Chinasoft International
　　Slow IT service demand in 1H24 and Huawei catalysts in 2H24
　　We believe the overall weakness in IT spending and software sector will add pressure to Chinasoft’s 1H24 financials. Like many of its peers, Chinasoft suffered from project delays, IT outsourcing service cut and margin erosion upon challenging macro. However, we think Huawei demand is bottoming out with positive development in HarmonyOS NEXT and Ascend AI, while SOE new contracts tend to concentrate in the second half. We cut 2024/25/26 EPS by 20%/21%/20% to factor in soft demand but maintain BUY with new TP of HK$5.40 as the stock is cheap at -1sd of five-year P/E average with Huawei catalysts in 2H24.
　　Key Factors for Rating
　　Soft domestic IT spending and loss of workforce could drag on top line: we expect the slow domestic IT spending YTD will weigh on IT service revenue growth of Chinasoft in 1H24. We are concerned that demand from distressed sectors such as financial and internet may be weaker than expected with ongoing layoffs and application of AI. Meanwhile, total headcount of Chinasoft fell from 82k by Dec 2022 to 70k by Dec 2023; the overall new hiring was stagnant in 1H24. We believe the movement in headcount indicates an overall conservative strategy of the Company.
　　Huawei HarmonyOS NEXT and Ascend AI are key catalysts in 2H24: despite the macro headwind, we believe Huawei, which accounted for c.45% 2023 revenue of Chinasoft, is turning around with HarmonyOS NEXT, MetaERP and Ascend AI. In particular, we think investors should pay attention to two developments in 2H24 which may benefit Chinasoft: 1) the operating system of the upcoming Mate 70 is likely HarmonyOS NEXT, which is a Harmony native OS without Android compatibility, requiring massive mobile app migration services by Chinasoft; 2) SMIC’s new advanced node capacity in 2H24 will likely remove the supply bottleneck of Ascend AI chips, unleashing Chinasoft’s Ascend cloud business growth potential.
　　Huge share buybacks: YTD Chinasoft has repurchased 175m shares or 6% of total shares outstanding with HK$774m. We believe it is value accredited as current valuation is only 0.8x P/B, also at historical low.
　　Key Risks for Rating
　　1) Slowdown in domestic substitution progress;
2) high reliance on Huawei;
3)delay in IT projects; and 4) GenAI disruption.
　　Valuation
　　We cut 2024/25/26 revenues by 5%/5%/5% and EPS by 20%/21%/20% to factor in slow IT services demand due to weak macro and project delay. Our new TP of HK$5.4 (was HK$6.0) is based on 15x 2025E EPS (was 15x 2024E EPS).