摩根士丹利-中国-IT服务与软件行业-中国IT服务与软件业：α编码-2019.6.18-123页 (2).pdf

FOUNDATIONMChina IT Services and SoftwareCoding For AlphaRapid growth in Chinas enterprise software industry is being propelled by innovation,policy support and the macro environment.We are bullish on vertical names as lower-risk plays,and prefer vendors with better visibility and reasonable valuations,such as Glodon,Thunisoft and VenusTech.Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research.Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section,located at the end of this report.+=Analysts employed by non-U.S.affiliates are not registered with FINRA,may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company,public appearances and trading securities held by a research analyst account.June 18,2019 09:00 PM GMTFOUNDATIONMMORGAN STANLEY ASIA LIMITED+Yang LiuEquity Analyst+852 2239-1911Yang.L Contributors MORGAN STANLEY TAIWAN LIMITED+Sharon ShihEquity Analyst+886 2 2730-2865Sharon.SMORGAN STANLEY ASIA LIMITED+Camille XuResearch Associate+852 3963-0692Camille.XMORGAN STANLEY TAIWAN LIMITED+Ray Wu,CFAResearch Associate+886 2 2730-2871Ray.WMORGAN STANLEY ASIA LIMITED+Gary YuEquity Analyst+852 2848-6918Gary.YFOUNDATIONMChina IT Services and SoftwareCoding For AlphaRapid growth in Chinas enterprise software industry is being propelled by innovation,policy support and the macro environment.We are bullish on vertical names as lower-risk plays,and prefer vendors with better visibility and reasonable valuations,such as Glodon,Thunisoft and VenusTech.Exhibit 1:Ratings and price targets*TickerNewOldThunisoft300271.SZOW26.00 18.08 44%Glodon002410.SZOW36.00 28.87 25%VenusTech002439.SZOW32.00 24.95 28%Yonyou600588.SSOWOW34.62 24.85 39%Baosight600845.SSOWOW39.00 34.34 14%Hundsun600570.SSEW65.00 64.88 0%BONC300166.SZEW13.00 12.08 8%Iflytek002230.SZUWUW28.00 29.44 -5%Winning300253.SZUW9.00 12.89 -30%RatingCurrent price(Rmb)Upside/downsidePrice targetSource:Morgan Stanley Research.Share prices as of June 13,2019.*Note:With this report,Yonyou and iFlytek are reclassified from Greater China Technology Hardware(In-Line)to Greater China IT Services and Software(Attractive).Industry ViewGreater China IT Services and Software AttractiveWe initiate on China IT Services and Software with an Attractive industry view.We believe rising demand for software and out-sourced IT services is being driven by Chinese enterprises increased focus on internal efficiency to combat slowing top-line growth and higher labor costs.Further tailwinds are coming from technological innovation(in areas like artificial intelligence),previous underinvest-ment in IT by enterprises(historically low IT spending as a%of GDP)and government policy support(favorable tax rates and the promo-tion of domestic technology amid trade tensions).Gartner forecasts 15%annual revenue growth for the industry in 2018-21.We like vertical players for their lower risk.With their deep industry know-how,local services,customer stickiness,and customi-zation expertise,we believe vertical enterprise players are protected from the three biggest threats to the software sector:1)global leaders like Microsoft and Oracle,2)new entrants like BAT(Baidu,Alibaba,Tencent),and 3)software piracy.Over the long term,we see major potential for enterprise software in terms of market size,recurring revenue,and market share consolidation.In the short to medium term,considering the late-cycle nature of enterprise spending,particularly in the private sector and at SMEs,we prefer vendors that 1)can transition to business models with more recurring revenue(SaaS),2)are focused on the public sector(high certainty of growth),and 3)cater to compliance demands like cybersecurity.Strong likelihood of growth warrants valuation premium.The Chinese IT services and software sector is generally immune to the current trade tensions,making it especially attractive compared with most of the technology space.We expect stable or even rising valua-tion multiples for software names,helped by fund inflows from hard-ware names exposed to trade tensions as well as the scarcity of higher visibility growth stories in a slowing macro economy.We believe free cash flow multiples are more relevant than P/E multiples considering the companies different R&D capitalization accounting policies and working capital dynamics.The various business models,technology trends,downstream segments,and competitive risks of software names also render their terminal values significantly dif-ferent.In addition to higher growth,we believe sustainability and scalability can justify premium multiples.Our top picks are Thunisoft(a public sector leader with attractive valuation)and Glodon(SaaS transition and upselling opportunities),as well as VenusTech(cybersecurity leader).We stay OW Yonyou and Baosight and recommend waiting for a better entry point for Hundsun(EW).FOUNDATIONM4 Contents 5Key Charts8Order of Preference9Investment Summary13Theme One:Why Were Bullish on Vertical Software20 Theme Two:Comparing Global Long-term Trends and Short-term Opportunities37Theme Three:Identifying Undervalued,Quality Names44 Glodon57Hundsun69 Thunisoft81VenusTech93Winning Health105 BONC118 Valuation Methodology and RisksFOUNDATIONMMORGAN STANLEY RESEARCH5Exhibit 2:Software sectors share price performance:vertical vs.horizontal(market cap weighted)804 602 100 97 -500 1,000 1,500 2,000 2,500Feb-07Feb-09Feb-11Feb-13Feb-15Feb-17Feb-19Vertical leadersHorizontalSHA300Source:Refinitiv,Morgan Stanley ResearchNote:Horizontal consists of Yonyou,Kingdee,VenusTech,Nsfocus;Vertical consists of Glodon,Hundsun,Thunisoft,Winning Health,BONCKey ChartsExhibit 3:Vertical software is more defensive against market risksSource:Morgan Stanley ResearchExhibit 4:China IT services and software spending by vertical industries37 42 48 55 63 72 84 01020304050607080902016201720182019E2020E2021E2022E(USD bn)Wholesale TradeUtilitiesTransportationRetailManufacturing&MeterialInsuranceHealthcare ProvidersGovernmentEducationCommunications&MediaBanking&Securities15%CAGR Source:GartnerExhibit 5:Global IT services and software spending as%of GDP:China is under-investedSource:Gartner,National Bureau of StatisticsExhibit 6:Revenue scale of Chinese vendors and their US counterparts(2018)422 2,570 475 8,423 394 935 367 2,273 209 5,366 290 2,164 -1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000GlodonAutodeskHundsunFISThunisoftTylerVenusTechPalo AltoWinningHealthCernerBONCTeradataConstructionFinancialGovernmentCybersecurityHealthcareTelecommunication(USD mn)Source:Company data,Morgan Stanley ResearchExhibit 7:Recurring revenue%of Chinese vendors and their US counterparts(2018)13%97%15%80%18%65%8%33%15%64%15%53%0%20%40%60%80%100%120%GlodonAutodeskHundsunFISThunisoftTylerVenusTechPalo AltoWinningHealthCernerBONCTeradataConstructionFinancialGovernmentCybersecurityHealthcareTelecommunicationSource:Company data,Morgan Stanley Research estimatesFOUNDATIONM6Exhibit 8:Multiple quadrant Source:Morgan Stanley ResearchExhibit 9:Our valuation focuses on FCF,which varies significantly from reported earnings 409 516 436 456 279 518 656 790 186 121 (54)(358)(600)(400)(200)-200 400 600 800 1,000GlodonHundsunVenusTechThunisoftWinningBONC(Rmb mn)Normalized net profit(2018)FCF(2018)Source:Company data,Morgan Stanley Research*Glodons free cash flow has adjusted the income from financial businessExhibit 10:Chinese software leaders and their global peers:Key statisticsCompanyRICCountryMarket valueRevenueRecurring rev.BusinessOverseas exposureGross margin(%)S&M expenditureR&D expenditureNo.of employees(USD mn)(USD mn)as%total rev.diversification as%of rev.as%of rev.Glodon002410.SZChina 4,59942213%Almost 100%from construction 65%87%48%33%8,985Hundsun600570.SSChina 6,95647515%70%from capital market7%from banking business15%from Internet business Mainly in CN with recent expansion in HK 97%27%43%7,122FISFIS.NUS39,658842380%50%from banking and payment 100+countries(local presence)34%15%NA47,000Thunisoft300271.SZChina 2,00039418%65%from Law and justice with recent expansion to other industriesDomestic player43%7%14%-17%6,000TylerTYL.NUS8,43293565%40%from Financial/ERP25%from court&justiceDomestic player47%22%6%-7%4,600VenusTech 002439.SZChina 3,1133678%70%from security productSecurity service business ramping up quicklyDomestic player65%24%24%3,863Palo AltoPANW.NUS18,767227333%40%from product 60%from security services Market leader with global footprint 76%38%11%5,348Winning Health300253.SZChina 2,92420915%Focus on health care industry Domestic player52%14%20%4,241CernerCERN.OUS23,671536664%Focus on health care industry 88%domestic revenue12%overseas revenue83%46%13%24,400BONC300166.SZChina 1,80329015%50%from telecom20%from finance15%from industrial50%Lubansoft20%SJ MS Operating profit CAGR Revenue CAGR Increasing recurring part of the revenue,but from maintenance service Valuation multiple upsideNegative Hard to change government procurement behavior(like cloud and annual fee-based payments)VenusTech vs.Palo AltoPositive Much bigger market size Security services outgrowing hardware and software Big operating leverage potentialNegative Computing workload moving to the cloud gives cloud vendors an opportunity to tap into the security market Deferred revenue increase helps Palo Altos cash flow,while the trend for VenusTech is going towards the other sideWinning Health vs.Cerner Positive Much bigger market size Recurring revenue(maintenance)contribution has significant room to increase Market consolidation opportunityNegative Consolidation of hospitals in US helped Cerner gain share,but this is hard to see in China Demand will be policy-driven and volatile Subscription transformation is not easy,FFV(fee for value)is even more difficult Winnings margin is already higher than CernerBONC vs.TeradataPositive Chinas big data and analytic market is growing at a faster growth rate Big market opportunity with low adoption rateNegative Less sales contribution from recurring revenue Lack of free cash flow generating ability Still a lot of room to improve accounts receivable days and cash conversion daysSource:Morgan Stanley ResearchExhibit 32:Implications from global comparison of valuation multiplesCompanyRICImplication2019E2020E2019E2020E2019E2020EThunisoft300271.SZ24.7 20.1 29.5 22.9 3.5 2.8 TylerTYL.N41.5 37.2 33.7 27.6 6.4 5.8 Glodon002410.SZ85.4 43.0 41.5 32.6 9.7 7.5 AutodeskADSK.O59.0 35.4 28.2 22.8 11.3 9.1 VenusTech002439.SZ40.6 31.8 58.0 34.5 6.9 5.6 Palo AltoPANW.N38.1 30.3 20.0 13.6 6.4 5.2 BONC300166.SZ19.5 15.6 NMNM4.2 3.2 TeradataTDC.N24.4 18.0 28.4 15.3 2.2 2.2 Hundsun600570.SS73.7 54.9 54.1 41.0 12.2 10.4 FISFIS.N16.2 14.8 22.2 19.2 4.9 4.7 Winning300253.SZ55.4 41.1 162.6 74.7 11.6 9.6 CernerCERN.O27.2 23.2 24.6 19.8 4.0 3.7 Valuation Multiples Implied by Current PricePE(x)EV/FCF(x)EV/Sales(x)Source:Refinitiv,consensus estimates for non-covered companies,Morgan Stanley Research(E)estimates for covered companies.Prices as of 13 June 2019.FOUNDATIONM22Glodon vs.AutodeskAutodesk(ADSK.O,covered by Keith Weiss)is a close comparable for Glodon.Autodesk and Glodon are both highly engaged in the con-struction engineering industry.Autodesk primarily provides drafting and design software(targeting architects and structural engineers),whereas Glodon is a local leader in construction cost software(tar-geting cost engineers).Glodon is transforming its business model to an SaaS subscription from a traditional license model,which is what Autodesk did in 2014-16.Autodesk and Glodon are direct competi-tors in some new areas,such as BIM(building information modeling).In its most recent fiscal year,Autodesks revenue and net profit(non-GAAP)were a respective 6x and 4x higher than Glodons,and its cur-rent market cap is 8x higher.However,more than 65%of Autodesks revenue comes from the global market,whereas 95%of Glodons revenue is domestic.Autodesk is more diversified,with revenue exposure in manufacturing(24%in FY19)and entertainment(8%in FY19),while Glodons revenue is highly concentrated in construction.Positive implications for Glodon:lGlodon shares a number of winning traits with Autodesk that should help its SaaS transformation:1)both had leading product quality and dominant market shares before their SaaS transitions;2)their customers highly rely on their products in day-to-day,mis-sion-critical work,with very high switching costs;and 3)down-stream is fragmented,with limited bargaining power.lReported financial pressure in the transition period is inevitable,but the market will likely value a well-executed transition with premium multiples.Autodesk booked negative revenue growth in FY16/17 and a net loss in FY17/18 as the annual recurring revenue from SaaS was only one-third of that from license fees,while opex is relatively rigid.Glodon is experiencing the same issue,with sin-gle-digit reported revenue growth for construction cost product revenue in 2017 and a slight profit decline in 2018.Overall,the impact of Glodons transition has been milder than Autodesks,as it scheduled three phases of SaaS transition.The market was excited about the transition,focusing more on metrics like billing numbers,deferred revenue and ARR(annual recurring revenue)and being less concerned with short-term financial pressure.Autodesks share price outperformed the S&P 500 in this period,and its revenue,profits and FCF improved significantly after the transition.lWhat will follow the SaaS conversion?Autodesk has a 110-120%revenue retention rate,and Glodon is excited about upselling opportunities.Autodesk disclosed a net revenue retention range of 110-120%through FY19.We think this metric should prove an important indicator of the success Autodesk is having in mone-tizing its large installed base of customers,as well as potential in upselling new cloud-based add-ons.Glodon plans to sell cloud VAS packages(mainly live construction material price info)to its large existing customer base,which would lift its addressable market,from Rmb3bn to Rmb5bn,according to the company.lBIM and construction engineering are the future directions.Both Autodesk and Glodon are close to the ceiling in their traditional markets.Low digital adoption in the construction industry is a global issue,and both companies are targeting the construction engineering market with a focus on BIM.Both see enlarged TAMs ahead(Rmb100bn for Glodon,US$59bn for Autodesk,according to management).Negative implications for Glodon:lDemand is still linked to the macro economy.Though SaaS con-version can mitigate the volatility,genuine demand for construc-tion-related software is highly linked with new home starts and infras