Chanjet’s 1H17 results beat expectations. Net profit reached RMB47.2million compared to a net loss of RMB40.6 million in 1H16 due to a reductionin employee trust benefit scheme expense, decrease in losses from ChanjetPayment and stronger cloud service contribution.
　　Revise up FY17-FY19 total revenue estimations by 7.2%/ 8.5%/ 11.0%,respectively, to reflect better cloud platform contribution. The Companyadded 18,000 cloud service users in 1H17, with aggregate users reachingover 40,000. Chanjet will launch more new versions of cloud serviceapplications to boost user growth and improve average spending per user.
　　Profit margin to be improved by cloud platform contribution anddeconsolidation of payment services. 1H17 gross margin dropped 6 pptyoy to 84.6%, which was affected by lower margin payment servicesinfluence. We expect gross margin improvement thanks to better cloudservice contribution and deconsolidation of Chanjet Payment. We revise upFY17-FY19 gross margin by 1.0ppt/ 1.5ppt/ 2.2ppt to 86.9%/ 86.9%/ 87.9%,respectively.
　　Maintain the Company’s investment rating of “Buy” and revise up theTP from HK$13.50 to HK$14.20. Due to revisions to revenue forecasts andgross margin estimations, we adjust FY17-FY19 EPS by 8.0%/ 9.1%/ 10.8%,respectively. The new TP represents 21.7x FY17 PER, 13.2x FY18 PER and10.1x FY19 PER.