Maintain "Buy" rating and increase TP to HK$8.18, based on a 8.4x 2025 PE ratio. Mainland China’s cloud demand has increased over the past year, with the leading indicator being large cloud services providers significantly increasing their CAPEX spending. Being a top vendor for Alibaba, Huawei, Tencent, and Kingsoft Cloud, and their wide arsenal of products and services, VSTECS (or the “Company”) possess the ability to provide AI cloud business support and materials provisioning for virtually any enterprise that wants to improve their Cloud services. Therefore, VSTECS’s higher margin segments, cloud and IT provisioning, are very likely to grow at a CAGR of over 25% for the next three years, thereby doubling its EPS by 2027. Based on conservative estimates, we adjust our forecasts for the Company’s shareholders' net profit in 2025-2027 to HK$1,361 mn (+16.0%)/ HK$1,597 mn (+19.2%)/ HK$1,991 mn, respectively. We increase our forecasts for the Company’s revenue in 2025-2027 to HK$103.6 bn (+12.2%)/ HK$121.2 bn (+15.8%)/ HK$143.1 bn. The current TP represents 1.3x 2025 PBR and 8.4x 2025 PER.
　　VSTECS projects a 3-year revenue CAGR of 15-20%, primarily driven by cloud demand in mainland China. As of year-end 2024, the Company has obtained contracts for over 30 of the 40 scheduled AI computing center projects started in China, including 7 “State Level” AI computing center projects. In addition, VSTECS provides services for compute transfer, compute operations and LLMs as a service, classified under its enterprise systems segment. It has a long list of high quality SOE customers that require these services including State Grid, Dongfeng Group, China International Marine Containers, and China Machinery Engineering Corporation, providing recurring revenue for the years to come. The Company predicts a profit increase of RMB100 mn - RMB300mn in 2025 solely due to the above factors. With a far higher portion of the Company’s revenue coming from cloud infrastructure, and high revenue and EPS growth, we predict there to be a slow recovery in the Company’s P/E valuation multiple as VSTECS gains exposure.
　　The Company’s SEA revenue, although providing high growth in 2H2024, is unlikely to be sustainable due to: 1) demand for server systems in SEA from international companies declining; 2) a large portion of its revenue coming from inclusion of VSTECs Philippines subsidiary into the consolidated financial statements. In addition, dividends for the Company will remain at the standard level of 30%, as the Company needs to fund the expansion of working capital that comes with revenue growth.
　　Catalysts: release of sustainable cloud revenue growth for the period 1H2025.
　　Risks: cloud margin lower than historical levels.