The first-half results are in line with our expectations.
The company announced its first-half results: operating income of 259 million yuan, an increase of 5.2% over the same period last year, and net profit of 91.89 million yuan, an increase of 4.5% over the same period last year, in line with our expectations. The steady growth of performance is due to the company's strategy of cloud transformation as the core.
Trend of development
Software business growth is under pressure. The revenue from the software business was 214 million yuan, down 6% from the same period last year. The company continues to adjust its product structure to meet the escalating market demand. We expect sales of its T+ products to continue to grow in double digits, and the company is currently focusing on upgrading its T+ product line and encouraging customers to buy. By providing more quality services to customers and helping customers upgrade their ERP systems, product support services business has also achieved steady growth. We expect the company to continue to implement the strategy of optimizing the product structure to reduce the pressure on the growth of traditional software business. Taking into account the company's cost control efforts, we expect the company to maintain flat performance and stable profit margins throughout the year.
With the increase of investment, cloud computing business expands rapidly. The company's cloud business revenue rose 142% year-on-year to 45 million yuan, accounting for 17% of total revenue. Cloud business growth was mainly driven by two major products, good Accounting and T+ Cloud, with year-on-year growth of 99 per cent and 37 per cent, respectively. The company has invested more to accelerate the growth of its cloud business, including research and development and marketing. At the end of 2018, the company expanded its sales team (R & D expenses increased by 45% in the first half of this year compared with the same period last year) and expanded distribution channels (including offline strategic partners and online channels such as Aliyun and Huawei Yun). We expect the company's cloud business to maintain 100% year-on-year growth for the whole year.
Adhere to cost control, the performance is more robust. Although the company has increased its investment in the cloud business (we estimate it to be about 300 million yuan), the company's total expense rate has remained flat thanks to a decline in administrative expenses (the cost of the employee stock ownership plan has significantly narrowed by about 20 million yuan in the first half of the year).
Profit forecast and valuation
We keep our profit forecasts for 2019 and 2020 unchanged. We take a more cautious view of the software business outlook, so the target price is reduced by 28.6% from HK $14 to HK $10.0 based on the category plus total valuation, which is 22.1% upside from the current share price. Maintain an industry rating that outperforms.
Risk
Uncertainty of cloud business; market demand weakens.
