China Software and IT Services

China Technology | OVERWEIGHT Please read the analyst certification and other important disclosures on last page China Software and IT Services 18 October 2010 Digitizing China China is striving to shrug off its image as the world’s factory. Boasting a large pool of well educated youth, it is embracing the software and IT services industry, which it believes is critical to its transformation to a knowledge-based economy. Against this backdrop, we expect China’s domestic software and IT services industry to grow at a CAGR of 15% in the coming years. China is also becoming an attractive destination for outsourcing, with China-based offshore outsourcing forecasted to grow at a CAGR of 26% in 2009-2013F. With industry consolidation well under way, we like industry leaders. Our top pick within the sector is AsiaInfo-Linkage. We also have Outperform ratings on Digital China, Kingdee, VanceInfo, and Yucheng, and a contrarian Neutral on Longtop. Company Ticker Market cap (US$b) Rating AsiaInfo ASIA US 1.52 O/P Longtop LFT US 2.19 Neutral VanceInfo VIT US 1.37 O/P Yucheng YTEC US 0.07 O/P Digital China 861 HK 1.73 O/P Kingdee 268 HK 1.02 O/P Lenovo 992 HK 6.86 O/P Analyst Xin Zhao, CFA (852) 2533 2414 zhaoxin@ccbintl.com China Software and IT Services: Digitizing China 18 October 2010 2 Table of Contents Digitizing China ............................................................................................................................ 3 Investment highlights ................................................................................................................... 4 A long march on the information highway .................................................................................... 8 Pockets of investment opportunity ............................................................................................. 15 Risks .......................................................................................................................................... 22 AsiaInfo-Linkage (ASIA US) ....................................................................................................... 24 Longtop Financial Technologies (LFT US) ................................................................................. 34 Yucheng Technologies (YTEC US) ............................................................................................ 51 VanceInfo Technologies (VIT US) .............................................................................................. 63 Digital China (861 HK) ............................................................................................................... 75 Kingdee International (268 HK).................................................................................................. 86 Lenovo Group (992 HK) ............................................................................................................. 96 China Software and IT Services: Digitizing China 18 October 2010 3 Digitizing China Sector Rating: Overweight (Initiation)
We initiate coverage on China’s software and IT services sector with an Overweight rating.
We expect China’s IT spending to grow at a CAGR of 13% from 2009 to 2013F, with spending on software and IT services to grow even faster. Domestic demand for software and IT services will be driven by ongoing industrialization and digitization. Moreover, the government’s macro stimulus and key industry reinvigoration initiatives will boost IT spending in coming years. China is also rising as an attractive destination for outsourcing due to its ample supply of engineering talent and customer efforts to diversify away from India.
Leaders emerge in a fragmented market. While Chinese software and IT services companies generally lack scale and expertise compared with global leaders, their proximity to end customers, nationwide delivery and service platforms, and high degree of cost effectiveness have enabled some local players to become leaders in their respective domains. Telecom, outsourcing, financial services, and packaged software present the best investment opportunities, in our view, given their size, growth potential, and competitive landscapes.
We like the industry leaders and have Outperform ratings on AsiaInfo, Digital China, Kingdee, VanceInfo, and Yucheng, and a contrarian Neutral on Longtop. Among the large-cap tech companies, we believe that Lenovo is best positioned for China’s robust IT spending growth.
Top pick: AsiaInfo-Linkage, the dominant player in telecom IT solutions. High entry barriers, product stickiness, together with world-class products and strategic M&A, have helped AsiaInfo-Linkage secure a dominant market share o