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23 Jul, 2019 (Tuesday)

            
COLOUR LIFE(1778)
Analysis¡G
Colour Life (1778) announced that it had entered into subscription agreement with an indirect wholly owned subsidiary of JD.com and an indirect wholly owned subsidiary of 360.com. The Subscription will enable the Company to raise fund and broaden its capital base. JD.com is a leading technology-driven e-commerce company and retail infrastructure service provider in the PRC. The Company will foster greater cooperation with JD.com in the Company`s commerce, logistics, finance and technology businesses. 360.com is the largest internet and mobile technology provider in the PRC. The Company will cooperate with 360.com in widely applying the technologies such as core security capacity, big data, IoT and artificial intelligence to the community security segment, so as to effectively enhance the brand recognition and influence of 360.com in urban and community security. (I do not hold the above stock)
Strategy¡G
Buy-in Price: $5.60, Target Price: $6.20, Cut Loss Price: $5.15


CHINA CRSC(3969)
Analysis¡G
Since the government has vigorously promoted de-leveraging in 2018, making local governments difficult to finance, fixed assets investment in transportation, warehousing and postal services has only increased by 4.4% in 2018 and 7.2% YoY in October-December. The Group also indicated that many projects have been suspended. However, as China-US trade conflicts heat up, the uncertainty in China`s economic growth rises. At the meeting, the Politburo of the Communist Party of China proposed ¡§Six stables¡¨ (Stable employment, Stable finance, Stable foreign trade, Stable foreign investment, Stable investment, Stable expectations). Among them, "Stable investment" is regarded as an incentive for investment in fixed assets, because in the past when the economic growth slowed down, the investment in fixed assets was used as a countermeasure. In February this year, the National Development and Reform Commission released the "2018 National Fixed Assets Investment Development Trend Monitoring Report and the 2019 Investment Situation Outlook", indicating that infrastructure investment is expected to maintain a medium-speed growth in 2019. We believe that infrastructure projects such as transportation will be rebounded in 2019 to offset the impact from foreign trade.
Strategy¡G
Buy-in Price: $5.30, Target Price: $6.00, Cut Loss Price: $4.80



Yonyou (600588.SH) - Robust growth of Cloud services in hope of domestic replacement

Investment Summary

Yongyou is a leading provider of enterprise services in China, offering cloud, software and financial services. The result in first quarter was doing well, where the revenue grew by 16.6%, and the cost control improved. Besides, the growth of revenue from cloud services remained robust, up by 95% YoY, and paid enterprise customers increased by 46.3% YoY. We give a TP of RMB $29.58, 6.4% lower than previous, downgrading to ¡§Accumulate¡¨ recommendation, with 10.1% potential upside. (Closing price at 18 Jul 2019)

Result update

The group announced its first quarter results for 2019. During the period, the revenue was RMB 125 million , up 16.6% YoY; the operating loss was RMB 155 million, an increase of about RMB 40 million over last year. In addition, gross profit margin decreased by 1.6% to 62.5%, but the cost control improved. Selling and administrative expenses to revenue decreased by 3.5% and 4.7% respectively. Net profit was RMB 102 million, which turned into a profit from last year, mainly due to the sale of SuiRui Technology this year. The net loss attributable to owners after deducting non-recurring gains was RMB 54.77 million, a decrease of 51.2% YoY.

Revenue from Cloud services reached RMB 125 million, a YoY increase of 95%. Currently, there are about 4.77 million cloud service enterprise users and about 380,000 paid enterprise customers, increased by 46.3% YoY.

In other business areas, revenue from software business was RMB 864 million, up 20.6% YoY; payment service revenue was RMB 74 million, up 230.1% YoY; however, revenue from Internet investment and financing information service business decreased 29.7% YoY to RMB 197 million.

Launch and strength the cloud products, build up a cloud ecosystem

The Group launched NC Cloud 1903, which adopted the latest hybrid cloud technology architecture to provide hybrid cloud solutions for large enterprises. It is believed that the new products will help the group enter the cloud market of large enterprises. Besides, the Group has also strengthened the marketing of NC Cloud, which is expected to make NC Cloud sales scalable. For U8 Cloud which is targeting the medium-sized companies, the Group will accelerate its research and development and strengthen its promotion in the industry.

The Group continued to build up a cloud ecosystem and launched 52 models in the cloud market, including cloud-based eco-products such as IoT services, business travel services, and cloud customer service small business editions. The total number of eco-partners in cloud market exceeded 3,500, and the total number of products and services exceeded 5,500.

We expect the Group to increase its investment in research and development in the cloud business, which may reduce the net profit margin in the short term, but it is expected to create a long-term competitive advantage.

Visiting from Huawei may implies the acceleration of domestic replacement

Media reported that the Huawei ERP team visited Yonyou Industrial Park in Beijing. Therefore, it is speculated that Huawei may abandon SAP, their current ERP system, and adopt a domestic one. We think it is likely to happen. Under the China-United trade war, Huawei became one of the targets United States wants to restrain. US prohibited companies in US from providing any services to Huawei. In order to reduce the dependence on foreign software, we believe that Huawei has sufficient incentives to shift their current foreign ERP system into domestic. Although there is no confirmation at present, this visit reflects the intention of Huawei.

Valuation

Based on the net profit attributable to the owner in 2020, we derive a TP of RMB $29.58, 6.4% higher than the previous TP, reflecting a 20x P/E in light of the rapid growth in cloud services. Although increase in research and development on cloud services may reduce the net profit margin in the short term, but it is expected to create a long-term competitive advantage. Since the sharp rise in share prices recently, we have downgraded to the ¡§Accumulate¡¨ rating, with a potential upside of 10.1%.

Risk

1. Slower-than-expected growth in cloud products

2. The economy of China slows down

3. Cloud ERP may take away the existing customers of traditional ERP, particularly SME

Financials

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Recommendation on 23-7-2019
RecommendationAccumulate
Price on Recommendation Date$ 26.870
Suggested purchase priceN/A
Target Price$ 29.580
Writer Info
Terry Li
(Research Analyst)
Tel: +852 2277 6527
Email:
terryli@phillip.com.hk

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