2019 and 1Q20 results in line with our expectationGiven the consolidation of Baosight Wuhan, revenue, attributable netprofit, and recurring attributable net profit at Baosight Software rose17.7%, 99.8%, and 38.7% YoY in 2019 to Rmb6.85bn, Rmb879mn, andRmb840mn. On comparable basis, revenue fell 7.4% YoY in 1Q20 toRmb1.3bn, and attributable net profit grew 45.9% YoY to Rmb274mn.

The results are in line with expectation.

Trends to watch

Software business to benefit from upgrades to the industrialinternet. Baosight is promoting smart upgrades in software productsand maintaining steady revenue growth for its software business byleveraging its experience in industrial manufacturing. Softwarerevenue grew 23.9% YoY in 2019 on a comparable basis. The firm isfocusing on core smart manufacturing technologies – e.g., big dataand artificial intelligence – and building industrial internet platformsto develop integrated strength in 5G and the industrial internet.

Clear advantages in IDC business; strong growth ahead. We estimaterevenue of the internet data center (IDC) business rose 36.4% YoY in2019 with cabinet utilization rate exceeding 80%. By leveragingBaoCloud, Baosight is promoting new-generation IT infrastructureacross China. The firm is steadily expanding in Shanghai, with a quotaof 5,000 cabinet approved in November 2019, and it expanding intocentral China where it is jointly establishing a big data industrial parkwith Wuhan Iron & Steel in 2019.

Financials and valuation

Baosight A-share and B-share are trading at 50x and 15x 2020e P/E.

Given the consolidation of Baosight Wuhan, we raise our 2020 and2021 revenue forecasts 10.6% and 14.3%, and lift our earningsforecasts 1.3% and 4.9%. We maintain OUTPERFORM on bothBaosight A- and B-shares. For the A-shares, we raise our SOTP-basedTP 16% to Rmb54 (56x 2020e P/E) offering 12% upside, given ouroptimistic expectation for expansion in central China. For theB-shares we maintain TP at US$3.50 (28x 2020e P/E) offering 59%upside.

Risks

COVID-19 affecting downstream orders; new business still in earlystage.