Investor Notes - Phillip Securities (HK) Ltd

1 Apr, 2019 (Monday)

TSAKER CHEM(1986)
Analysis：
Tsaker Chemical Group (1986) is involved in the following principal activities : manufacture and sale of pigment intermediates; manufacture and sale of dye and agricultural chemical intermediates; manufacture and sale of battery materials; environmental technology consultancy services. For the year ended 31 December 2018, the total revenue of the Group increased by 21.5% to RMB1.515 billion. The increase was mainly due to the increase in sales price and increase in revenue from the environmental protection business. The net profit of the Group increased by 63.7% to RMB222 million. The overall gross profit margin of the Group increased to 34.6% from 29.1% for the same period in 2017. (I do not hold the above stock)
Strategy：
Buy-in Price: $3.35, Target Price: $3.80, Cut Loss Price: $3.15

CHINA TOWER(788)
Analysis：
China Tower`s annual revenue reached RMB 71.819 billion, up 4.6% year-on-year; net profit increased by 36.4% year-on-year to RMB 2.50 billion. Domestic mobile phone manufacturers such as Huawei and Xiaomi have said that they will launch new mobile phones soon. The 5G landing time is getting closer and closer, and the demand for base station construction will increase accordingly.
Strategy：
Buy-in Price: $1.79, Target Price: $2.25, Cut Loss Price: $1.50

iShares Expanded Tech-Software Sector ETF (IGV)
iShares U.S. Medical Devices ETF tracks the performance of the Dow Jones US Select Medical Equipment Index, with market cap of approximately USD 2.56 billion and expense ratio of 0.43%. The ETF holds 58 health care stocks of varying cap sizes. Its investments are focused in health care equipment and supplies. Some of the top 10 holdings of IHI include ABBOTT LABORATORIES, MEDTRONIC PLC, STRYKER CORP, DANAHER CORP and BOSTON SCIENTIFIC CORP.U.S. Medical devices companies have a substantial competitive advantage due to significant innovations in microelectronics, biotechnology and software. The demand for medical devices is expected to increase throughout the world due to the aging population. Hence, IHI is poised to take advantage of the future growth prospects in this sector. In 2018, S&P 500 Healthcare Equipment Index generated 16.2% total return , which was greater than that of S&P 500 Index (-4.39%) and that of S&P Healthcare Index (6.4%). Within health care sector, large-cap medical device stocks were the best performers in 2018. Although medical device stocks` P/E ratio is at decade high (19x for 2019), the organic growth of the sector is likely to remain strong due to new product cycles, strong emerging-market demand and better operating margin in 2019. Additionally, the sector is also benefiting from Trump tax reform policy, which encourages increased M&A activities and R&D activities. Heading into 2019 of expected economic slowdown and US-China trade war, investor can invest in IHI ETF as health care stocks have historically been considered non-cyclical, defensive stocks. Recommend to buy at $224, target price $246, cut loss if drop below $218.

ChinaSoft International (354.HK) - Annual result in line with expectations, emerging business becomes the new growth driver

Investment Summary

ChinaSoft International is one of the leading software and information services companies in China. Revenue growth in line with our expectations, while net profit surpassed it. And, emerging business became the new growth driver. Based on 2019 net profit, we assume a P/E ratio of 16.5x (average over the past three years), deriving a TP of HK$6.57, 22.3% higher than previous TP, we reiterate a “Buy” rating with a potential return of approximately 41.0%. (Closing price at 27 Mar 2019)

Annual result update

Revenue growth in line with our expectations, while net profit surpassed it

The total revenue in 2018 reached RMB 10.6 billion, increased by 14.5% YoY; the net profit attributable to the shareholders was RMB 715.8 million, up by 26.6% YoY. The gross profit margin improved from 29.8% to 30.7%, thanks the increasing portion of emerging business that has higher gross profit margin.

The revenue was generally in line with our expectation, just 0.9% lower, but the gross profit margin was slightly lower than expected, 0.3%. The net profit was above our estimate, about 7%, thanks to the lower administration cost and tax expenses that are deducted on certain research and development expenses.

Demand from Large-sized customers remains strong, but that from small and medium-sized customers became stagnant

The revenue from Technology Professional Services Group (TPG) grew by 16.7% to RMB 9.2 billion, thanks to the strong demand from large-sized customers. The revenue from the largest customers (Huawei) increased by 15.3% to RMB 5.6 billion, accounted for 53.1% of the total revenue. Meanwhile, the revenue growth from HSBC and Ping An were around 47% and 40% respectively. We believe it shows the fact that the large-sized customers are less sensitive to the economic cycle, which will remain the main driver of the Group during the economic downturn.

However, the revenue from Internet IT Services Group (IIG) just grew by 1.8%. The tiny growth was attributed to the pessimistic outlook of the economy, leading to a reduction in IT expenditure from small and medium-sized customers.

Fast-growing emerging business became an new growth driver

The revenue from Cloud, Big date and Jointforce has reached around RMB 1.6 billion, up by 60% YoY, becoming the new growth driver for the Group. For Cloud Software Park, it is covering 15 cities in 11 provinces, including Jiangsu, Shandong, Hubei, Anhui and so on. For Cloud Integration Platform, the registration from government units exceeded 3,000 with 263 number of projects and the amount was above RMB 137 million. For Jointforce, the number of clients placing packages in the platform has grown by 83% to around 55,000. Since the emerging business has a higher gross margin and create a strong switching cost, we believe the valuation will be enhanced as the proportion of those businesses goes up.

Valuation

We expect the revenue growth of TPG to be 16.5% in 2019, in line with last year, while that of IIG will revive to 4%. Meanwhile, emerging business will remain fast-growing, about 50%. Based on 2019 net profit, we assume a P/E ratio of 16.5x (average over the past three years), deriving a TP of HK$6.57, 22.3% higher than previous TP, we reiterate a “Buy” rating with a potential return of approximately 41.0%. (HKD/CNY=0.8655)

Risk

1. Slower-than-expected growth in SaaS market

2. Suddenly loss on major customers

3. Slower-than-expected growth in emerging business

4. New products replace the company's existing products

Financials

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Recommendation on 1-4-2019
Recommendation	Buy
Price on Recommendation Date	$ 4.660
Suggested purchase price	N/A
Target Price	$ 6.570

Writer Info

Terry Li
(Research Analyst)

Tel: +852 2277 6527

Email:
terryli@phillip.com.hk

Enquiry : 2277 6666 OR investornotes@phillip.com.hk
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