Azeus Systems (KimEng)

Background: Azeus Systems is an information technology services consultant based in Hong Kong, with software development done in China and the Philippines. It has a solid track record of completing over 100 projects for more than 40 government departments in Hong Kong and over 16 projects with private sector companies.

A rare breed: Azeus was the first company in Greater China in 2003 to be ranked at Level 5 under the Capability Maturity Model (CMM), a model used to improve organisational business processes. CMMI Level 5 is very difficult to attain and is an important endorsement benchmark used by customers to rate software companies.

Big player in HK public sector IT deals. When Azeus was listed in 2004, almost all of its revenue came from the Hong Kong government. Since then, it has also ventured into the private sector and completed more than 16 projects with various companies. However, it still maintains a large contribution from public sector contracts. For example, it recently secured one of the largest government contracts ever worth HK$70m for application maintenance services for a major government department.

Balanced revenue mix but volatile earnings. Azeus derives 55% of its revenue from IT services, which is deal-related and lumpy, while a high level of recurring revenue (46%) comes from maintenance and support and business process outsourcing. But earnings have been volatile as cost control was also a recurring problem. Particularly unpredictable were purchases of lower-margin third-party hardware and software, and legal fees arising from disputes with customers over contract handling.

However, financial strength is undisputed. Despite unpredictable earnings, Azeus has maintained a clean balance sheet. It is debt-free while cash alone accounts for 68% of its market capitalisation. Although it may suffer negative cash flow in certain years, that is mainly due to timing as Azeus collects cash upon achievement of project milestones. As such, it has traditionally paid out 100% of its earnings even in 2009 and 2011 when earnings plunged to HK$0.8m and HK$3.4m, respectively.