Kingdee (268 HK) Buy (maintained) Target price: HK$3.58. Solidifying leadership in cloud services; maintain Buy but revise TP down to HK$3.

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1 Equity Research Information Technology Aug 2, 21 Kingdee (28 HK) Buy (maintained) Target price: HK$.8 Solidifying leadership in cloud services; maintain Buy but revise TP down to HK$.8 Lower-than-expected 1H1 results Kingdee reported lower-than-expected net profit of Rmb92m in 1H1, up 12% YoY, 1% below Bloomberg consensus. 1H1 revenue of Rmb8m was up just 1% YoY, mainly due to a decline in traditional ERP sales but partly offset by strong momentum in its cloud service business. Operating profit declined % YoY to Rmb1m. Operating margin dropped 1.1pp YoY to 1.2% along with a 1.8pp decline in gross margin. Net margin rose 1.2pp YoY to 12.1%, mainly owing to a decrease in net financial expense. Ryan Zhu, CPA SFC CE No. BDK82 zhuran@gfgroup.com.hk Joseph Ho, CFA SFC CE No. AFP8 josephho@gfgroup.com.hk GF Securities (Hong Kong) Brokerage Limited 29-/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Stock performance 1% 1% 12% 1% 8% % % 2% % -2% -% Source: Bloomberg Key data Source: Bloomberg Kingdee HSI.HI Aug 2 close (HK$) 2. Shares in issue (m) 2,911 Major shareholder Xu Shaochun 2.% Market cap (HK$ bn). M avg. vol. (m) 9.1 2W high/low (HK$).2 / 2.8 ERP business to see a better growth in 2H1 Traditional ERP sales declined % YoY to Rmbm, accounting for 89% of total revenue. The weak performance was mainly a result of ongoing channel transition from direct sales to indirect sales, which led to a 9% YoY decrease in maintenance service sales (19% of total revenue) and a 8.% decline in K/ license sales (1% of total revenue). Direct channel saw a % decline in sales and a 1pp drop in terms of contribution to overall ERP sales (from 2% in 1H1 to 1% in 1H1). Management is confident in small-medium enterprise market demand and expects stable growth in its traditional ERP business in 2H1, given a smaller impact from indirect channel transition and continuous growth in software license shipments. Solidifying leadership in cloud services The company s emerging cloud service business posted strong revenue growth of 82% YoY to Rmb82m, representing 11% of total sales, compared to % a year ago. Its four cloud service products, ERP cloud, mobile office cloud, finance cloud, and industry cloud all posted strong growth of 1%, 9%, 28% and % YoY respectively in 1H1. As a first-mover in software-as-a-service (SaaS) cloud services, Kingdee s investment has begun to deliver results, and is outperforming competitors in terms of product maturity and popularity. Meanwhile, Kingdee has established favorable partnerships with leading infrastructure-as-a-service (IaaS) providers including JD.com, Kingsoft and Amazon. JD became a strategic shareholder in Kingdee after taking a 1% stake in May, and will jointly develop and promote e-commerce solutions for over, online shops on its platform. We believe these moves should provide infrastructure support and mass cross-selling opportunities, which will solidify the company s leadership in the SaaS-level cloud service business while also driving ERP sales. Maintain Buy but revise target price down to HK$.8 We trim our forecast for FY1 revenue and net profit by 8% and 1% respectively given the lower-than-expected performance in its traditional ERP business. However, we still favor the stock as we believe: 1) the company is well-positioned in the rapidly growing and profitable ERP cloud service segment; 2) profitability in the ERP business will improve gradually with stable revenue growth and improving operating leverage amid an optimized channel and product mix. Potential catalysts include further initiatives in cooperation with leading partners and accelerating development through M&A with regard to its cloud service business. We maintain our Buy rating but revise down our target price from HK$.1 to HK$.8, based on a lower 21 P/E of x (down from x), given lower overall risk appetite. Our target P/E is still 28% discount to current 9x FY1 P/E of its A-share peer Yonyou (88 CH). Key risks Macroeconomic downturn, rising staff costs, and slower-than-expected progress in cloud business development. Stock valuation Turnover (Rmb m) YoY Net profit (Rmb m) YoY Diluted EPS (Rmb cents) YoY P/E P/B ROE Net gearing 21 1, N/A.8 N/A , E 1, cash 21E 1, cash 21E 2, cash

2 Aug 2, 21 Figure 1: 1H1 results summary Rmb m 1H1 2H1 1H1 2H1 1H1 YoY Software license 8 8 1% Implementation % maintenance % Cloud service % Others % Turnover % Cost of sales (189) (2) (1) (12) (21) % Gross profit 99-1% Gross margin % % 81% 8% 9% -2% Selling&marketing exp. () (9) (82) () (98) % Admin exp. (8) (121) () (129) () -% R&D costs (12) (1) (112) (111) (1) -% OPEX () (21) () () () 1% OPEX/Revenue -8% -2% -% -81% -% % Operating profit % operating margin 8% 21% 18% 2% 1% -1% Finance income % Finance costs () () () () () -12% Share in associates () (1) () Pre-tax income % Taxation () (11) () (2) (8) % Taxiation rate 8% 9% % 1% 8% Net profit % Net margin 1% 1% 11% 1% 12% 1% Diluted EPS (Rmb cents) % Figure 2: Revenue breakdown by product and service (Rmb m) Figure : Cloud service revenue breakdown by product (Rmb m) H1 2H1 1H1 2H1 1H H1 2H1 1H1 2H1 1H1 Others Cloud service maintenance Implementation Software license Industry cloud Finance cloud Mobile office cloud, ERP cloud Page 2

3 12/1 12/ 12/ 12/1 1/1 1/ 1/ 1/1 1/1 1/ 1/ 1/1 1/1 1/ 1/ 12/1 12/ 12/ 12/1 1/1 1/ 1/ 1/1 1/1 1/ 1/ 1/1 1/1 1/ 1/ Company report Aug 2, 21 Figure : Revenue and gross margin forecasts Figure : Net profit and net margin forecasts, 2, 2, 1, 1, FY1 FY11 FY12 FY1 FY1 FY1E FY1E FY1E (1) (2) FY1 FY11 FY12 FY1 FY1 FY1E FY1E FY1E (1) (.9) () (1) Revenue (Rmb m) Gross margin Net profit (Rmb m) Net margin Figure : Forecast adjustments Rmb m New Previous Chg FY1E FY1E FY1E FY1E FY1E FY1E FY1E FY1E FY1E Revenue 1, 1,98 2, 1,82 2,2 2,99-8% -12% -1% Net profit % -1% -1% EPS (Rmb cents) % -2% -2% Gross margin (.) (.) (.) Net margin (1.) (.) (.) Figure : 1-year forward P/E band Figure 8: 1-year forward P/B band 2 1 (1) (2) 2 1 () close price 2x 2x x x x close price 1.x 1.x 2.x 2.x.x Sources: Bloomberg, GF Securities (HK) Sources: Bloomberg, GF Securities (HK) Page

4 Aug 2, 21 Figure 9: Financial statements Income Statement Year end Dec (Rmb m) E 21E 21E Year end Dec (Rmb m) E 21E 21E Software license ,118 Cash/ST Investments 999 1,21 2,81,1,2 Implementation Account receivables 9 8 1,2 maintenance Inventory 9 Cloud service Other Current Assets Others Total current assets 1,8 2,1,,9,91 Turnover 1,2 1, 1, 1,98 2, YoY (9) () Property, plant &equipment Intangible assets Cost of sales (9) (21) (2) (9) (8) Land use rights Gross profit 1,2 1,2 1,28 1,9 1,9 Investment properties Selling&marketing exp. (828) (8) (8) (9) (1,1) Other LT Assets Admin exp. (2) (22) (29) (28) (28) Total non-current assents 2,8 2,29 2,2 2,21 2, R&D costs (2) (22) (29) (28) (292) Total Assets,928,9,8,188, Fair value on inv properties Other gains ST Debt Operating profit Trade payables Finance income 9 2 Deferred revenue Finance costs (111) (9) (8) (8) (8) Other Current Liabilities Share in associates () (1) Total current liabilities 92 1,29 1,292 1, 1,2 Pre-tax income LT Debt 1,1 1,291 1,189 1,188 1,18 Taxation (1) (2) () () (1) Other LT Liab MI () (2) - - Total non-current liabilities 1,221 1, 1,2 1,22 1,21 Net profit YoY n/a 2 29 Minority Interests 9 Non-GAAP net profit Shareholders' Equity 1, 1,989,29,8,92 YoY n/a Total Equity & liabilities,928,9,8,188, EPS (Rmb cents) BPS (Rmb) YoY n/a YoY 11 8 (1) 1 Non-GAAP EPS (Rmb cents) YoY n/a Cash Flow Statement Financial Ratio Year end Dec (Rmb m) E 21E 21E Year end Dec E 21E 21E Margins Pretax profit Gross margin Tax Paid (1) () () () (1) EBITDA margin Depr/Amort Operating margin Change in working capital (8) () (8) () () Net margin Others () (22) Operational cash flow Returns and profitability ROE Capex (19) () (1) (1) (1) ROA Assoc, MI, Invsmt Investment cash flow (28) (22) () () () Working capital Receivables (days) Net Change in Debt (1) Inventory (days)..... New Capital 1 1,9 - - Payable (days) Dividend - () () () (9) Others Financial health Financing cash flow (1) 28 1,11 () (9) Current ratio (x) Net gearing cash cash cash FX and others - - Chg in Cash ,28 Others Beginning cash ,21 2,8,11 Dividend payout ratio Ending cash 999 1,21 2,81,1,2 Effective tax ratio Balance Sheet Page

5 Aug 2, 21 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 1% Accumulate Stock expected to outperform benchmark by more than % but not more than 1% Hold Expected stock relative performance ranges between -% and % Underperform Stock expected to underperform benchmark by more than % Sector ratings Positive Sector expected to outperform benchmark by more than 1% Neutral Expected sector relative performance ranges between -1% and 1% Cautious Sector expected to underperform benchmark by more than 1% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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