Goldman Sachs downgraded ChinaSoft International's rating to "Sell" with a target price lowered to HKD 3.1

Goldman Sachs published a research report, downgrading the investment rating of ChinaSoft International (00354.HK) from "Neutral" to "Sell," and lowering the target price from HKD 6.8 to HKD 3.1, corresponding to a forecasted price-to-earnings ratio of 9.6 times for 2027, consistent with the company's historical low price-to-earnings ratio. This reflects concerns over slowing future profit growth and the market's worries about AI disruption leading to a downgrade in the sector.

The firm stated that it holds a positive view on the company's shift from traditional IT outsourcing to internet-based IT services, but the downgrade is based on three main reasons: 1) Moderate growth in the Chinese end market and intensified competition limiting the company's revenue growth and gross margin expansion; 2) A shift in talent from traditional software engineers to AI engineers, increasing recruitment costs; 3) Overall concerns in the software industry due to fears of disruption from generative AI leading to downgrades. The firm expects the company's profit growth to have bottomed out in 2025 (with a compound annual growth rate of -27% for net profit from 2021 to 2025), gradually recovering thereafter.

Goldman Sachs has lowered its net profit forecasts for ChinaSoft International for 2026 and 2027 by 37% and 42%, respectively, mainly due to downward revisions in revenue and gross margin forecasts, while R&D expenses remain at a high level, reflecting the company's recruitment of AI engineers. The firm expects revenue growth of 9% and 9% year-on-year for 2026 and 2027, with gross margins of 20.5% and 20.5%, and net profits of RMB 574 million and RMB 693 million. The firm believes that if client IT service spending recovers, Huawei's product deployment is faster than expected, or AI investments yield returns quicker than anticipated, it will take a more positive view on the stock