My Thoughts on Inspur International and XIRR

 

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Inspur Intl(HK:596) share price surged 36% today with 64mil volume size, the largest intraday volume since inception. Lets look at what Inspur does and why its undervalued to me.

Inspur International is a subsidiary of Inspur Group which is a state backed information technology enterprise in mainland China focusing on cloud computing, big data, key application hosts, servers, storage, artificial intelligence and ERP. 

Inspur Int does enterprise software and enterprise cloud services. They tap into industries like taxation, finance, government, ERP, telecommunication, software outsourcing. Their business model is very similar to Kingdee and Yonyou. It is currently ranked third behind Kingdee and Yonyou in terms of the size of their cloud service business.

Mingyuan Cloud(HK:909) has revenue of 1.7 billion this year and is expected to be 2.4 billion next year. The market value now exceeds 98 billion. Inspur, whose revenue exceeded 2.4 billion in 2018, is close to 3 billion in 2019, and its market value is only HK$3.4 billion. One party must be wrong.

Mingyuan Cloud's client is real estate while Inspur Intl clients are mainly state owned enterprises so there is a subtle difference. Inspur is a SOE, but the management has incentives and professional executives hired from overseas. Cloud service revenue accounted for 19% in the first half of the year. Cloud revenue doubled in 2019, increased by 40% in 2020, and will grow by more than 50% next year. They started cloudification slow relative to Kindgee. This could be the reason for its obscurity and low valuation. 

In terms of its balance sheet, 500 million in cash, no interest-bearing debt, over one billion real estate, over one billion contract liabilities, rent can be collected 6000-7000w a year, the main business is still growing, next year cloud growth rate of more than 50%, traditional ERP revenue exceeds Kingdee. Large customers have strong demand and stable expenses, but the transfer to the cloud will be slow. So at the time of the interim report, ERP surpassed Kingdee, but cloud revenue was only about a quarter of Kingdee’s. Although the revenue of cloud services is increasing, the proportion of total revenue is still too small. A typical Saas valuation of 20-30x price to sale needs at least 50% weightage of cloud services to be considered a Saas company.

There is an underestimation if we compare  Yonyou(SHA: 600588) with Inspur Intl too. The customer structure and revenue structure of Inspur Int and Yonyou are very similar, Yonyou's valuation is around 130 billion yuan, while Inspur Int only has a valuation of more than 3 billion. Yonyou uses PS valuation, Inspur Intl uses PE valuation. The PE valuation may underestimate the value of Inspur Int Saas business.

Inspur's cloud services in 1H2020 increased by 40.5%, accounting for 19.36% of the total cloud service weight of the entire business. The quantum revenue of cloud computing is 225.6 million yuan. Kingdee's cloud services in 1H2020 increased by 45.1%, while the proportion of cloud services in its entire business is now 57.5%. Cloud's quantum revenue is 798 million yuan. Kingdee's cloud revenue is almost 4x Inspur's.

Another point to note is Inspur did not publish all the cloud product revenue, renewal and other indicators like Kingdee, and the market couldn't understand it. More of such detail is needed to fully understand their business growth.

If I use a back of an envelope calculation. Assuming a conservative 40% growth next year for their cloud services base on 2019's cloud revenue of 388mil HKD, that's 543mil HKD. Cloud services are valued at around 20x price to sale in the current market, If I use 12x, that will work out to be 6.5bil HKD. If I use 12x PE for its Management software segment that's 3.24bil HKD. IoT due to extremely low profit margin I can give it zero valuation. Means overall valuation assuming 40% growth in cloud services will be 9.74bil HKD. Its current market cap is only 3.4bil HKD.

Of course there are numerous unknowns and risk involved. Inspur is state owned and only its subsidiaries are listed. Inspur Information and Inspur Cloud both are on Shanghai exchange, but the mothership Inspur Group remained a private unlisted company. Its massive earnings from the group level did not trickle down to its subsidiaries proportionately, more transparency is need. At present, the company has a large number of investment property yields(5%) lower the overall ROE. The company's customers are mainly group enterprises, Slow recovery of accounts receivable. Cloud services segment is also very competitive.

Full disclosure, I have vested interest in Inspur Intl and it is currently up 13%

Snap shot of my portfolio performance as of today: Total profit for 2021: S$63,478.53 due to 36% price increase for Inspur today.


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