69.8% Long-term Investments SG&A Margin % 16.2% 16.4% 15.5% 15.0% 15.0% Other Intangibles EBIT Margin % 38.4% 42.9% 43.1% 44.9% 48.6% Deferred Tax Assets, LT EBITDA Margin % 39.2% 43.7% 43.8% 45.5% 49.2% Other Long-Term Assets Net Income Margin % 34.0% 36.7% 36.7% 38.3% 41.5% Goodwill Accounts Receivable Long-Term Asset Turnover Total Long Term Assets Total Asset Turnover 0.4x 0.4x 0.5x 0.5x 0.5x Total Assets ,200 1,455 Fixed Asset Turnover 2.2x 2.1x 2.7x 3.4x 3.9x Accounts Receivable Turnover 1.4x 1.5x 1.6x 1.6x 1.5x LIABILITIES & EQUITY Inventory Turnover 232.4x 354.4x 354.4x 354.4x 354.4x Accounts Payable Accrued Exp Liquidity Short-term Borrowings Current Ratio 7.4x 11.4x 11.4x 11.7x 12.7x Curr. Port. of LT Debt Quick Ratio 7.4x 11.4x 11.4x 11.7x 12.6x Curr. Income Taxes Payable Avg. Days Sales Out Unearned Revenue, Current Avg. Days Inventory Out Other Current Liabilities Avg. Days Payable Out Total Current Liabilities Avg. Cash Conversion Cycle Long-Term Debt Net Debt to Equity net cash net cash net cash net cash net cash Def. Tax Liability, Non-Curr Other Non-Current Liabilities Growth Over Prior Year Total Liabilities Total Revenue 26.4% 23.2% 29.2% 24.6% 15.8% Common Stock Net Income 32.4% 33.3% 29.3% 29.9% 25.4% Additional Paid In Capital Payout Ratio % 13.1% 14.6% 20.0% 20.0% 20.0% Retained Earnings ,078 1,316 Treasury Stock Comprehensive Inc. and Other Minority Interest Total Equity ,086 1,325 Total Liabilities And Equity ,200 1,455 3

4 Figure 3: Peer Comparison Ticker Company PE EV/EBITDA P/B ROE ROA Div yield Price Market Cap 2015F 2016F 2017F 2015F 2016F 2017F F F F F Lcy US$m x x x x x x x x % % % % % % HK Listed Software plays 268 HK Kingdee International Sftwr , HK Sinosoft Technology Group Ltd HK Chinasoft International Ltd , HK Inspur International Ltd n.a. n.a. n.a. n.a. n.a. n.a. 0.8 n.a. 6.5 n.a n.a. 1.9 n.a. 861 HK Digital China Holdings Ltd , n.a HK Vst Holdings Ltd HK Chanjet Information Tech-H n.a Average A-share Listed Software plays CH Shanghai Kingstar Winning-A , n.a CH Beijing Orient National-A , CH Yonyou Network Technology-A , n.a CH Beijing Thunisoft Corp Ltd-A , CH Beijing Teamsun Technology-A , n.a. n.a. n.a. n.a. 7.1 n.a n.a. n.a CH Neusoft Corp-A , n.a. n.a. n.a. n.a. 5.3 n.a. 7.9 n.a. 2.1 n.a. n.a. n.a CH Inspur Electronic Informat-A , n.a CH Bringspring Science And Te-A , n.a. n.a. n.a. n.a n.a n.a. 9.3 n.a. 0.2 n.a CH Ygsoft Inc -A , n.a. n.a. 0.3 Average Overseas Listed Software plays SAP GY Sap Se , n.a. 1.6 CRM US Salesforce.Com Inc , IBM US Intl Business Machines Corp , ORCL US Oracle Corp , Average Sources: Bloomberg, Company, CGIHK Research estimates for covered stocks 4

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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: