Chinasoft delivered in-line FY20 results with net profit growth of +26% YoY despite the impact from COVID-19 in 1H20. Revenue from Huawei grew at +22% YoY, which reaffirmed our view that Huawei will survive amid US ban given strong cash and patents on hand while demanding more IT services from Chinasoft to build its software ecosystem. More than expected employees were added in FY20 (+24% YoY to 76k), which could imply strong growth outlook in FY21E. Maintain BUY.
- FY20 core profit +15% YoY. Chinasoft delivered solid revenue growth of +17% YoY to RMB14,101mn in FY20 despite the impact from COVID-19 (2H20 revenue rebounded strongly at +24% YoY). Operating profit was +15% YoY RMB952m, in-line with our estimate. Net profit was at RMB955m, beating our forecast by 8% mainly on higher government subsidies (other income +76% YoY to RMB313m).
- Huawei revenue not slowing amid U.S. sanction. Revenue from Huawei in FY20 increased by 22% YoY to RMB8,030m (57% of FY20 revenue) although Huawei was under U.S. ban. This confirmed our previous view that Huawei will survive given strong cash position and long-accumulated standard essential patents (to receive license fee). Huawei is likely to demand more IT services from Chinasoft as it transforms from hardware to software/service focus (e.g. Harmoney OS/ IoT products/ Huawei cloud).
- Increase in employees reflect strong demand in FY21E. IT service is a labor-intensive business. Increase in no. of employees can largely reflect next year growth outlook. In FY20, Chinasoft increased no. of employees to 75,956 (+24% YoY EoP). This could suggest accelerating revenue growth in FY21E. We are positive that non-Huawei tech clients are growing fast (Alibaba/ Tencent/ Baidu/ Ping An growing at 40%+ YoY in FY20).
- Maintain BUY. We raised FY21-22E net profit by 2-4% mainly to reflect stronger revenue growth. Maintain BUY with new target price of HK$11.57 (prior HK$11.35), based on unchanged 22x FY22E P/E, 50% premium to five-year mean given accelerating growth with better margins. Chinasoft is trading at 15.1x FY22E, 46% discount to Indian IT service peers Infosys and Tata Consultancy of 28x FY22E P/E but with higher sales and EPS CAGR growth in FY20-22E.
