2023 revenue and net profit to mother fell short of agreed market expectations
Chinasoft International announced 2023 results: Revenue fell 15% year on year to 17.09 billion yuan, lower than market expectations, mainly due to lower revenue contributions from leading customers than expected; net profit to mother fell 7% year on year to 710 million yuan, lower than market expectations by 19%, mainly due to lower revenue than expected and higher than expected expenses such as stock incentives. In 2023, the company repurchased a total of HK$437 million of shares, accounting for about 44% of the total amount of the HK$1 billion repurchase plan previously launched in April 2022; in addition, the company announced a dividend of HK$811 per share (total RMB 138 million) for the end of 2023.
Development trends
Digesting the cornerstone business pressure is coming to an end to seize emerging opportunities. In 2023, Company 1) Cornerstone business revenue declined by about 20% year-on-year, mainly due to a contraction in demand from major customers in the communications, finance and Internet industries. The concentration of major customers continues to decline. In 2023, the share of service-oriented revenue from the top ten customers fell from 73% to 70% in the same period last year; 2) Cloud intelligence business revenue fell about 3% year on year, mainly due to the company's strategic business optimization based on profitability considerations. The management reiterated the goal of binding 10% of Huawei's capabilities, and proposed a “4+2” (in-depth cooperation with Huawei's key business groups) based on “1+3” (basic cloud platform plus the three directions of AIGC, AIOT, and MetaERP) and “3+1” (binding to Huawei's first-tier key regions). Looking ahead to 2024, in terms of cornerstone business, we expect the release of demand from leading customers such as operators, as well as the steady contribution of blue-chip customers in the financial and Internet industries, which is expected to offset the contraction in demand from customers in the financial and Internet industries, and is expected to remain basically the same; in terms of cloud intelligence business, we expect business demand related to Shengteng computing power operations, AIGC solutions, Hongmeng software and hardware, and ERP implementation consulting will gradually increase, supporting the company's cloud intelligence business revenue growth of about 25-30% year on year; we expect the company's overall revenue to return to a 10% year-on-year increase.
The profit side has steadily recovered. In 2023, the company's gross margin increased 0.4 percentage points to 23.4% year on year, and net profit margin increased 0.4 percentage points to 4.1% year on year, mainly due to the Group's focus on developing high-value projects, further clearing low-profit businesses, and improving operating efficiency through financial integration reforms in traditional businesses. Looking ahead to 2024, in view of the continued optimization of the revenue structure, we expect gross margin to improve steadily; considering new business investment, we expect net income to be stable throughout 2024 or remain stable year over year.
Profit forecasting and valuation
Considering that demand from leading customers was adjusted more than expected and the company's more prudent business choices, the 2024 revenue/net profit forecast was lowered by 19%/41% to $18.80/778 million yuan; a 2025 revenue/net profit forecast of 20.44/908 million yuan was introduced. Maintain a neutral rating; reduce the target price by 15% to HK$5.5 (based on 18 times the 2024 price-earnings ratio), taking into account the effects of the change in valuation year, valuation multiples and profit reduction. The current transaction is 15 times the 2024 price-earnings ratio, which corresponds to 17% upside.
risks
Macroeconomic fluctuations; there is uncertainty about Huawei's business.