My Thoughts on Inspur Part 2 with XIRR Update

 


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Inspur Intl(HK:596) share price has risen another 30% today, which means it has risen more than 218% from the lows of Jan 2021. There is a few new announcements to look at this time. 

First was a voluntary update regarding their 30% owned associate Qingdao Lejin which Inspur will suspend operation in March 2021. This is a good and bad news. Withdrawal of investment in this associate will facilitate the company in focusing on the development of its principal cloud business and not get distracted. Qingdao does manufacturing and sale of wireless global system for communications mobile phones and value added software for mobile phones. It has nothing to do with ERP or cloud services.

However this associate has been paying a consistent dividend to Inspur. In terms of dividend quantum:

  1. 2015 - 60.5mil HKD
  2. 2016 - 1623mil HKD
  3. 2017 - nil
  4. 2018 - 92mil HKD
  5. 2019 - 288mil HKD

Means 50% of Qingdao's investment gain will be forsaken this year and long term investment impairment will likely be recognized for FY 2020. Qingdao profit margin is razor thin though, so I feel its still an ideal situation for Inspur, if management can focus more on their cloud services which will likely give them a much higher profit margin in the future.

The final announcement made was a profit warning for their FY 2020 result. Which was expected, but a break down on what was released will give us a clearer picture.

  1. The company's total revenue is expected to decrease by 10% compared to last year. 
  2. The company will record a loss attributable to shareholders of approximately 140mil to 160mil HKD.
  3. Cloud service business sees a year on year increase of approximately 30%
  4. Cloud service business is still in the expansion phase so substantial investment in R&D is necessary
  5. Impact of epidemic and industry competition result in a 10% decrease in revenue for their Enterprise software business.
  6. Ceasing business operation in Qingdao incurs non cash impairment and loss of dividend
  7. Investment properties incurring non cash losses due to market environment.
  8. The company will continue to increase R&D investment and insist on its cloud transformation
  9. The company is confident in the long term future development of the Group
With this information given, lets break down its cloud service revenue against total revenue.

Inspur only started to cloudify since 2018. 

2018: 185.05mil HKD which is 7.8% of total revenue
2019: 387.91mil HKD which is 13.4% of total revenue

From the information given we can extrapolate that:

2020: 504.28mil HKD which is 19.34% of total revenue

20201H: 225.59mil HKD which is 19.36% of total revenue
20202H: 278.69mil HKD which is 19.32% of total revenue

20201H revenue: 1.165bil HKD
20202H revenue: 1.443bil HKD

In terms of 1H and 2H comparison, cloud services revenue has increased by 23.5% and total revenue by 23.8%. The substantial losses incurred for FY2020 I believe a portion of it is non cash due to impairment of Qingdao and their investment properties. The total revenue and cloud improvement in the second half is likely due to the epidemic being more controlled in the latter half, and state own enterprise starting to be more willing to purchase their enterprise software.

The result is acceptable in terms of cloud services growth even though the growth has slowed. But overall, 2020 has not been a good year for Inspur, its more a transitional phase for cloudification with their legacy enterprise software business, which they are trying to transition out and yet maintain. Quite a tricky feat to juggle in the midst of a pandemic.

The company needs to accelerate their cloudification at a faster rate to hit the 50% of total revenue mark before they can compete with Kingdee. Also I feel they need to disclose more detailed information in regards to their cloud services breakdown.

Really have to see how the market reacts tomorrow, because Inspur is extremely underestimated in terms of valuation relative to the other cloud players on HKSE and global markets seems to have looked past 2020 so far. 

Kingdee the current cloud leader also announced a profit warning 3 weeks ago with similar cloud growth as Inspur, but incurred a heftier loss of 250-350mil. Market seems to have ignored it completely as Kingdee has been on an uptrend after its profit warning announcement.

Inspur after 30% price rise today is valued at 5.86bil HKD market cap after 19.34% cloudification vis a vis Kingdee which is 128bil HKD after 54-59% cloudification. One party must be wrong...

Full disclosure, I have vested interest in Inspur Intl and it is currently up 95%

Snap shot of my portfolio performance as of today: Total profit for 2021: S$92,085.96 due to 30% price increase for Inspur today. 

As of today I manage to profit over 200% from XD(204%) and close to over 100% from 4 more counters in my portfolio: Chanjet(176%), Inspur(95%), Weimob(161%), China Youzan(123%)




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