20141009-巴黎银行证券-On_cloud_nine_24页_830kb

KINGDEE INT'L 268 HK: Summary

Core Content

Kingdee Int'l (268 HK) is a leading domestic enterprise resource planning (ERP) software company in China, specializing in ERP solutions for small- and medium-sized enterprises (SMEs). The report highlights its strategic shift back to off-the-shelf software sales and indirect sales channels, which is expected to drive revenue growth and margin expansion.

Main Points

• Revenue Growth Outlook:

  • Revenue is expected to return to growth in 2015 and normalize at a double-digit organic growth rate in 2016, in line with the broader ERP software sector.
  • The shift in product and sales channel mix is expected to be completed by 2016, leading to a return to normalized growth.

• Margin Expansion:

  • Kingdee's operating margin is projected to expand from 21% in 2014 to 26% in 2016, driven by operating leverage and cost efficiencies in sales and marketing.
  • The report notes that indirect sales, which have higher gross margins and lower sales & marketing costs, will play a key role in margin improvement.

• Cloud Strategy and SaaS Market:

  • Kingdee has been a pioneer in cloud ERP solutions, with K/3 cloud being the first domestic cloud ERP product launched in 2012.
  • It is well positioned to benefit from the growth of the SaaS market in China, which is expected to grow at a 40% CAGR from 2013 to 2018.
  • The company's Cloud Hub platform, which integrates with ERP applications on PC and mobile, is a strategic investment in enterprise mobile Internet.

• Investment Recommendation:

  • The report initiates a "BUY" recommendation with a target price of HKD3.80, set at 25x FY15E PE.
  • This target price represents a 6% to 10% upside to the Bloomberg consensus earnings for 2015 and 2016.

Key Financials

Strategic Positioning

• Kingdee has a first-mover advantage in the Chinese SaaS market due to its early investments in cloud ERP solutions.
• As enterprises adopt cloud and mobile platforms, Kingdee's legacy PC-based ERP products will serve as a competitive asset.
• The company is expected to benefit from market consolidation in the SME software market as the cloud adoption accelerates.

Catalysts for Growth

• Revenue growth returning in 2015.
• Continued margin expansion as sales and marketing efficiencies improve.
• Sale of Beijing software park improving the balance sheet and reducing interest expenses.
• Cloud revenue gaining momentum, especially with the growth of Cloud Hub and K/3 cloud.

Risks

• A major economic slump in China could adversely affect IT budgets.
• Weaker-than-expected operating margins.
• Slower-than-expected cloud revenue growth.

Competitive Landscape

• Kingdee's cloud-first strategy gives it an edge over foreign vendors such as SAP and Oracle, which face challenges with data storage and security in the SaaS model.
• The company's market share leadership in SME ERP software positions it well for growth in the cloud era.
• Indirect sales are expected to increase from 21% in 2012 to 48% in 2015 and stabilize at 50% in 2016.

Market Structure

• The Chinese software market is dominated by domestic companies, with Yonyou and Kingdee holding significant shares.
• Foreign vendors are less successful in securing contracts with Chinese SMEs and state-owned enterprises (SOEs), due to regulatory and data security constraints.

Conclusion

Kingdee is strategically well-positioned to benefit from the growth of the SaaS market in China, especially with its early investments in cloud ERP solutions and its focus on SMEs. The company is expected to return to growth and expand its operating margin as it completes its strategic shift. The report recommends a BUY with a target price of HKD3.80, based on a 25x FY15E PE multiple, which is lower than global peers but on par with domestic peers. The potential for market consolidation and the company's competitive edge in the cloud era are key drivers of the investment thesis.