Original title: National software platform, domestic alternative beneficiaries, compound growth rate of 14%, China software: R & D investment is tough, financial treatment is generous, government subsidies are the key to profitability
Author | Changshan
Edit | Little white
Among the A-share listed companies, the company's abbreviation can be titled "China" and has a certain strategic positioning.
The same is true of the Chinese software we talked about today.
Brand
1 Sit back and wait for the business to come to you
Founded in 1994 and listed in 2002, China Software is the northern software base among the three major software bases approved by the former State Planning Commission, and a core member unit of China Electronics.
China Software also undertakes independent controllability and information security in important areas of the national economy such as party and government, taxation, finance, electric power, petitioning, transportation, intellectual property rights, and national defense.
Its most representative cases include the Golden Tax Phase III system, railway communication system, etc., and the current focus is on the new generation of financial unified supervision and reporting platform.
To some extent, China's software has become an important technical support enterprise for the informatization process of government affairs departments in the mainland.
At present, its main products and services include operating systems, information security products, government affairs information systems, tax and financial supervision systems, etc., and its main customers are government departments at all levels and large central enterprises.
As a large-scale comprehensive IT service provider in China, China Software has a relatively complete independent security software industry chain including basic software such as operating systems (operating systems, databases, office software and middleware), security products, and application systems.
In addition, in December 2019, its winning bid Kirin merged with Galaxy Kirin to jointly create a domestic operating system and bring rapid growth in business revenue.
In the first half of 2021, Kirin Software achieved revenue of 515 million yuan, an increase of 472% year-on-year, and net profit reversed losses year-on-year, reaching 97.95 million yuan.
The business model of listed companies is mainly to participate in the project-based operation of customer public bidding or single-source procurement.
In fact, for Chinese software, many times it is the business that takes the initiative to come to the door. At the end of the third quarter of 2021, the advance collection/contract liabilities exceeded 1.8 billion yuan, accounting for 40% of the operating income of 4.4 billion yuan in the first three quarters.
2 Industry Solutions has the largest revenue but the lowest gross margin
Listed companies divide their main business into three categories: industry solutions, service-oriented business, and independent software products.
Industry solutions include information system construction, digital business, etc.;
Service-oriented business refers to the operation and maintenance of information systems, financial supervision and other operation services extended on the basis of traditional industry solutions;
Autonomous software products include basic software, office software, information security products, etc.
From the perspective of revenue composition, industry solutions are currently the largest revenue segment, and show an upward trend year by year, accounting for more than 60% in 2020; service-oriented business revenue accounted for 25%-30%; and independent software product revenue has rebounded since 2019.
Interestingly, the industry solution business, which accounts for the largest proportion of revenue, has the lowest gross profit margin and shows a downward trend, which has been less than 15% in recent years.
The independent software products with small revenue scale have higher gross profit margins and show an upward trend, exceeding 70% in the past two years.
The gross profit margin of the service business is also higher, remaining above 60% since 2013.
3 Performance seasonality is obvious
The performance of China Software has a very obvious seasonal characteristic, and the revenue and profit in the first three quarters are often inferior to the single quarter in the fourth quarter.
It can be clearly seen from the chart above that since 2014, the operating income of Chinese software in the fourth quarter has significantly exceeded that of any single quarter in the previous three quarters. The net profit in the first three quarters was a loss, and the net profit in the fourth quarter was a large profit, which made the net profit for the whole year remain profitable.
The emergence of this obvious seasonal characteristic is mainly related to the cyclical characteristics of the business. Usually, the project is determined in the first half of the year, the development and commissioning in the second half of the year, the centralized acceptance in the fourth quarter, and the final recognition of revenue.
In addition, the company's receivables also showed the same seasonal characteristics, that is, after the fourth quarter of revenue recognition, notes receivable and accounts receivable decreased from the end of the third quarter.
Let's look at another set of data.
The 2021 interim report disclosed that the company's inventory was 3.1 billion yuan, of which 2.5 billion yuan was issued, accounting for more than 80%. By the end of the third quarter, inventories had climbed to $3.7 billion. According to a simple estimate of 80%, the number of goods sent is close to 3 billion yuan.
How much of this can be recognized as sales revenue in the fourth quarter will greatly affect the size of the revenue for the whole year.
There were few troubles
Of course, as a national software application platform, Chinese software also has its troubles, in order to achieve the requirements of "independent controllability, information security", continue to invest more money in research and development, which in turn affects corporate profits.
1 Increase in revenue does not increase profits
From the perspective of revenue growth, China's software has fully benefited from the process of software localization, and revenue from 2011 to 2020 has maintained a certain growth rate, with an average annual compound growth rate of 13.6%.
However, the growth of net profit is not obvious, and the deduction of non-net profit has been a situation of 4 consecutive years of losses, maintaining a scale of 40 to 50 million since 2016, and losing again in the first three quarters of 2021.
Obviously, in the past decade, the company has basically been in a state of increasing revenue and not increasing profits.
Revenue has grown, but non-net profit has not grown much, so where does the money go? In this regard, the mystery will be revealed in the financial analysis section below.
It should be noted that since 2014, the company's operating cash flow has been positive and higher than net profit. However, in 2021, operating cash flow flowed out sharply, reaching 1.86 billion yuan at the end of the third quarter.
Is it that the business situation is deteriorating, or is there something else hidden?
2 Decrease in expense rates during the adjusted period
Below, Fengyunjun takes you to start from the operating cost of Chinese software and explore the reasons why its income does not increase profits.
The operating cost ratio of Chinese software is relatively stable, remaining around 61% for a long time, rising since 2019, once approaching 70%, and 65% in the first three quarters of 2021.
Prior to 2018, the company's operating cost ratio did not see a significant increase. However, in the same period, the deduction of non-net profit fluctuated greatly, indicating that there are other factors that lead to profit fluctuations.
Adjusted period expenses include selling expenses, administrative expenses, finance expenses, and exclude research and development expenses.
It is not difficult to see from the chart below that from 2011 to 2020, the expense ratio during the adjustment period was reduced, from 22% to 11%, and the decline was very obvious.
The cost-to-expense ratio has not changed much, and the expense ratio has continued to decline during the adjustment period, so what factors affect the profit?
3 Developed into the largest gold-devouring beast
China's software R&D expense ratio is around 20%, more than 33% in the first three quarters of 2021.
To make a simple calculation, the operating cost ratio is 60%, the adjusted period expense ratio is 12%, and the R&D expense ratio is 20%, which together exceed 90%, compared with 117% in the first three quarters of 2021.
Therefore, it is not difficult to understand the loss.
It must be said that the company's R & D expense rate has been above 20% for a long time, which is relatively high. Moreover, R&D investment is basically expense-based, and all of them are included in the total operating cost of the current period.
It can be said that the high R&D expense ratio is an important reason for its long-term thin profit operation, and even loss.
Suppose that if a listed company capitalizes 30% to 50% of its R&D investment every year and counts it under the "non-patented technology" account, the R&D expense ratio will fall to 50% to 70%. According to the first three quarters of 2021, the total cost of operations will be reduced by 400 million yuan to 700 million yuan, so the operating profit will be turned from loss to profit.
That's right, financial skills are magical. Dear owners of proposed listed companies, have you gotten to get it?
Some people may be curious, can be so easy to "turn decay into magic" operation, why not Get Chinese software?
Fengyunjun dared to speculate: First, as a "national character" enterprise, there is little interest in playing with financial skills to create profits; second, over the years, hundreds of millions, or even billions of research and development, perhaps not much technology has been precipitated, and the cost is more in line with the actual situation.
Compared with the tens of billions of R&D investment (most of the expense), the current R&D investment of Chinese software is actually quite small.
In the analysis of oriental Guoxin ("rubbing the concept is addictive but the performance is not crotch, keen on mergers and acquisitions but not thunder, dividends are very cut to reduce holdings is not much, but also rely on research and development to whitewash profits: operators "dog-headed military division" Oriental Guoxin) in the article mentioned that many companies in order to make the income statement look good, capitalize large amounts of research and development expenditure, and accumulate huge amounts of "non-patent technology" assets in the long run. However, these so-called assets ultimately do little to help the company's gross profits and sustained profits, and even explode.
So, what is the significance of capitalizing R&D investment?
From another point of view, if the continuous large amount of R & D investment, but also can not be exchanged for the improvement of gross profit and profitability, indicating that the company's R & D investment is very inefficient, or even ineffective.
4 Government subsidies are the key to profitability
Further analysis found that "government subsidies" are the key to the company's profitability, and it is also an important reason for the obvious gap between its net profit and deducted non-net profit.
In addition to 2018 and 2019, the amount of government subsidies (including VAT refunds, major projects, other scientific and technological projects, tax deductions, etc.) received by the company exceeded 100 million yuan, and also exceeded the net profit amount of the current period.
It is precisely because of the blessing of government subsidies that the company has been able to maintain its net profit for four consecutive years from 2012 to 2015, after deducting non-net profit losses.
(Note: According to the "Finance and Accounting [2017] No. 15" document, before 2017, the statistical caliber was "government subsidy" under "non-operating income", and the statistical caliber since 2017 was "other income" account)
The successful experience of China's software performance reversing losses and net profits significantly higher than deducting non-net profits tells us that we must keep up with the policy orientation, apply for more government subsidies if there are difficulties, and apply for more difficulties without difficulties.
5 The scale of operating liabilities is greater than that of operating assets
As operating income grew, so did accounts receivable.
However, the growth of the latter does not mean that it is not bad, but also depends on the situation of accounts payable and accounts received in advance (contractual liabilities). The ratio of operating liabilities to operating assets is usually used to make a comprehensive judgment.
Prior to 2016, the company's operating liabilities were not much different from its operating assets. But in the past two years, the growth rate of the former has been significantly higher than that of the latter. As of the end of the third quarter of 2021, operating liabilities reached 5 billion yuan, which is twice that of operating assets in the same period.
Operating liabilities are taken advantage of customers and suppliers, and operating assets are taken advantage of by customers and suppliers. Obviously, Chinese software is taking advantage of customers and suppliers.
From this perspective, it can also be explained that the company's deduction of non-net profit is poor, but the operating cash flow is still better, see the figure below.
This incident once again tells us that even if it is a small profit business, as long as the operating cash flow continues to flow in, it is worth doing.
6 Interest-bearing liabilities have risen sharply
As mentioned above, the growth rate of operating liabilities is higher than the growth rate of operating assets, which will inevitably lead to an increase in the asset-liability ratio of Chinese software.
Since 2019, the company's gearing ratio has risen significantly, from 59% at the end of 2019 to 76% at the end of the third quarter of 2021. What is particularly clear is that in the third quarter of 2021 alone, the asset-liability ratio rose by nearly 3 percentage points.
Among them, at the end of the third quarter of 2021, the current liabilities increased by 1.24 billion yuan compared with the beginning of the year, and the non-current liabilities increased by 770 million yuan, a total increase of 2 billion yuan.
Among the new liabilities, the vast majority are interest-bearing liabilities, with short-term borrowings increasing by nearly 1 billion yuan from the beginning of the year, long-term borrowings increasing by 470 million yuan, and leasing liabilities increasing by 240 million yuan, totaling about 1.7 billion yuan.
Among the operating liabilities, notes receivable and accounts receivable fell by nearly 500 million yuan, but contract liabilities increased by 860 million yuan.
Rapid growth in interest-bearing liabilities led to an increase in finance expenses.
For example, at the end of the third quarter of 2021, the interest expense exceeded 40 million yuan, a new high since 2014, which made the already small profit (the actual first three quarters were losses) even more hurtful.
Comparison of the same industry
At present, the A-share enterprises with Chinese software in government affairs informatization and industry application solutions include Donghua Software, Taiji Shares, Neusoft Group, Nanwei Software, etc.
Donghua Software, is a large-scale comprehensive industry application software development, computer system integration and information technology service provider in mainland China, the first batch of information system integration and service large-scale first-class enterprises in China, currently mainly focusing on medical, financial, smart city, energy and other industries, with an operating income of 9.17 billion yuan in 2020.
Taiji Co., Ltd., a core member enterprise of China Electronics Technology Group, obtained the first batch of computer information system integration special first-class enterprise qualifications in the mainland and the certificate of key enterprises for national security information system integration, with business concentrated in the fields of party and government, national defense, public safety, electric power, transportation and other fields, with an operating income of 8.5 billion yuan in 2020.
(Government affairs monitoring background display map)
Neusoft Group, the actual controller is the Ministry of Education, is also the first batch of computer information system integration special first-class qualification enterprises in the mainland, the business is concentrated in the fields of medical health and social security, intelligent car interconnection, smart city, enterprise interconnection, etc., is currently the largest solution and service provider in the domestic social security and medical industry, the leading service provider of on-board system, has covered the vast majority of domestic car factories, and the operating income in 2020 is 7.6 billion yuan.
Nanwei Software, a large-scale government affairs information service provider in China, currently focuses on urban public safety, grass-roots social governance and operation services, with an operating income of 1.54 billion yuan in 2020.
(1) Comparison of gross profit margins
1 Industry application solution business: China has the lowest software
According to the annual reports of listed companies, Donghua Software, Taiji Shares, China Software, etc. have a larger revenue scale in this business; among them, China Software surpassed Taiji Shares in 2020.
From the perspective of gross profit margin, the higher ones are Nanwei Software and Donghua Software. Chinese software has the lowest gross profit margin in this business, obviously increasing in scale, but profitability has not followed suit.
2 Independent software products: upstream of China Software Division
Among its independent software products, Neusoft Group has the largest revenue scale.
At the same time, the gross profit margin of all three companies is relatively high; in 2020, Donghua Software rose to 89% and China Software was 75%, higher than Neusoft's 64%.
(2) R&D expenditure: Chinese software has the greatest impact on profits
In 2020, China Software, Donghua Software and Neusoft Group had the highest R&D expenditure, and exceeded or approached the scale of 1 billion yuan; Taiji's R&D expenditure was small, which was not quite in line with its revenue scale of 8.5 billion yuan.
Among the five companies, China Software's R&D expenditure accounted for the highest proportion of operating income, followed by Donghua Software, then Neusoft Group, and finally Taiji Shares.
As mentioned above, the proportion of R&D expenditure to operating income cannot be said to be as large as possible, and reasonable R&D investment is maintained according to the actual situation, and the relationship between current profit and R&D is balanced. In addition, the key indicator of R&D investment is whether profitability continues to improve.
If continuous R&D investment can lead to an increase in profitability, it means that the R&D investment is effective. If long-term and sustained R&D investment fails to drive an increase in profitability, it is necessary to consider whether its R&D investment is effective.
It should be noted that among the 5 companies, only Nanwei Software carries out a large proportion of R&D capitalization, and the other 4 companies have a lower capitalization ratio, Donghua Software is almost 0, China Software has dropped to 2%, Neusoft Group is around 13%, and Taiji shares are around 20%.
The R&D investment of China Software, Donghua Software and Neusoft Group is basically 1 billion yuan, but the proportion of R&D capitalization is very low. From this perspective, the three companies are financially sound.
Relatively speaking, the capitalization ratio of Nanwei Software is very high, once exceeding 80%, and the R&D expenditure of 126 million yuan in 2020 was more than 60 million yuan capitalized, which is more aggressive financially.
Combined with the ratio of R&D expenditure to net profit. This indicator reflects the degree of impact of R&D expenditure on net profit, the higher the value, the greater the impact of R&D expenditure on net profit; conversely, it indicates that R&D expenditure has little impact on net profit.
It can be clearly seen from the following table that the R&D expenditure of four companies, such as China Software, Neusoft Group, Taiji Shares, and Donghua Software, has a very large impact on net profit.
From this point of view, China Software, Donghua Software, Neusoft Group, etc., which have a higher amount of R&D investment and a low proportion of R&D capitalization, can beautify the income statement by increasing the capitalization ratio. However, none of these companies have done so, and they are financially cautious.
(3) Comparison of fundraising dividends
From the perspective of the net profit created since its listing, Donghua Software has the highest, with a cumulative net profit of 8.3 billion yuan, but it has raised less, 2.9 billion yuan, with a cumulative dividend of 2.2 billion yuan, and a fundraising dividend ratio of 1.33:1.
Since the listing of China Software, the cumulative net profit has only reached 1.7 billion yuan, which is lower than that of Donghua Software, Neusoft Group and Taiji Shares; the cumulative dividend amount is the lowest, less than 400 million yuan.
From 2014 to 2021, China's software did not raise capital abroad, and endogenous growth and foreign investment all relied on profit accumulation and debt financing.
From the perspective of fundraising, Neusoft Group raised the most, reaching 10.3 billion yuan, with a dividend of 1.53 billion yuan, and the fundraising dividend ratio was close to 7:1, which was equivalent to raising 7 yuan to dividend 1 yuan.
Neusoft Group has generated a total of 7.3 billion yuan since its listing, of which 21% of the profit is used for dividends.
Overall, with its unique innate advantages, Chinese software is in a monopoly position in specific fields.
Under the general trend of accelerating the promotion and popularization of domestic software, its revenue has maintained rapid growth, and the expense ratio has also decreased significantly during the period. At the same time, its performance shows a very regular seasonal characteristic, and the fourth quarter is a key time for profitability for the whole year.
In recent years, China's software has significantly increased its investment in research and development, and in the short and medium term, the investment in research and development has not been effectively converted into operating results, resulting in less profits brought by business activities.
The unique brand advantage makes it in a strong position in the supply chain, which is financially manifested in the fact that the operating liabilities are significantly higher than the operating assets, and at the same time, the asset-liability ratio will inevitably rise.
Compared with the same industry, China Software has higher profitability in its own software products, and its R&D expenditure is significantly higher than that of other companies in the same industry, but both profitability and dividends need to be improved.
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