VSTECS(00856.HK)：Leading IT distributor in Asia riding on tailwinds of AI & overseas expansion; initiate at BUY

The following contents are from CMB International

VSTECS, founded in 1991, is one of the leading IT distributors and cloud service providers in Asia. Supported by its solid market leadership, global footprint and diversified IT solution offerings, VSTECS is well-positioned to benefit from the booming demand for AI computing, IT localisation trend in China, and robust digitalisation demand in Southeast Asia, in our view. VSTECS’ total revenue reached HK$73.9bn in 2023, with enterprise systems/consumer electronics/ cloud computing accounting for 55/41/4% of total revenue. VSTECS has established over 80 offices in 9 countries. The company has formed partnerships with over 300 leading upstream tech vendors and over 50,000 downstream channel partners, providing end-users with high-quality IT solutions. We value VSTECS at HK$7.20 per share based on 10x 2025E P/E. Initiate at BUY.

◆ Capture growing digitalisation demand in Southeast Asia market. Overseas expansion has become one of the key growth drivers for VSTECS, with the revenue contribution from Southeast Asia up from 21% in 2019 to 34% in 1H24. The company is the largest IT distributor in several Southeast Asian countries such as Thailand, Malaysia, the Philippines and Indonesia. We are upbeat on the two key growth opportunities in Southeast Asia market: 1) As more Chinese IT companies enter Southeast Asia, we expect VSTECS to benefit from their overseas expansion as VSTECS has become a go-to sales channel for several leading Chinese IT platforms in Southeast Asia market; 2) local enterprise/government IT demand also continues to grow in Southeast Asia market. With a strong local partner network and rich operational experience, VSTECS is well positioned to capture the IT investment opportunities in Southeast Asia, in our view.

◆ Eyes on AI development and software localization trend in China. For the China market, we expect: 1) VSTECS will benefit from the secular trend of AI development, which boosts demand for IT products like servers and storage. Driven by the strong demand for GenAI infrastructure, products and services, China IT spending has accelerated to grow by 8% YoY to US$589bn in 2024E, per Gartner; 2) the business will benefit from the IT system localization trend in China. VSTECS has partnerships with a number of local IT brands, which could meet the growing demand for IT system localization. We also expect China’s policy support will start to show effects in 2025, boosting local government and enterprise digitalization demand.

◆ Initiate at BUY with TP of HK$7.20. We estimate VSTECS total revenue to grow at a CAGR of 10% over 2024-2026E and reach HK$98.6bn in 2026E, driven by the solid growth of cloud computing business, and the strong enterprise demand for AI & software localisation. We forecast OPM to be slightly down YoY in 2024E and stable at 1.8% over 2025-2026E, mainly due to the intensive competition in China’s enterprise IT market. VSTECS has maintained decent shareholder returns over past several years, and raised its dividend payout ratio to 40% in 2023 (from 30%), translating into a dividend yield of 5%.

Full report：CMBI-VSTECS Initiation report.pdf