CICC maintains a "neutral" rating on CHINASOFT INT'L (00354) and raises the target price to 5.5 Hong Kong dollars.

CICC released a research report stating that it will maintain a neutral rating on CHINASOFT INT'L (00354), considering the repair of industry valuation center, and raising the target price by 31% to HK$5.5 (based on a 2025 P/E ratio of 17 times). The company is currently trading at a P/E ratio of 15.9 times, corresponding to a 9% upside potential. Due to the uncertainty of the release of demand from top customers and the pace of new business confirmation, the bank has lowered its 2025 revenue forecast by 5.4% to HK$17.5 billion; considering the gradual digestion of price pressure from top customers, the forecast for 2025 net profit attributable to shareholders remains basically unchanged. Introducing revenues of HK$18 billion and net profit attributable to shareholders of HK$888 million for 2026. Key points from CICC: Full-year performance in 2024 is below market expectations CHINASOFT INT'L released its full-year 2024 financial results: revenue decreased by 1.0% year-on-year to HK$16.95 billion, slightly below market expectations, mainly due to slower-than-expected progress in the core business repair; net profit attributable to shareholders decreased by 28.7% year-on-year to HK$504 million, below market expectations, mainly due to increased bad debt provisions and lower-than-expected government subsidies. Core business gradually stabilizing, AI commercialization results emerging In full-year 2024, the company's 1) core business revenue decreased by approximately 9.5% year-on-year. During the reporting period, the company's average number of employees decreased by 4.6% year-on-year to about 72,500; according to the performance announcement, the company's employee base began to rebound in the second half of 2024, providing a guarantee for the stabilization of the core business in 2025; 2) revenue from cloud intelligence business increased by approximately 13.4% year-on-year, and its revenue share increased by 5.5 percentage points to 43.6%. In 2024, the company actively deployed full-stack AI business for computing power, cloud-edge-end model deployment, and application, accelerating the AI transformation of the "1+3" (intelligent cloud base plus AIoT, AIGC, ERP three directions) business lineup. According to the performance meeting, the company's full-stack AI product and service revenue reached HK$957 million in 2024, accounting for 5.6% of total revenue. In addition, the company has achieved positive results in expanding its presence in the Hong Kong market. Leveraging its technological accumulation and delivery capabilities in smart parks and smart venues, the company is one of the core builders of the new generation smart venue application system at the Kai Tak Sports Park in Hong Kong, providing comprehensive solutions for intelligent venues including command centers, physical security, passenger flow statistics, and venue reservation management. Looking ahead to 2025, management stated at the performance meeting that the company's revenue is expected to return to positive growth for the full year. Profit margins urgently need improvement In full-year 2024, the gross profit margin was 22.1%, a decrease of 1.3 percentage points year-on-year, mainly due to 1) increased strategic investment in areas such as HarmonyOS and ERP by the company, and 2) the expansion strategy since the second half of 2023 had some impact on the overall pricing of the company. The net profit margin attributable to shareholders was 3.0%, a decrease of 1.1 percentage points year-on-year, mainly due to the decline in gross profit margin. Looking ahead to 2025, with the gradual stabilization of the company's revenue, improvement in the profitability of emerging businesses, and further enhancement of personnel capacity and management efficiency, the bank expects that the company's gross profit margin and net profit margin attributable to shareholders are likely to moderately recover. Risk warning: Weak macroeconomic conditions; new business development progresses slower than expected.