China software sector to grow 15-18% until 2017: Morgan Stanley

April 29, 2015 18:07
A software development and technology center in Beijing. China's software industry is expected to maintain its heady growth pace for the next few years. Photo:

China's software industry is expected to maintain 15-18 percent revenue growth annually for three years, taking the market to 5.5 trillion yuan (US$886 billion) by the end of 2017, according to Morgan Stanley.

The solid growth will be driven by government initiatives to improve the nation's economic efficiency and measures aimed at supporting domestic companies, analysts Alvin Jiang and Ben Lin said in a report released Wednesday.

The sector will also be helped by improved profit margins as wage inflation pressures ease, they said.

The growth rate projection is more optimistic than the 15 percent estimated by market intelligence firm IDC.

Expressing confidence over China's economic transformation prospects, the Morgan Stanley analysts said their forecast is based on an assumed 7.4 percent compound annual GDP growth for the period, and a rise in total IT expenditure-to-GDP ratio to 2.3 percent in 2017, among other things.

Thanks to favorable Chinese government policies, domestic firms are expected to account for 50 percent of the industry revenue by the end of 2017, up from the present level of 34 percent.

"Market share gains will start from application software, rather than infrastructure and middleware market" as the segment is less focused on technology, and more on responsive service and better understanding of the local usage context, the report said.

Meanwhile, in bad news for fresh graduates but a good development from the perspective of software companies, wage increases are slowing in the industry as a result of increased supply of manpower.

Because manpower cost is a large component in the industry expenditure, slower wage growth will improve economies of scale and boost profitability, Jiang said.

The analysts said they initiated coverage on market leaders Kingdee Software (0268.HK) and Aisino Corp. (600271.SH) with "overweight" ratings due to the firms' strength in business sustainability and their cheaper valuations.

Morgan Stanley has a price target of HK$5 on Kingdee and a target of 62 yuan on Aisino.

It, however, has an "underweight' rating on Hundsun Technologies as (600570.SH) as the stock's current valuation is deemed to be excessive.

Overall, the two major risks for the sector are a highly fragmented market and rich valuations of some companies, Jiang said.

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EJ Insight reporter