We expect Chinasoft’s 2024 financials will be under pressure as fiscal stimulus such as the AI supercomputing centre spending plan would have more meaningful impact only from 2025 onwards. IT service industry was still facing pricing pressure in 4Q24. From 2025, we expect business fundamental of Chinasoft to rebound meaningfully driven by stimulus, HarmonyOS and AI. Our new TP of HK$5.9 (was HK$5.3) is based on 17x (was 15x) 2025E EPS, as we anticipate more positive investor sentiment towards IT service sector. Maintain BUY.
　　Key Factors for Rating
　　2024 results likely under pressure: we project Chinasoft’s 2024 net income to be within the range of RMB600m-650m, below Company’s previous guidance of flat YoY at RMB700m, primarily due to our concerns regarding: 1) the weak IT spending sentiment in 2H24 may add pricing pressure to Chinasoft; 2) the fiscal stimulus package should only start to reflect on Chinasoft’s business from 2025; and 3) ESOP scheme cost.
　　IT spending should accelerate meaningfully in 2025: we expect fiscal stimulus package should accelerate domestic government and enterprise spending on AI and IT, which are both Chinasoft’s core strength in the market.
　　In particular, we expect Chinasoft revenues from HarmonyOS should be more than double in 2025 driven by multiple drivers including: 1) app migration demand as Huawei aims for aggressive HarmonyOS NEXT adoption in 2025; 2) Open HarmonyOS application proliferation in multiple ToB and ToG verticals; and 3) upcoming Huawei HarmonyOS PC launch. Meanwhile, Chinasoft is in deep collaboration with multiple Huawei Ascend AI computing centre projects, which are one of the key domestic infrastructure investment areas in 2025.
　　Valuation is low enough in view of our perceived AI risk: while we see accumulating risk in general AI sector in 2025, IT service sector was sidelined and heavily underweighted for a long period of time. Thus, we believe the bottom-out fundamental and incremental positive news flow from stimulus and recovering economy will be able to lift Chinasoft’s current valuation.
　　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 keep 2024 revenues unchanged but cut EPS by 14% to reflect stressed fundamental. However, we lift 2025/26 EPS moderately by 1%/3% to factor in the recovering fundamental from stimulus package and HarmonyOS contribution. Our new TP of HK$5.9 (was HK$5.3) is based on 17x (was 15x) 2025E EPS, as we anticipate a more positive investor sentiment towards IT service sector.