Chanjet’s FY16 results missed our expectations due to a decline in grossprofit margin and increments in R&D costs.
　　Revise up FY17-FY18 software revenue estimations by 7.8%/ 9.4%,respectively, due to stronger demand from the SME manufacturingsector and cloud platforms. The SME manufacturing sector is supported bythe 13th Five-Year Plan, with the “Made in China 2025” and “industrie 4.0”
　　targets. The cut in SME fixed-line broadband service tariffs by telecomoperators is expected to help cloud platform demand with the reduction ofSME transaction costs.
　　Revise up FY17-FY18 service revenue estimations by 10.4%/ 13.1%,respectively, due to stronger contributions from payment and cloudservices. In FY16, payment and cloud services revenue grew 428.6%/60.5%, respectively.
　　We cut FY17-FY18 gross profit margin by 1.8 ppt/ 2.5 ppt, respectively,due to stronger contributions from lower margin payment and cloud servicerevenue. FY16 gross profit margin declined by 8 ppt yoy to 83.3%.
　　Maintain the Company’s investment rating of “Buy” and revise up theTP from HK$11.00 to HK$13.50. Due to the revisions to revenue and grossprofit margin estimations, we adjust FY17-FY18 EPS by -16.3%/ 6.9%,respectively. The new TP represents 3.4x FY17 PSR, 1.8x FY18 PSR and1.1x FY19 PSR.