SINOSOFT TECHNOLOGY (1297.HK)

Transcription

1 Carbon Management Solution business continues to grow Bloomberg Reuters POEMS 1297.HK 1297.HK 1297.HK Industry: Software & Services Phillip Securities (Hong Kong) Ltd Phillip Securities Research Rating: Accumulate, CP: HKD 2.47, TP: HKD 2.80 Company Profile Sinosoft Tech was a PRC administrative software development company, which is currently focused in the Jiangsu Province. Business is divided into five major categories, the Export Tax Software and related services, e-government Solutions, Carbon Management Solutions, Information Integration Software and Systems Integration Solutions. Company was successfully listed on the Hong Kong Stock Exchange Main Board by initial public offering on July 9, Financial Highlights Sinosoft 2013 revenue reached RMB 281 million (as below), an increase of 23.9% yoy; operating profit was RMB 112 million, an increase of 19.7% yoy. Profit attributable to shareholders increased by 32.4% to RMB 101 million, it was because the company is recognized as a key software enterprise by the state, leading to a reduced income tax rate of 10%. Earnings per share was cents with final dividend 1.5 cents. The leading administrative software developer in Jiangsu Province, ranking No. 1 for several business lines in the province According to Sinosoft s listing prospectus, in 2012, the company was the sole supplier of the Export Tax Software and Carbon Management Solutions in Jiangsu. The main customers were local government organizations and local groups. Since both business owned unique technology, coupled with the primary considerations of its customers in the selection of suppliers were mainly the quality of technology, operation experience and after-sales service, which gave Sinosoft certain pioneer advantage. E-government Solutions business, as of 2012 was still the first in market share in the province of 9.3%. However, the gap has narrowed substantially with the second place 9.2%. Fig e-government Solutions market in Jiangsu SINOSOFT TECHNOL Rating 2.00 Accumulate - Previous Rating N/A Not Rated Target Price (HKD) Previous Target Price (HKD) N/A Closing Price (HKD) 2.47 Expected Capital Gains (%) 13.4% Expected Dividend Yield (%) 0.8% Expected Total Return (%) 14.1% Market Cap. (HKD mn) 2,550 Enterprise Value (HKD mn) 2,611 3M Average Daily T/O (mn) w eek range (HKD) Closing Price in 52 w eek range Key Financial Summary FYE MAR FY13 FY14E FY15E FY16E Revenue (RMB mn) Net Profit, reported (RMB mn) EPS, adj. (HKD cents) P/E (X) P/B (X) DPS (RMB cents) Div Yield (%) 1.2% 1.2% 1.3% 1.6% Source: Bloomberg, PSR est. Valuation Method PE May-13 Jul-13 Sep-13 Volume, mn (RHS) HS I (LHS) 0% 50% 100% Nov-13 Jan-14 Mar HK Equity (LHS) May Research Analyst Kay Ng kayng@phillip.com.hk Source: Company Listing Prospectus, IPSOS 1 of 1

2 For the Information Integration business, although it was not comparable with the foreign well-known software enterprises, Oracle, IBM, Microsoft etc., it was still at the top 5 in the province together with the foreign brands. Fig Information Integration Software market in Jiangsu In addition, Sinosoft s the second largest shareholder was Alibaba, which held 13.32% stake. We believe both companies can work closely with each other, by the unique technology and rich management experience of Export Tax and Carbon Management Solutions of Sinosoft, coupled with strong sales networks and large client base of Alibaba, the company can expand its business by reaching other provinces. Cost of sales decreased slowly, expense as percentage of revenue remained stable Cost of sales as a percentage of revenue decreased from 52% in 2010, to 35.8% in 2013, but it is difficult to continue the decline. Although there was an upward trend in R & D expenditure to revenue, the ratio is around 10% in It is expected in the coming few years, all expense to revenue ratios will become stable. Fig 4 Costs as percentage of revenue estimates Source: Company Listing Prospectus, IPSOS Growth momentum comes from the Carbon Monitoring Solutions and it is expected to expand its business to other provinces In 2013, the revenue from Export Tax Software and related services increased significantly of 73.7% to RMB million. After the internal merging of the Information Integration Software into the e-government Solutions segment, the overall revenue grew only 14.4% to RMB 122 million. System integrated solution slightly increased by 1.1% to RMB million. Carbon Management Solutions business surged 158.8% to RMB million. It is expected in the coming year, the revenue from Export Tax Software and related services will resume it historical growth of around 30%. e-government Solutions revenue will maintain a small increase of 3%, while the System Integration Solutions revenue may reduce by 5% since its market share continued to decline. The revenue growth will mainly be driven by growth in Carbon Management Solutions as the strong demand for carbon calculation and management system due to the government policy to promote environmental protection. In the coming year, the growth is expected to nearly double the current revenue. Fig 3 Revenue mix estimate Source: PSR, Company reports Valuation In recent years, the PRC government was actively supporting the local information software industry, which on the one hand to encourage the information consumption and thus push up the economy, on the other hand also for the protection of national information security. Moreover, the current software development technology in mainland was much more mature than the past. We expected that the market will increase its acceptance of local commercial administrative software in the future. Based on the stable growth of Export Tax Software and Information Integration Solutions, together with the expected rapid development of the Carbon Management Solutions business, we give Sinosoft HK $ 2.52 per share of its business valuation and HK $ 0.28 of cash in hand, and rated as "Accumulate ", target price of HK $ The business valuation HK $ 2.52 is equivalent to 18x/14.8x/12x of forecasted earnings for 2014/2015/2016. Potential risks E-government Software market share continues to decline; The growth of Carbon Management Solutions slowdown significantly; Fail to develop new markets in other provinces; R & D expense ratio continues to rise; Source: PSR, Company reports 2 of 2

3 Financial Status FY12 FY13 FY14E FY15E FY16E Valuation Ratios P/E (X) P/B (X) EV/EBITDA (X) Dividend Yield (%) 0.0% 0.8% 0.8% 0.9% 0.9% Per share data (HKD) EPS DPS BVPS Outstanding Shares (basic, mn) , , , Growth & Margins (%) Growth Revenue 22.7% 23.8% 21.0% 20.6% 20.5% EBIT 32.5% 10.7% 31.9% 21.7% 21.0% Margins Gross profit margin 66.6% 64.2% 65.0% 65.4% 65.8% EBT margin 41.5% 40.0% 39.7% 39.8% 39.7% Net Profit Margin 33.7% 36.0% 35.3% 35.1% 34.6% Key Ratios ROE (%) 32.8% 16.3% 16.2% 16.3% 16.2% ROA (%) 18.4% 14.2% 14.4% 14.7% 14.9% Income Statement (RMB mn) FY12 FY13 FY14E FY15E FY16E Revenue Cost of revenue (76) (101) (119) (142) (169) Gross profit Selling & Marketing expenses (15) (19) (24) (30) (36) Administrative expenses (21) (29) (34) (40) (48) R & D expenses (21) (28) (35) (43) (53) Other income Other expense (10) (13) (3) (3) (3) Operating profit Non operating income (expense) Net finance income (expense) (3) (2) (2) (2) (2) EBT Profit Before Tax Taxation (18) (11) (15) (19) (25) Net Profit EPS Source: Company, PSR 3 of 3

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