20180412-兴业金融证券-金蝶国际-00268.HK-Leader_In_China_s_SaaS_Market_9页_367kb

Kingdee Summary

Core Content

Kingdee is a leading enterprise resource planning (ERP) software provider in China, with a strong focus on small and medium enterprises (SMEs) through its well-known products KIS and K/3. The company has been expanding its cloud ERP offerings, which are expected to continue growing strongly due to favorable market trends, positive user feedback, rich vertical experiences, and a leading product roadmap. The report highlights that Kingdee's cloud ERP business is poised for high growth and has been valued at a higher price-to-sales (P/S) ratio compared to its traditional ERP business.

Main Points

• Market Demand: The China ERP SaaS market is expected to grow at a CAGR of 45% from FY17 to FY21F. Cloud ERP is seen as more flexible and cost-effective than on-premise ERP, which supports this growth.
• Vertical Experience: As a first mover in cloud ERP, Kingdee has developed extensive experience across various sectors, including retail, manufacturing, and services, which gives it a competitive edge.
• Customer Feedback: Kingdee's cloud ERP has received positive feedback from customers, who find it more flexible and better suited to Chinese enterprises than its overseas counterparts. The customer retention rate is above 90%.
• Product Roadmap: Kingdee's current cloud ERP product is already ahead of its competitors by 1-2 years, and the company is set to launch its next-generation cloud ERP in 2H18. This new architecture is expected to cater to large enterprises.
• M&A Strategy: Kingdee is exploring M&A opportunities to enhance its enterprise SaaS offerings and gain more customers, which could help solidify its market position and reduce competition.

Financial Highlights

• Revenue Growth: Kingdee is projected to have a revenue growth of 24.2% in FY18F and 26.1% in FY19F.
• Gross Margin: The gross margin is expected to remain stable at 82% for FY18F and increase slightly to 82.3% in FY19F.
• Recurring Net Profit: The recurring net profit is forecasted to grow by 37.1% in FY18F and 35.5% in FY19F.
• Earnings Growth: The company's recurring earnings are expected to grow at 22% and 36% for FY18F and FY19F, respectively.
• Valuation: The report maintains a "Buy" rating with a higher target price of HKD10.63, up from HKD4.92. The valuation for the cloud business is based on a FY19F P/S of 12x, while the traditional ERP business is valued at a FY19F P/E of 15x.

Key Risks

• Competition: The cloud ERP market is highly competitive, and Kingdee may face challenges from other players.
• Cloud Business Costs: The cloud ERP business is expected to incur losses in FY18F, and higher-than-expected spending could impact its financials.
• Traditional ERP Margins: The traditional ERP business may face margin pressure as the market recovers.
• Share Dilution: The conversion of Kingdee's convertible bond (CB) could lead to potential share dilution.

Financial Outlook

• Cloud ERP Growth: The company expects its cloud ERP business to grow at a CAGR of 60% during FY17-20F, with revenue contribution reaching 60% in FY20F.
• GPM Improvements: The gross profit margin is expected to improve due to the use of Huawei's public cloud, which is cheaper than AWS.
• R&D Expenses: R&D costs will remain high as the company develops its next-generation cloud ERP.
• Earnings Projections: The report forecasts a 17% increase in FY18F earnings and a 23% increase in FY19F earnings.

Shareholder and Market Data

• Shareholders: Chairman Mr. Xu Shaochun holds 27% of the shares, followed by Oriental Gold Ltd (14.5%) and JD.com (10%).
• Market Cap: The current market cap is USD3,248 million.
• Share Performance: The stock has shown strong performance, with an estimated return of 26%.
• Price Range: The 52-week price range is from HKD3.04 to HKD9.03.

Valuation Metrics

• P/E: The recurring P/E is expected to decrease from 103 in Dec-16 to 44 in FY19F.
• P/B: The price-to-book ratio is projected to decrease from 5.60 to 3.54.
• EV/EBITDA: The enterprise value to EBITDA ratio is expected to decrease from 25.9 to 7.8.
• P/CF: The price-to-cash flow ratio is projected to decrease from 35.8 to 14.6.

Strategic and Operational Insights

• Recurring Revenue: The recurring revenue is a key driver of the company's growth, with the cloud business expected to be a major contributor.
• Customer Retention: The company maintains a strong customer retention rate, indicating satisfaction with its cloud ERP offerings.
• Cloud Business Challenges: While the cloud ERP business is expected to grow, it may also face challenges such as higher-than-expected costs and competition.

Investment Recommendation

• Rating: The report maintains a "Buy" rating for Kingdee.
• Target Price: The target price is HKD10.63, reflecting a higher valuation for the cloud business.
• Performance Outlook: The report suggests that the share price may exceed 10% over the next 12 months, with a 15% gain over the next 3 months.

Summary Table

Key Risks and Opportunities

• Opportunities: Strong growth in cloud ERP, M&A strategy, and customer retention.
• Risks: Competition, potential share dilution, and financial pressures on the cloud business.

Conclusion

Kingdee is a strong contender in the Chinese SaaS market, with a clear growth strategy and a solid financial outlook. The company's cloud ERP business is expected to drive significant growth, supported by its strong market position and customer feedback. Despite the challenges, the report maintains a "Buy" rating, reflecting confidence in the company's future performance.