1H22 results largely in line with our expectations

Aisino announced its 1H22 results: Revenue rose 0.11% YoY to Rmb9.20bn, attributable net profit fell 19.30% YoY to Rmb292mn, and recurring attributable net profit dropped 22.23% YoY to Rmb372mn. Results were largely in line with our expectations.

Trends to watch

Smooth progress in corporate finance and taxation business as well as AI and Internet business; total revenue stable. 1) In 1H22, revenue rose 0.11% YoY to Rmb9.20bn, largely remaining stable. In particular, revenue from Aisino’s anti-counterfeiting tax control and information businesses dropped 8.54% and 2.18% YoY to Rmb1.58bn and Rmb1.15bn, while that from corporate finance and taxation, artificial intelligence (AI) and Internet businesses grew 14.44% and 9.14% YoY to Rmb1.81bn and Rmb1.71bn. Policy adjustments weighed on revenue from anti-counterfeiting tax control, but the firm is expanding its marketization business. 2) In 1H22, Aisino’s contract liabilities equaled Rmb1.03bn, a decrease of Rmb114mn from the beginning of 2022. The firm is actively pushing forward the delivery of projects on hand. In 1H22, inventories totaled Rmb2.06bn, an increase of Rmb821mn from the beginning of 1H21 as the firm increased its investment in system integration and information businesses. 3) In 1H22, net operating cash flow was -Rmb593mn as the system integration business occupied capital.

Increasing R&D investment to accelerate transformation and upgrades. In 1H22, Aisino’s gross margin (GM) dropped 1.69ppt YoY to 26.09% due to the anti-counterfeiting tax control business. As the firm strengthened its efforts in marketing, its selling expenses rose 6.93% YoY to Rmb428mn in 1H22. In particular, its labor costs for sales rose 9.89% YoY to Rmb315mn. In 1H22, R&D expenses grew 28.57% YoY to Rmb498mn, with its Rmb333mn labor costs for R&D staff increasing 34.19% YoY. Its R&D expense ratio reached 5.42% as the firm increased its R&D investment for faster upgrading and transformation. In 1H22, the firm’s losses from fair value changes reached Rmb106mn due to changes in CNPC Capital’s share prices. 5) In 1H22, Aisino’s attributable net profit dropped 19.30% YoY to Rmb292mn due to increased investment in R&D.

Accelerating the expansion of corporate finance and taxation service market; localization to bring opportunities to the industry. For businesses related to the Golden Tax[1] projects, Aisino provides taxation management solutions for over 20,000 groups with experience in tax information technology. It expects its Aisino corporate service platform to roll out in 36 provinces and cities and cover over 5mn enterprises in full-year 2022. Regarding its AI and internet business, the firm implemented new projects such as the provincial emergency supplies management cloud platform in Jiangsu. In terms of the information business, several major domestic localization projects were accepted by clients in Guangdong, Jiangsu, Guizhou provinces, and other regions. Aisino also won nearly 100 new domestic localization projects in the industry.

Financials and valuation

Due to the increased R&D investment, we cut our 2022 and 2023 net profit forecasts by 4.6% to Rmb1.13bn and by 6.0% to Rmb1.25bn. The stock is trading at 17.5x 2022e and 15.8x 2023e P/E. We maintain an OUTPERFORM rating. However, due to lowered profit forecasts, we also cut our TP 8.1% to Rmb12.50 (20.6x 2022e and 18.5x 2023e P/E), offering 17.4% upside.

Risks

Disappointing localization substitution; higher-than-expected R&D investment.