YGSoft 1H16quick take:Turning point is yet to come;watch for progress on power reform
1H16 revenue grew by 4.6% YoY, earnings dropped by 41.2% YoY.
YGSoft announced 1H16 results: revenue grew by 4.6% YoY but earnings dropped by41.2% YoY on lower gross margin and higher S&M expense ratio. The companyguided for a 20-40% earnings decline in 1-3Q16, claiming that "internal optimizationof management and R&D is starting to deliver, so 3Q16 will be much better."Still suffering from weak demand from power industry.
We believe YGSoft is still suffering from weak demand for IT solutions from the powerindustry. The company's group management and financial management software sawYoY revenue declines of 1% and 34%, respectively, in 1H16. Fuel management, on theother hand, delivered 199% YoY revenue growth in the same period, reflectingrelatively strong demand for fuel cost-saving in power plants.
Progress on power reform is crucial for YGSoft's future.
YGSoft has been preparing for the power reform since 2015. On 23 Aug 2016, thecompany announced an equity placement to raise up to Rmb595m to develop powerindustry software, mostly related to new demand created by the reform. The UBSutilities research team is still cautious on the progress of power reform. YGSoft's futuregrowth depends on whether the reform moves ahead as the company believes it will.
Valuation: Maintain Sell rating, PT of Rmb11.70.
We expect the company to continue to suffer from the lack of demand for IT solutionsfrom the power industry unless the power reform advances more rapidly. The stock istrading at 50x/37x 2016E/17E PE, in line with the A-share peer average, but we areconcerned about its long-term growth prospects. Our DCF-derived price target ofRmb11.70 (WACC 8.2%) implies 32x 2017E PE. Maintain Sell.