20230327-招银国际-用友网络-600588.SH-Concern_on_the_higher_R_D_capitalization_11页_1mb

Yonyou (600588 CH) Summary

Core Content

Yonyou (600588 CH) reported its FY4Q22 results, which showed a revenue decline of 8% YoY to RMB3.67bn and a net profit increase of 31% YoY to RMB759mn. The results missed both the analysts' and consensus estimates by 13% and 17% respectively. The weak performance was attributed to the resurgence of the pandemic and a decline in gross margin due to increased staff costs and outsourcing expenses. The cloud segment saw no YoY growth in revenue, although its Annual Recurring Revenue (ARR) increased by 23.8% YoY to RMB2.04bn. However, ARR accounted for only 32% of cloud revenue, indicating that the majority of Yonyou's cloud revenue is not recurring in nature. This is partly due to the company's customer mix, which is heavily skewed towards large-sized enterprises (69% of FY22 cloud service revenue), which require more customization and thus limit recurring revenue visibility.

Yonyou's R&D capitalization rate reached a record high of 48%, up from 36% in FY21. This surge in the capitalization rate is a concern as it may indicate a deterioration in earnings quality. Assuming all R&D expenses were expensed, Yonyou would have suffered a net loss of RMB1.18bn in FY22, which is a significant increase from the net loss of RMB137mn in FY21.

The company has been downgraded from HOLD to SELL with a new target price of RMB19.56, down from the previous RMB22.27. The target price is based on an unchanged EV/sales multiple of 6.0x for FY23E, which is 1 standard deviation below the three-year mean. The downgrade reflects concerns about margin erosion, the non-standardized nature of cloud revenue, and the deteriorating earnings quality.

Main Points

• Revenue and Profit Performance:

  • FY4Q22 revenue: RMB3.67bn (-8% YoY).
  • FY4Q22 net profit: RMB759mn (+31% YoY).
  • FY4Q22 cloud service revenue: RMB2.81bn (no YoY growth), accounting for 77% of total revenue.
  • FY4Q22 software revenue: RMB840mn (-29% YoY).
  • FY4Q22 operating profit: RMB750mn (-19% YoY).
  • FY4Q22 gross margin: 59.5% (-6.3 pct pts YoY).

• Earnings Quality Concerns:

  • R&D capitalization rate increased to 48% (vs. 36% in FY21).
  • If all R&D were expensed, net loss would have been RMB1.18bn in FY22.
  • This indicates a potential deterioration in earnings quality and could lead to a de-rating of the share price.

• Downgrade and Target Price:

  • Downgraded from HOLD to SELL.
  • New target price: RMB19.56 (down from RMB22.27).
  • Target price based on 6.0x EV/sales for FY23E.

• Valuation:

  • EV/sales multiple for FY23E: 6.0x (unchanged).
  • The multiple is 1 SD below the three-year mean.
  • Yonyou's valuation is compared to its peers, such as Kingdee, which has a lower R&D capitalization rate and better earnings quality.

Key Information

• Revenue Trends:

  • FY21A: RMB8,932mn.
  • FY22A: RMB9,262mn.
  • FY23E: RMB10,692mn.
  • FY24E: RMB12,195mn.
  • FY25E: RMB13,525mn.
  • YoY growth: 3.7% in FY22A, 15.4% in FY23E, 14.1% in FY24E.

• Net Profit Trends:

  • FY21A: RMB707.8mn.
  • FY22A: RMB219.2mn.
  • FY23E: RMB509.2mn.
  • FY24E: RMB611.1mn.
  • FY25E: RMB694.9mn.
  • EPS (Reported): RMB0.22 (+24% YoY).
  • EPS (Consensus): RMB0.21 (missed by 5%).

• Margins:

  • Gross margin: 59.5% in FY22A, down from 65.9% in FY21A.
  • Operating margin: 20.5% in FY22A, down from 23.2% in FY21A.
  • Net margin: 4.8% in FY22A, up from 2.4% in FY21A.

• Cloud Service Metrics:

  • Cloud service revenue: RMB2.81bn (77% of total revenue).
  • ARR: RMB2.04bn (+23.8% YoY).
  • ARR as % of cloud revenue: 32% (similar to FY21).
  • Subscription contract liabilities: RMB1.32bn (+56% YoY).
  • Cloud service contract liabilities: RMB1.92bn (+22% YoY).

• Operating Model:

  • Software business continues to shrink (-29% YoY).
  • Cloud service business is the main growth driver, but not on a recurring basis.
  • Financial service business has been shrinking over the years.

• Valuation Comparison:

  • Yonyou's EV/sales multiple is lower than that of its peers.
  • R&D capitalization rate is higher than that of Kingdee.
  • Earnings quality is deteriorating, leading to concerns about future performance.

Financial Summary

Valuation Metrics

Shareholding Structure

• Mr. Wang (Chairman): 38.9%
• HKSCC: 7.7%

Stock Performance

Market Data

• Market Cap: RMB89,234.2mn
• Average 3-months turnover: RMB962.1mn
• 52-week High/Low: RMB28.22/RMB16.73
• Total Issued Shares: 3,433.4mn

Conclusion

Yonyou's FY4Q22 results were weak, with revenue declining 8% YoY and cloud revenue showing no growth. The company's focus on cloud-native products has led to a high R&D capitalization rate, which is a concern for earnings quality. The downgrade to SELL reflects these concerns and the potential for continued margin erosion. The target price of RMB19.56 is based on an EV/sales multiple of 6.0x for FY23E, which is 1 SD below the three-year mean. Yonyou's valuation is lower than that of its peers, and its cloud service revenue is not recurring in nature, which is attributed to its customer mix. The financial performance and valuation metrics suggest a need for caution in investing in Yonyou.