The company will work with Shenkaihong and Shenzhicheng to develop a digital city in Shenzhen to push Hongmeng further towards edge intelligence and empower smart cities. We believe that Chinasoft International is expected to benefit from the urban system and related ecological development needs brought about by the construction of Shenzhen's Hongmeng Euler City. Considering that the current form of cooperation and the pace of potential implementation still need to be tracked and confirmed, we maintain the company's 2023-2025 EPS forecast at HK$0.35/0.44/0.58. Combined with the valuation of comparable companies, we gave it 18 times PE for 2024, corresponding to the target price of HK$8, and maintained the “buy” rating.

Matters: On November 16, 2023, the company issued an announcement. Beijing Chinasoft International Information Technology Co., Ltd. (hereinafter referred to as “Chinasoft International”), Shenzhen Kaihong Digital Industry Development Co., Ltd. (“Shenzhen Kaihong”) and Shenzhen Smart City Technology Development Group Co., Ltd. (hereinafter referred to as “Shenzhen Smart City”) formally signed a comprehensive strategic cooperation agreement. The three parties will focus on the Shenzhen Digital Twin Pioneer City Action Plan and promote comprehensive and deepening cooperation in emerging technologies such as open source Hongmeng and AIGC big models in the fields of pioneering platforms, pioneer applications, pioneer data, pioneer technology, etc., to achieve win-win development.

Business progress: new developments in smart cities, new applications of domestic operating systems. According to the company announcement, the three parties will combine their respective strengths and capabilities. With its deep information technology service capabilities and extensive practice in the field of intelligent IoT, China Soft International will work with the other two parties to consolidate the foundation, innovate applications, co-build ecology, restructure models, expand markets, etc., promote comprehensive application access to city-level IoT sensing platforms, and build integrated urban service intelligence covering end, edge, network, cloud, and service, and jointly research and develop national, industry, and regional standards based on IoT perception. In terms of industry applications, intelligent innovation is carried out around “CIM+ smart water conservancy, smart transportation, smart pipe gallery and other scenario applications”, promoting the integrated breakthrough development of KaiHongOS and AIGC models and digital twin solutions, and promoting the construction of “industry prosperity”.

Policy support: As a city of Hongmeng Euler, Shenzhen has proposed several major development goals until 2025. On July 28, 2023, the Shenzhen Bureau of Industry and Information Technology issued the “Shenzhen Action Plan to Promote Open Source Hongmeng Euler Industrial Innovation and Development (2023-2025)”, which proposes several major development goals until 2025, namely leading core technology, high industrial concentration, rich application scenarios, complete ecological support, and global industrial radiation. Among them, more quantitative requirements are put forward for goals such as high industrial concentration and rich application scenarios. Specifically, the industry is highly concentrated: by 2025, Shenzhen Hongmeng Euler's overall industrial strength will rank first in the country and lead the world, becoming an export destination for industrial standards and a preferred place for the development of distribution companies. Hongmeng Euler has achieved remarkable results in building an industrial ecosystem, gathering more than 1,000 industry players and promoting a large number of equipment manufacturers to develop Hongmeng and Euler products. The scale of equipment in use nationwide has reached 1 billion units. There are plenty of application scenarios. By 2025, more than ten new industries and no less than 100 organizations will use Hongmeng and Euler products to create more than 100 industry application benchmarks that can be replicated and promoted, and achieve full coverage of Hongmeng and Euler applications in key industry areas. In promoting the new market for server operating systems for critical information infrastructure in the city, Euler accounts for more than 40% of the market; in the national smart terminal operating system ecosystem, Hongmeng occupies an important position.

Risk factors: The rise in the company's labor costs exceeded expectations; the risk that Huawei was disrupted by the supply chain; Hongmeng's ecological development fell short of expectations; market competition intensified; the liquidity of Hong Kong stocks was tightening; and the recovery of the macroeconomic environment fell short of expectations.

Investment advice: Hongmeng further moves towards edge intelligence, empowers smart cities, and brings new demand to Hongmeng's ecological development. We believe that China Soft International, as a strategic partner in the same boat for Shenzhen Kaihong and Shenzhen Smart City, is expected to benefit from the urban system and related ecological development needs brought about by the construction of Shenzhen's Hongmeng Euler City. Considering that the current form of cooperation and the pace of potential implementation still need to be tracked and confirmed, there is some uncertainty, we maintain the company's 2023-2025 EPS forecast of $0.31/0.39/0.51, equivalent to HK$0.35/0.44/0.58.

The company's cloud intelligence business continues to grow, and is progressing smoothly in businesses such as Hongmeng Ecology, Meta ERP, and smart cars. We combine Hong Kong stocks and comparable companies such as Wave Digital Enterprise (0596.HK), 14 times PE (Wind unanimous expectations) in 2024, Softcom Power (301236.SZ) 28 times PE in 2024 (Wind unanimous expectations), considering the migration of Android apps to Hongmeng, smart city Hongmeng ecological construction, etc., the growth impetus given to the company, as well as the valuation differences between Hong Kong stocks and A-shares Comparing the valuation of the company with Hong Kong stocks and giving the company a certain premium, give the company 18 times PE valuation in 2024, maintain the company's target price of HK$8 for 2024, and maintain the “buy” rating.