Morgan Stanley (NYSE:MS) has upgraded shares of Longshine Technology Group (300682:CH) from Equalweight to Overweight, setting a price target of RMB12.00.
The adjustment comes as the company shifts its focus away from its underperforming Over-the-Top (OTT) terminal sales. The strategic change is expected to enhance Longshine's profitability and long-term growth prospects.
The firm noted that the OTT business's terminal sales have been adversely affecting Longshine's revenue and net profit growth, profit margins, and cash flow. Additionally, this segment created confusion among investors regarding the company's business model and position, which in turn suppressed its valuation multiple.
Morgan Stanley anticipates that eliminating terminal sales will allow Longshine to concentrate on its software and platform services, leading to an immediate improvement in profitability.
While the decision to remove terminal sales is seen as a positive move for the company, it is not without its costs. The discontinuation of the hardware segment may result in significant one-time compensation and restructuring expenses in 2024.
Despite these anticipated costs, the firm believes that the benefits to Longshine's growth and cash flow in the long term will outweigh the initial financial impact.
The company's shift away from the less profitable OTT terminal sales is expected to streamline operations and improve its financial outlook, making it a more attractive investment opportunity according to the firm's analysis.
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