Chinasoft’s 1H24 results were a miss, with revenues and net income declining 6% and 19% YoY. Challenging macro and IT spending slowdown are key dragging factors. However, management expects project delay by SOE enterprise is only temporary as 2027 is a hard deadline for many domestic substitution projects. Meanwhile, Huawei's HarmonyOS NEXT/Ascend AI and other client groups will lit 2H24 momentum. As a leading indicator, after two-year long downsizing, Chinasoft’s headcount started to increase moderately from May, in accordance with management’s bullish guidance into 2H24. We slightly cut our EPS by 3-6% and lower TP from HK$5.4 to HK$5.3. Maintain BUY.
　　Key Factors for Rating
　　1H24 results missed but showing signs of recovery: Revenue decreased 6% YoY to RMB7.9bn, missing consensus by 8%, with GPM down 0.6ppt YoY to 23.1%, mainly due to demand decline and pricing pressure from major customers. Consequently, net income dipped 19% YoY to RMB286m, missing BOCIe and street by 10% and 21% respectively. Despite weak 1H24, group headcount started to rebound from May onwards as management expects gradual demand recovery. Net operating cashflow improved slightly in 1H24 to RMB-686m. Company will continue share buyback in 2H24.
　　2H24 momentum lit by both Huawei and other client groups: Company guides 2H24 revenue and net income to improve HoH meaningfully. Regarding Huawei, HarmonyOS NEXT and Ascend AI will be key catalysts. Mate 70 smartphone will adopt Harmony native OS. According to QuestMobile, the amount of active Harmony IoT devices reached 0.9bn in 1H24. Ascend AI penetration rate is growing rapidly in the domestic AI computing power market, according to IDC. Regarding non-Huawei clients, we expect outsourcing revenue from non-Huawei clients to increase 10% YoY in 2H24, bringing better margins. Notable new clients include Xiaomi, OPPO, Hisense and HK government.
　　Cloud growth beat our estimate. Revenue from cloud intelligent service increased 2% YoY to RMB3,367m in 1H24, beating BOCIe by 6% and accounting for 42% of total revenue. Chinasoft retained its domestic leadership in cloud and data related services such as cloud migration, cloud deployment, database, data analytics and ERP. Additionally, Chinasoft provided AIGC solution across various industries including energy, finance, transport, utilities, as well as Ascend AI computing power operation services in multiple fields. We expect cloud intelligent services to grow 35% YoY in 2H24.
　　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 2%/4%/5% and EPS by 6%/4%/3% to factor in slow IT services demand due to weak macro and project delay. Our new TP of HK$5.3 (was HK$5.4) is based on unchanged 15x 2025E EPS.