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Market Review

Corporate News Commentary / Reports Summary

  • A note on Software/IT Service sector

Subsectors drawing our attention are ERP (Kingdee INT’L – 268 HK) and IT Outsourcing (Chinasoft INT’L– 354 HK).

 

ERP: SaaS investment starts to pay off – Kingdee’s cloud based ERP solutions have been driving strong growth in cloud segment revenue, which is RMB 355m in 1H18, accounting for 28% of topline. Its stock price fell after announcing a 26% YoY (missing consensus 60%) Cloud segment growth in 1H18. The company guided >60% YoY Cloud segment growth in 2H18, with revenue reaching RMB 458m, giving full year growth of 45% YoY. While the government is vigorously promoting “enterprise Cloud adoption”, Kingdee benefits as the domestic market leader with 18% Enterprise SaaS market share, twice that of the 2nd place. According to iResearch, the SaaS market would have a 4-year CAGR of ~30% in China. Though promising longer term, it’s rather unattractive on 49x 2019E P/E.

 

IT Outsourcing: New social security policy weighs on labor cost – As the largest IT outsourcing vendor in China, Chinasoft has 55k employees with RMB ~180k annualized revenue per head. The company will incur extra ~RMB800/month labor cost per head if it is going to absorb all the difference according to our worst-case estimate. The company also suffers from the slowdown in clients’ outsourcing demand (from double-digits to 8% in 1H18), especially from its largest client, Huawei, which accounts for half of its RMB 4.8b revenue. Its revenue from Cloud and Jointforce platform doubled to RMB 742m in 1H18, becoming the new driver.

 

Conclusion: Software/IT Service sector is in the transition period, with cloud based solutions in vogue. While promising long-term, valuation, sales growth and efficiency are keys to watch. (Steven Nie)

 

China Market News

  • China stocks closed higher last Friday, led by consumer stocks.
  • Shares of financial sectors and real estate sectors also had strong performances.