This article is from China Galaxy International's research report "TMT Industry Update-which non-hardware TMT stocks will run out?" the author is Bujiajie, an international analyst at China Galaxy.
China Galaxy International published a research report saying that Hong Kong-listed non-hardware TMT shares (+ 15.7%) underperformed major indices such as the Hang Seng Index (+ 21.5%), the State-owned Enterprises Index (+ 17.9%) and the MSCI China Index (+ 18%) so far this year, Zhitong Financial APP learned. But in the past month, non-hardware TMT stocks have caught up and outperformed the market.
Galaxy International believes that its strong performance is due to investors looking for lagging stocks after the rise of large-cap stocks. On the other hand, the recent IPO activity has led to an increase in market attention to non-hardware TMT stocks.
IT service stocks are expected to outperform the market in the short term.
Galaxy International divides the non-hardware TMT shares listed in Hong Kong into several categories:IT services, game developers and social networks, online entertainment, e-commerce and media.
Kingdee International Software Group (00268), China Optimus Software (01297), China Software International (00354), Weishijiajie (00856), China Holdings (00861) and Changjietong (01588)And other IT services stocks outperformed other market segments. Galaxy International believes that this is not only due to plate rotation, but also due to the improvement of basic factors. The improvement in the underlying factors is due to the improvement in the macro environment and the popularity of new technologies (cloud computing, AI, API economy, etc.).
Galaxy International pointed out earlier that the manufacturing PMI released by the National Bureau of Statistics reached 52.4 in September 2017, better than market expectations and the highest since 2010. The better-than-expected PMI reflects that terminal demand in China remains robust. China's industrial profits have also accelerated since the beginning of this year, which is higher than the single-digit increase in 2016. The improvement of the macro environment will not only boost the demand for production-related equipment, but also stimulate IT spending. IT spending in areas such as cloud computing, ERP and big data will help companies improve their performance: better allocate internal resources and create space for research and development; check sales performance in real time; improve efficiency to save costs; and remain competitive.
According to WIND, R & D accounted for about 4.44 per cent of the total revenue of all listed companies (excluding the financial sector) in 2015, up from 3.62 per cent in 2011. Galaxy believes that R & D spending as a share of total revenue will continue to rise, which is expected to boost IT spending. In the short term, IT Services stocks will continue to outperform, not only due to increased market attention to the sector, but also due to the visibility of some companies in China's financial circles.
In addition to Kingdee International Software Group, other shares may also rise. Galaxy International believes that Kingdee is still the main beneficiary of China's development of cloud computing. Kingdee is one of the few IT companies to announce targets for cloud-related businesses, including: to achieve revenue of 3.5 billion to 4.5 billion yuan by 2020; to increase pricing power when the customer base reaches 300000; to achieve operating profit of 200 million yuan in 2019; and to achieve a 30% operating profit margin in the long run. Galaxy International believes that because the company is mainly engaged in cloud-related business, coupled with improved profitability, the market has recently revalued the company.
In addition, Changjietong, another Chinese EPR supplier, will also benefit from the improvement in corporate performance. However, as the market capitalization of Cheongjietong is smaller than that of other TMT shares and the liquidity of transactions is also relatively low, this may be an issue of concern to investors.
In addition, Galaxy International agreed that investors may have doubts about China Holdings and China's giant software, which once put pressure on their share prices. However, Galaxy believes that these concerns have been reflected in the share price. Galaxy International has a more positive view of the two shares, which will boost share price performance if there is an improvement in investment sentiment in the two companies.
China Holdings will focus on the application of big data and cloud technology in the following areas: health care, agriculture, smart city, supply chain management. In addition to big data and Cloud Technology, China Holdings is also developing AI technology to drive long-term growth. China Holdings's business focus has shifted to new areas, such as PaaS (platform as a Service) for the Smart City project, which enables the company to implement API economic concepts to reduce lead time for development projects. Management mentioned that it was possible for the company to introduce strategic investors into new business units to reflect the market value of those units (although they were still at a loss).
As for China's giant software, e-government business (especially judicial products) and carbon management solutions continue to maintain good growth. The company launched value-added services, such as export tax data analysis, to restore growth in the export tax software business, which grew by only 3% in the first half of 2017 compared with the same period a year earlier. The company's long-term growth is still driven by the geographical expansion of its business, the release of new products, government support policies, and potential cooperation with partners. If the company completes the introduction of potential strategic investors, it will become a stock catalyst.
It's time to pay attention to the game developers again.
Overall, the share prices of game developers and social networking divisions have also outperformed the index over the past month, but individual companies have performed differently. Game developers such asIGG (00799), Kingsoft (03888) and Burson (00434)On the other hand, market concerns about their slowing growth and their performance in three quarters limited their share price performance in the third quarter. The valuations of leading game developers have become more reasonable after the share price adjustment.
Despite slower growth in the overall market, slower growth in the number of gamers and rising demand from gamers, game developers with quality games should outperform their peers. It is believed that the market is waiting for the three quarters of 2017 to re-evaluate them, related stocks including IGG and Kingsoft, now or time to re-examine these two shares.
For IGG, the Kingdom era, Castle for Supremacy and Wars of Lords 2 contributed 69 per cent, 23 per cent and 5 per cent of the company's revenues in the first half of 17 years, respectively. The overall ranking of the Kingdom era has been relatively stable since July 2017. IGG is boosting the user base of the Kingdom era, especially since the company launched the Android version of the Kingdom era in China in September 2017.
As for Kingsoft, the negative factors of poor three-quarter results and delayed launch of Mobile JX III should have been reflected in the stock price. If the company splits WPS in 2018, it is expected to help release the value of non-game business. Kingsoft is also one of the leading cloud service providers. Although the cloud business is still losing money, the market should not ignore the growth potential of its cloud business.
Despite the strong performance of the TMT industry, there seems to be little interest in the other three segments (online entertainment, e-commerce and media). Galaxy International believes that this is mainly due to the lack of catalysts for revaluation in the three divisions, weak growth potential and uncertainties about individual companies. It is believed that in the short term, the market will continue to focus on IT services stocks and game developers. (editor: Hu Min)