Accounting Standards Series - CAS No. 14 Impact on China Software Companies - Venustech (2439 CH)

China's cybersecurity market growth is set to reaccelerate given increased digitisation of the economy, emphasis on data security, and increase in cybersecurity spending. While pandemic disruptions had led to an inevitable slowdown in 2020, recent cybersecurity spending trends by corporates and government bodies suggest a cyclical rebound.

In the First of this Three part SK Originals series, we discuss how China's Company Accounting Standard No. 14 - Revenue ("CAS No. 14")'s application and consequent changes in accounting policy could result in material changes to the revenue recognition policy of Venustech Group Inc A (002439 CH), such as changing the timing of revenue recognition and the amount being recognised across the company's various revenue segments.

Most Chinese software companies started adopting CAS No. 14 in 2020. Broadly, the net impact of CAS No. 14 is that recognition of software product revenue shifts from from multiple milestones based on a percentage of delivery completion to the transfer of actual control of the software products to customers, subject to specific terms of contract and management judgement.

We also discuss the materiality threshold used to identify the listed software companies that have made changes in lieu of CAS No. 14, the key implications, and what this all means for Venustech with reference to industry dynamics, relative valuation, and company fundamentals.

We are constructive on Venustech's prospects given its market leading position in software products, security operation centers and related services. At forward P/E of 21.9x and market leading ROE and operating margin relative to peer average, we believe that Venustech is attractively valued.