20150629-DBS_Group-Yonyou_Network_Technology_PRICED_BEYOND_PERFECTION_20页_472kb

Summary of DBS Group Research on Yonyou (用友网络)

Core Content

This report from DBS Group Research provides an analysis of Yonyou, a leading Chinese enterprise software provider, with a focus on its traditional ERP business and new initiatives in cloud services, third-party payments, and P2P lending. The report initiates coverage with a "Fully Valued" rating and sets a price target of RMB32.00, reflecting concerns about overvaluation and the uncertain earnings contribution from new business segments.

Main Points

• Company Overview: Yonyou is the largest Chinese ERP software provider, serving government, state-owned enterprises, and large multinational clients. It was founded in 1988 and listed on the Shanghai Stock Exchange in 2001. Wang Wenjing, the founder, holds a 46.5% stake.
• Market Position: Yonyou has a market share of around 20% in the Chinese enterprise software market and is a key player in the ERP segment.
• New Business Initiatives: The company is expanding into cloud services, third-party payments, and P2P lending. These new segments are expected to contribute around 30% of total revenue by FY17.
• Valuation Concerns: The stock currently trades at a high PE ratio (106x FY15F), which is above the historical average of 30x. The report believes the market is overoptimistic about near-term earnings from new businesses, making the valuation vulnerable.
• Earnings Growth: The traditional ERP business is expected to grow at a high single-digit rate, while new segments will require significant start-up investments and are not yet profitable.
• Price Target: Based on a 45x FY17F PE ratio, the price target is set at RMB32.00, implying a 31% downside from the last traded price of RMB46.34.

Key Financial Forecasts

Revenue Breakdown by Segment

• Traditional ERP: Expected to maintain steady growth, with a significant contribution to overall revenue.
• Cloud Business: Expected to contribute ~20% of total revenue by FY17.
• Third-Party Payments: Expected to contribute ~10% of total revenue by FY17.
• P2P Lending: Expected to contribute ~10% of total revenue by FY17.

Key Risks

• Uncertainty in New Business Earnings: The new segments (cloud, payments, P2P) require substantial start-up investments and are not yet profitable, which may impact near-term earnings.
• Intense Competition: The cloud and mobile ERP market has lower entry barriers, leading to more competition.
• Slower IT Spending: Economic slowdown may reduce IT investment, including ERP procurement and upgrades.

Investment Thesis

• Rationale: Yonyou has a strong track record in traditional ERP, with a diversified customer base and robust R&D capabilities. Its new business initiatives offer long-term growth potential.
• Recommendation: "Fully Valued" rating with a price target of RMB32.00 due to the high valuation and potential earnings disappointments from new segments.

Competitive Strengths

• Profound Experience: Serves large enterprises and government bodies, including 60% of the top 500 Chinese enterprises.
• Strong Brand Recognition: Well-known in China for ERP software.
• Advanced R&D Capabilities: Has the largest R&D team in China for enterprise and public sector software and cloud services.

Growth Drivers

• E-commerce and O2O Trends: These are driving digital transformation and increasing ERP adoption.
• Cloud and Mobile Adoption: Enhances accessibility and encourages ERP usage among small and medium enterprises.
• Government Policies: Support for "Internet Plus" and digital transformation initiatives in China.

Where We Differ

• The report expects new businesses to take longer to contribute to earnings compared to market consensus, leading to a more conservative outlook on near-term profitability.

Summary of Valuation Metrics

Conclusion

Yonyou is a leading player in the Chinese ERP market with strong R&D capabilities and a well-known brand. However, its current valuation appears overly optimistic, especially regarding the near-term earnings contribution from new business segments. The report suggests that while the company has long-term growth potential, investors should be cautious due to the uncertainty surrounding these initiatives and the potential for earnings disappointments.