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Investing In Sinosoft Technology Plc
Sinosoft Technology plc (SFT, London Stock Exchange - AIM), a leading developer and provider of software and IT solutions to Chinese regional and national government agencies and export enterprises in China. Founded in 1998 by CEO Ms Xin Yingmei, Sinosoft’s principal operating businesses capitalise on opportunities presented by the Chinese Government’s continuing drive for digitisation, particularly within export tax management and other areas of interaction between citizens and government. Sinosoft has established itself as the market leader in the provision of export tax rebate software within Jiangsu and Hainan provinces. Within those provinces alone over 24,000 export companies use Sinosoft’s software. As part of the Chinese Government’s Golden Tax Project all 31 provinces in China are scheduled to have their export tax rebate systems digitised. The Chinese Government’s drive to create centrally accessible administrative systems that collect and transport data to and from users (whether the public or national and regional government departments) extends beyond export tax. The Company has designed a portfolio of E-government software products to radically simplify interaction with local government across the country. Investment Report Summary: Are we about to see the start of a recovery for Sinosoft Technology plc? 2010 should see China's economy start to recover and exports pick up. The business websites are awash with recent reports that suggest that we have turned the corner. After the near collapse of the world banking system and the bursting of the asset bubble China can learn from the west’s mistakes and ensure that it does not fall foul of allowing bank lending to forever chase up asset/property prices and instead ensure that it grows its real economy – manufacturing, services, tourism. There are already indications that the Chinese government is looking more carefully at the way its banks lend to businesses. The question for Sinosoft investors is when will the Chinese government bring the SAT digitisation project back online? Restarting this project would potentially attract institutional investors back to Sinosoft and wake up the share price which has been slumbering in single figures for too long. It was the loss of confidence from large investors that caused the drop in the share price from the high teens and twenties down to single figures where the share price has stayed for the past 18 months. Considering that Sinosoft has cash in the bank, has continued to show a profit all the way through the recent recession and with things starting to pick up in the Chinese economy this share starts to look decidedly undervalued. The company has used this recent quiet period to solidify its position, ironing out bugs and enhancing the Export Tax software already deployed in some provinces, developing new E-government software products, forging links with software developers in India, acquiring a smaller Chinese IT development company and planning a move to new offices. All this and it has still turned in a healthy profit. In some ways this quiet spell may have helped the company by forcing it to diversify away from just providing Export Tax software products and provided a reality check for Sinosoft management and investors with regard to the company’s future direction and rate of growth. The way that Sinosoft planned the move to their new premises showing that the company’s management can think outside the box (for a software developer a shrewd property investment is outside the box!) and that they want to put every bit of cash to work for them as well as keeping an eye on reducing future costs such as rent. With cash deposited in a bank not earning a particularly good rate of return for anyone, including Sinosoft, the company entered into an arrangement with the developer of a software park in Nanjing to loan them the money for the development. The process is managed through the Shanghai Pudong Development Bank and Sinosoft picks up 10% interest on the loan (a short term bonus), naming rights to the new development (long term thinking) and a discount on the rent when it moves in (keeping down future costs). As security for the loan they have the land use rights for the property. An exact valuation for Sinosoft is difficult to come to as the company trades in China, the accounts are in USD and the share price/dividend in GBX, however a very simplistic calculation using the most recent unaudited figures gives a share value of approximately 12p. With Sinosoft poised to take full advantage of what now appears to be an imminent Chinese recovery we should see the current share price (7 - 9p) climb back into double figures towards the end of 2009 reflecting the true value of the company. Whenever the Chinese government do decide to restart the SAT digitisation project then expect another 5-10p to be added to the share price, not just because of the SAT project itself but because it opens up a market of thousands of potential customers who need software to integrate with the government SAT system. In the Jiangsu province the Chinese government made it compulsory for all company export tax returns to be submitted digitally after they had implemented the new digitised system. Also, after implementing the SAT digitisation system in the Jiangsu province, as an indication of how well the project went Sinosoft were awarded additional e-government contracts worth RMB 5 million for the districts of Taizhou and Nantong cities. In many of these cases Sinosoft are the first to market and that by itself will give them a huge advantage for further enhancements and additions to these systems in years to come. If I were to criticise Sinosoft then it would be to say that they appear to focus exclusively on the operation of the business without providing enough information and direction to shareholders and potential investors as to where they are taking the company in the future. Perhaps they prefer to let their results speak for themselves and maybe the company isn’t quite mature enough to really have found its feet yet. However this lack of information is what causes the share price to be undervalued, lagging behind events and reacting to news as it is announced by the company. Trading updates and results have a habit of shifting the share price either up or down significantly and this volatility may not appeal to all investors. As with a lot of AIM companies the lack of liquidity of the stock can also cause significant moves in the share price although in the current climate this is likely to cause a shortage of shares pushing the share price up. The present dividend level of 0.31p per share gives a yield of around 3.5% and costs Sinosoft a little over £500,000 a year to cover. This year’s profit is expected to be down from previous years due to the recession slowing Sinosoft’s progress but they should still easily be able to maintain the existing dividend and keep the dividend cover above two. The potential for this company is significant and from the way that Sinosoft has managed itself over the past 12 months it looks like a company that will take maximum advantage of whatever situation presents itself. Looking to the next 12 to 18 months I would say that China’s economy should just be starting to get into its stride again presenting many more opportunities for Sinosoft to continue existing Export Tax and E-government programmes as well as diversifying further into other areas. Verdict: Short to medium term - definite HOLD and a tentative BUY but only up to 12p per share at the moment, then wait for trading updates and/or results from Sinosoft. I would say that shares in this company are quite hard to come by and so selling for a quick profit after the share price rises hoping to get back in later at a lower price should be avoided. The spread on this share is at times as much as 25% and the vast majority of shares are held either by the original company owners or long term (since flotation) investors. Long term – BUY, if things go well for Sinosoft it should win more contracts as China’s economy expands and we could well see the share price rise back above the May 2006 peak of 36p and beyond within five years. As always before investing, think long term and be both patient and realistic. Article Directory: http://www.articledashboard.com |
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