September 17, 2008 Downgrade to ACC.

Software & Services

SinoCom Software (299.HK)

Lisa LI
SFC CE Ref: AGQ059
lilisa@cicc.com.cn
Su ZHAO
zhaosu@cicc.com.cn
1H08 Results Preview
(8610) 6505 1166

Financial highlights & share information Key Points:

(mn HKD) 2005A 2006A 2007A 2008E 2009E
1H08 results may fall below expectations. SinoCom is to
Revenue 262.3 393.6 589.8 691.9 819.6
(+/-%) 40.6% 50.0% 49.8% 17.3% 18.5%
release 1H08 interim results on September 18. Top-line may
Gross profit 126.7 157.9 223.5 231.7 260.0 grow around 25% YoY to HK$320m, a bit slower than our
(+/-%) 46.1% 24.6% 41.6% 3.7% 12.2% expectation, while bottom line may grow by just 15% to
Operating income 69.6 86.2 138.6 147.7 164.2 HK$55m, traceable to a higher tax rate.
(+/-%) 18.3% 23.9% 60.7% 6.6% 11.2%
Recurring net income 60.0 73.3 115.5 123.7 137.5 Weakening ITO demand from Japanese financial sector.
(+/-%) 14.8% 22.2% 57.5% 7.1% 11.2% Japan’s software investment growth is expected to slow to
EPS (HKD) 0.054 0.065 0.103 0.110 0.123
about 5% in FY3/09, mainly due to a 20% drop in software
PE (x) 12.5 10.2 6.5 6.1 5.5
PB (x) 2.4 1.5 1.2 1.0 0.8 investment from the securities sector (Chart 1).
ROA 17.0% 16.7% 19.6% 17.4% 15.5%
ROE 19.2% 19.1% 23.1% 19.8% 18.0%
High client concentration is a double-edged sword. In
H-share recent years, SinoCom’s business has been concentrated on
Bloomberg code 299.HK NRI and DIR, two typical securities IT service providers in
Share price HK$0.67 the financial sector, and achieved high growth from 2004 to
Daily turnover (mn shrs) 1.33
2007. However, when financial sector demand weakens,
52wk high/low HK$1.86/0.66
corporate earnings will be adversely affected.
Market Cap (HK$ mn) 748
Issued shares (mn) 1,116
Earning forecasts trimmed. We revise down our FY08~09
Free float (mn) 553
earnings forecasts by 19.7% and 36.4% to HK$0.110/sh and
Major shareholders China Way International (51.34%)
HK$0.123/sh, respectively: 1) We revise FY08/09 revenue
growth down to 17.3% and 18.5%, respectively, to reflect
52wk performance demand shrinkage in the target market, though SinoCom has
160 (%) SinoCom HSCEI begun diversifying the business mix to NEC and other
clients; 2) We revise gross margin down 1.2ppt and 0.9ppt,
140
respectively, as we believe top-line growth is slower than
120 that of headcounts in 2008 and SinoCom is diversifying its
business into less lucrative consumption sectors.
100
Downgrade to ACCUMULATE, though FY08 and FY09
80
P/Es are 6.1x and 5.5x, pretty attractive compared with
60
H-share, A-share, or Indian peers. The company’s client base
is too concentrated and demand from the financial sector is
40 weakening. We think that decline in the Japanese financial
07-09 07-11 08-01 08-03 08-05 08-07 08-09
sector will drag down growth, and currently only
Source: Company data, Bloomberg, CICC Research diversification into low margin business seems an option.

This report is based on information available to the public. No representation is made that it is accurate or complete. This report is not an offer to buy or sell or a solicitation of an offer to buy or
sell the securities mentioned. China International Capital Corporation Limited and others associated with it (CICC) may have positions in, and may effect transactions in securities of companies
mentioned herein and may also perform or seek to perform investment banking services for those companies. This report may also be made available in Hong Kong by China International Capital
Corporation (Hong Kong) Limited and/or China International Capital Corporation Hong Kong Securities Limited. Copyright of this report belongs to CICC. Any form of unauthorized distribution,
reproduction, publication, release or quotation by any institution or individual is prohibited without CICC's written permission.
 SinoCom Software: September 17, 2008

Chart 1: Japanese software investment

50% Insurance sector Large firms, non-manufacturing sector

Banking sector All sectors
40%
Securities sector
30%

20%
10%
0%
FY 3/07A FY 3/08A FY 3/09E
-10%
-20%

-30%

Source: Bank of Japan’s Quarterly Economic Survey, CICC Research

Table 1: SinoCom Earnings forecast change

2008E 2009E
(mn HKD) Original Current Change % Original Current Change %
Income statement
Revenue 799.3 691.9 -13.4% 1,106.0 819.6 -25.9%
ITO 724.9 623.5 -14.0% 989.7 723.0 -26.9%
Tech support 34.2 34.2 0.0% 51.3 51.3 0.0%
As % of Revenue
ITO 90.7% 90.1% -0.6% 89.5% 88.2% -1.3%
Tech support 4.3% 4.9% 0.7% 4.6% 6.3% 1.6%
Sales tax and surcharge (34.2) (29.6) -13.4% (47.3) (35.1) -25.9%
Net revenue 765.1 662.3 -13.4% 1,058.6 784.6 -25.9%
Cost of sales (488.4) (430.6) -11.8% (698.7) (524.6) -24.9%
Gross profit 276.8 231.7 -16.3% 359.9 260.0 -27.8%
Gross margin 36.2% 35.0% -1.2% 34.0% 33.1% -0.9%
Administrative expenses (103.3) (91.3) -11.7% (115.3) (104.4) -9.5%
As % of revenue 13.5% 13.8% 0.3% 10.9% 13.3% 2.4%
Operating profit 180.8 147.7 -18.3% 253.8 164.2 -35.3%
Operating margin 23.6% 22.3% -1.3% 24.0% 20.9% -3.0%
PBIT 180.8 147.7 -18.3% 253.8 164.2 -35.3%
Income tax expense (24.5) (22.2) -9.5% (34.4) (24.6) -28.4%
Effective tax rate 13.6% 15.0% 1.4% 13.6% 15.0% 1.4%
Minority interests (2.4) (1.9) -19.7% (3.3) (2.1) -36.4%
Net Profit 153.9 123.7 -19.7% 216.1 137.5 -36.4%
Net margin 20.1% 18.7% -1.4% 20.4% 17.5% -2.9%
Growth (YoY) 33.3% 7.1% -26.2% 40.4% 11.2% -29.2%
EPS 0.137 0.110 -19.7% 0.193 0.123 -36.4%

Source: CICC Research

This report is based on information available to the public. No representation is made that it is accurate or complete. This report is not an offer to buy or sell or a solicitation of an offer to
buy or sell the securities mentioned. China International Capital Corporation Limited and others associated with it (CICC) may have positions in, and may effect transactions in securities
2 of companies mentioned herein and may also perform or seek to perform investment banking services for those companies. This report may also be made available in Hong Kong by China
International Capital Corporation (Hong Kong) Limited and/or China International Capital Corporation Hong Kong Securities Limited. Copyright of this report belongs to CICC. Any form of
unauthorized distribution, reproduction, publication, release or quotation by any institution or individual is prohibited without CICC's written permission.
SinoCom Software: September 17, 2008

Table 2: SinoCom Earnings forecast

(mn HKD) 2005A 2006A 2007A 2008E 2009E 06 vs. 05 07 vs. 06 08 vs. 07 09 vs. 08
Income statement
Revenue 262.3 393.6 589.8 691.9 819.6 50.0% 49.8% 17.3% 18.5%
ITO 243.3 363.8 566.9 623.5 723.0 49.5% 55.8% 10.0% 16.0%
Tech support 19.0 29.8 22.8 34.2 51.3 56.7% -23.4% 50.0% 50.0%
As % of Revenue
ITO 92.8% 92.4% 96.1% 90.1% 88.2% -0.3% 3.7% -6.0% -1.9%
Tech support 7.2% 7.6% 3.9% 4.9% 6.3% 0.3% -3.7% 1.1% 1.3%
Sales tax and surcharge (11.7) (16.1) (25.2) (29.6) (35.1) 38.4% 56.4% 17.3% 18.5%
Net revenue 250.7 377.4 564.5 662.3 784.6 50.6% 49.6% 17.3% 18.5%
Cost of sales (124.0) (219.5) (341.0) (430.6) (524.6) 77.1% 55.3% 26.3% 21.8%
Gross profit 126.7 157.9 223.5 231.7 260.0 24.6% 41.6% 3.7% 12.2%
Gross margin 50.5% 41.8% 39.6% 35.0% 33.1% -8.7% -2.2% -4.6% -1.8%
Administrative expenses (60.4) (76.4) (91.2) (91.3) (104.4) 26.4% 19.4% 0.1% 14.4%
As % of revenue 24.1% 20.2% 16.2% 13.8% 13.3% -3.9% -4.1% -2.4% -0.5%
Operating profit 69.6 86.2 138.6 147.7 164.2 23.9% 60.7% 6.6% 11.2%
Operating margin 27.8% 22.8% 24.6% 22.3% 20.9% -4.9% 1.7% -2.2% -1.4%
PBIT 69.6 86.1 138.5 147.7 164.2 23.7% 60.8% 6.7% 11.2%
Income tax expense (9.0) (11.7) (20.8) (22.2) (24.6) 29.1% 78.6% 6.3% 11.2%
Effective tax rate 13.0% 13.6% 15.0% 15.0% 15.0% 0.6% 1.5% 0.0% 0.0%
Minority interests (0.6) (1.1) (2.2) (1.9) (2.1) 98.4% 92.9% -12.6% 11.2%
Net Profit 60.0 73.3 115.5 123.7 137.5 22.2% 57.5% 7.1% 11.2%
Net margin 23.9% 19.4% 20.5% 18.7% 17.5% -4.5% 1.0% -1.8% -1.1%
Growth (YoY) 14.8% 22.2% 57.5% 7.1% 11.2% 7.3% 35.4% -50.4% 4.1%
EPS 0.054 0.065 0.103 0.110 0.123 22.2% 57.5% 7.1% 11.2%
Source: Company data, CICC Research

This report is based on information available to the public. No representation is made that it is accurate or complete. This report is not an offer to buy or sell or a solicitation of an offer
to buy or sell the securities mentioned. China International Capital Corporation Limited and others associated with it (CICC) may have positions in, and may effect transactions in
securities of companies mentioned herein and may also perform or seek to perform investment banking services for those companies. This report may also be made available in Hong 3
Kong by China International Capital Corporation (Hong Kong) Limited and/or China International Capital Corporation Hong Kong Securities Limited. Copyright of this report belongs to
CICC. Any form of unauthorized distribution, reproduction, publication, release or quotation by any institution or individual is prohibited without CICC's written permission.
 SinoCom Software: September 17, 2008

Table 3: Valuation comparison

Market Cap Sales
Price @ US$ mn US$ mn PE ratio Growth PEG
08-9-16 08-9-16 2007A 2006A 2007A 2008E 2009E FY09/FY07 2009E
Outsourcing comparables
A-Share comparables
Neusoft CNY 22.07 1,692 418 59.1x 27.9x 23.9x 15.8x 32.8% 0.7x
Insigma CNY 3.82 454 786 25.4x 20.4x 16.8x 11.7x 32.2% 0.5x
Hyron CNY 9.96 109 22 36.7x 28.1x 21.7x 16.8x 29.1% 0.7x
Median 36.7x 27.9x 21.7x 15.8x 32.2% 0.7x

India comparables
Infosys INR 1,530.00 18,677 2,963 34.0x 22.1x 19.0x 15.0x 21.2% 0.9x
Tata Consultancy INR 738.30 15,410 3,985 24.4x 17.2x 14.1x 12.4x 17.8% 0.8x
Wipro INR 386.00 12,042 3,199 26.3x 18.7x 17.2x 14.4x 14.0% 1.2x
Satyam INR 345.80 4,966 1,383 19.5x 16.1x 13.6x 10.7x 22.9% 0.6x
HCL INR 214.80 3,063 1,294 20.0x 10.6x 11.4x 9.5x 5.8% 2.0x
Tech Mahindra INR 695.00 1,803 625 30.7x 65.8x 11.6x 9.2x 166.8% 0.1x
Mphasis INR 223.35 995 376 23.7x 25.5x 17.5x 13.3x 38.7% 0.5x
Rolta INR 279.00 958 152 29.6x 25.9x 19.1x 13.8x 36.7% 0.5x
Patni INR 194.30 576 574 11.0x 5.6x 7.2x 6.5x -7.4% -1.0
India Big 4 Median 25.3x 17.9x 15.7x 13.4x 19.5% 0.8x
Median 24.4x 18.7x 14.1x 12.4x 21.2% 0.6x

H-Share comparables
SinoCom HKD 0.67 96 73 10.2x 6.5x 6.1x 5.5x 9.1% 0.7x
Chinasoft HKD 0.72 93 104 16.0x 11.9x 8.3x 6.1x 39.6% 0.2x
Median 13.1x 9.2x 7.2x 5.8x 24.3% 0.4x

Europe & America comparables

Infosys-ADR USD 34.80 19,918 2,963 - - 17.4x 15.0x - -
Wipro-ADR USD 9.94 14,539 3,199 - - 17.8x 16.5x - -
Satyam-ADR USD 18.05 6,076 1,383 - - 14.3x 12.3x - -
Vance Info USD 7.72 278 63 - 35.1x 20.4x 15.3x 51.2% 0.4x
IBM USD 115.19 156,064 98,786 18.6x 15.7x 13.1x 11.7x 15.8% 0.8x
Accenture USD 36.22 27,730 21,453 22.0x 17.6x 13.7x 12.5x 18.8% 0.7x
CA USD 21.53 11,158 3,943 79.7x 97.9x 17.1x 14.2x 162.5% 0.1x
Cap Gemini EUR 35.84 7,443 12,402 16.2x 11.8x 10.5x 9.7x 10.2% 1.0x
CSC USD 43.80 6,629 14,855 15.4x 19.5x 11.3x 10.2x 38.2% 0.3x
ACS USD 49.30 4,795 5,772 16.9x 19.5x 14.0x 12.6x 24.1% 0.6x
Unisys USD 3.54 1,273 5,653 - - 22.5x 10.9x - -
Perot Systems USD 17.38 2,083 2,612 25.9x 18.5x 17.6x 15.4x 9.4% 1.9x
Median 18.6x 19.0x 15.7x 12.6x 21.5% 0.7x

A-share software Median 23.7x 19.1x 15.6x 12.4x 23.5% 0.6x

Source: Bloomberg, Wind Info, CICC Research

This report is based on information available to the public. No representation is made that it is accurate or complete. This report is not an offer to buy or sell or a solicitation of an offer to
buy or sell the securities mentioned. China International Capital Corporation Limited and others associated with it (CICC) may have positions in, and may effect transactions in securities
4 of companies mentioned herein and may also perform or seek to perform investment banking services for those companies. This report may also be made available in Hong Kong by China
International Capital Corporation (Hong Kong) Limited and/or China International Capital Corporation Hong Kong Securities Limited. Copyright of this report belongs to CICC. Any form of
unauthorized distribution, reproduction, publication, release or quotation by any institution or individual is prohibited without CICC's written permission.
SinoCom Software: September 17, 2008

Table 3 (continued): Valuation comparison

Market Cap Sales
Price @ US$ mn US$ mn PE ratio Growth PEG
08-9-16 08-9-16 2007A 2006A 2007A 2008E 2009E FY09/FY07 2009E
Other A-Share software comparables
Software product & application
Unfida CNY 20.82 1,408 192 60.7x 35.7x 24.9x 18.6x 38.6% 0.6x
Langchao CNY 4.85 132 87 52.2x 121.3x 49.1x 31.7x 95.6% 0.5x
Aero-info CNY 18.98 1,707 689 32.7x 24.8x 21.0x 18.1x 17.1% 1.2x
Eternal Asia CNY 13.39 484 262 31.5x 40.6x 17.9x 13.7x 72.1% 0.2x
Shiji Network CNY 42.40 694 40 82.7x 46.9x 32.4x 22.6x 44.1% 0.7x
Nari Tech CNY 16.47 614 156 36.5x 29.5x 23.2x 18.5x 26.2% 0.9x
Baaosight CNY 16.89 518 265 50.6x 32.4x 23.0x 17.8x 34.7% 0.7x
Mesnac CNY 12.00 500 73 38.4x 25.6x 16.1x 11.3x 50.4% 0.3x
Bright Ocean CNY 7.77 400 128 32.1x 21.9x 16.7x 12.4x 32.8% 0.5x
Newland CNY 4.01 265 124 44.0x 21.1x 13.8x 9.6x 48.0% 0.3x
Hundsun CNY 10.12 439 82 55.0x 23.8x 21.3x 15.5x 23.8% 0.9x
YG soft CNY 11.40 183 22 32.4x 22.6x 17.8x 13.5x 29.3% 0.6x
Yanhua Smartech CNY 7.17 84 29 24.8x 23.1x 25.7x 24.3x -2.4% -10.8
Median 38.4x 25.6x 21.3x 17.8x 34.7% 0.6x
System integrataion
Teamsun CNY 7.61 466 325 21.3x 17.9x 16.4x 12.6x 18.9% 0.9x
DHC Digital Tech CNY 11.41 473 116 44.7x 34.2x 19.0x 14.2x 55.2% 0.3x
Tiancheng CNY 5.50 126 73 21.4x 22.3x - - - -
CS&S CNY 7.38 174 273 21.3x 18.4x 17.3x 15.5x 9.0% 1.9x
Median 21.4x 20.3x 17.3x 14.2x 18.9% 0.9x

A-share software Median 36.5x 24.8x 20.0x 15.5x 33.8% 0.6x

Source: Bloomberg, Wind Info, CICC Research

Chart 2: P/E band of SinoCom

5.0 Price (HKD)

4.0

3.0

2.0

1.0

0.0
04-04 07-04 10-04 01-05 04-05 07-05 10-05 01-06 04-06 07-06 10-06 01-07 04-07 07-07 10-07 01-08 04-08 07-08
Stock Price 5x 15 x 25 x 35 x

Source: Bloomberg, CICC Research

This report is based on information available to the public. No representation is made that it is accurate or complete. This report is not an offer to buy or sell or a solicitation of an offer
to buy or sell the securities mentioned. China International Capital Corporation Limited and others associated with it (CICC) may have positions in, and may effect transactions in
securities of companies mentioned herein and may also perform or seek to perform investment banking services for those companies. This report may also be made available in Hong 5
Kong by China International Capital Corporation (Hong Kong) Limited and/or China International Capital Corporation Hong Kong Securities Limited. Copyright of this report belongs to
CICC. Any form of unauthorized distribution, reproduction, publication, release or quotation by any institution or individual is prohibited without CICC's written permission.
Beijing
China International Capital Corporation Limited China International Capital Corporation Limited
28th Floor, China World Tower 2 Beijing Jianguomenwai Ave Securities Trading Branch
1 Jianguomenwai Avenue 1st Floor, Capital Tower
Beijing, 100004 6A Jianguomenwai Avenue
Beijing, 100022
Tel: (8610) 6505-1166
Fax: (8610) 6505-1156 Tel: (8610) 8567-9238
Fax: (8610) 8567-9169

Shanghai
China International Capital Corporation Limited China International Capital Corporation Limited
Shanghai Branch Shanghai Middle Huaihai Road Securities Trading Branch
32nd Floor, Azia Center B1-B2, Century Autobus Tower
1233 Lujiazui Ring Road 398 Middle Huaihai Road
Shanghai, 200120 Shanghai, 200020

Tel: (8621) 5879-6226 Tel: (8621) 6386-1195

Fax: (8621) 5879-7827 Fax: (8621) 6386-1196

Hong Kong
China International Capital Corporation China International Capital Corporation
(Hong Kong) Limited Hong Kong Securities Limited
29th Floor, One International Finance Centre 29th Floor, One International Finance Centre
1 Harbour View Street 1 Harbour View Street
Central Hong Kong Central Hong Kong

Tel: (852) 2872-2000 Tel: (852) 2872-2000

Fax: (852) 2872-2100 Fax: (852) 2872-2100

China International Capital Corporation
Hong Kong Asset Management Limited
29th Floor, One International Finance Centre
1 Harbour View Street
Central Hong Kong
Shenzhen
China International Capital Corporation Limited
Shenzhen Fuhua 1st Road Securities Trading Branch
107 & 201, Annex Bldg, Shenzhen Duty Free Commercial Tower
6 Fuhua 1st Road
Futian District, Shenzhen, 518048

Tel: (852) 2872-2000 Tel: (86755) 8832-2388

Fax: (852) 2872-2100 Fax: (86755) 8254-8243

This report is based on information available to the public. No representation is made that it is accurate or
complete. This report is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned.
China International Capital Corporation Limited and others associated with it (CICC) may have positions in, and
may effect transactions in securities of companies mentioned herein and may also perform or seek to perform
investment banking services for those companies. This report may also be made available in Hong Kong by China
International Capital Corporation (Hong Kong) Limited and/or China International Capital Corporation Hong Kong
Securities Limited. Copyright of this report belongs to CICC. Any form of unauthorized distribution, reproduction,
publication, release or quotation by any institution or individual is prohibited without CICC's written permission.