20230201-招银国际-用友网络-600588.SH-Distressed_margin_with_non-standardized_cloud_11页_1mb

Yonyou (600588 CH) Summary

Core Content

Yonyou (600588 CH) reported preliminary FY22 net profit of RMB200-220mn, a decline of 68.9-71.7% YoY, missing the consensus estimate of RMB505mn. The company attributed this decline to the impact of the COVID resurgence in FY4Q22, increased R&D spending, and the absence of the one-off disposal gain from FY21. The core revenue (software + cloud) showed a YoY increase, but the growth rate was lower than FY21. Yonyou's business is slowly recovering in FY23E, with its subsidiary Chanjet targeting a 30% YoY top-line growth.

Main Points

• Net Profit Decline:

  • FY22 net profit was RMB200-220mn, down 68.9-71.7% YoY.
  • Excluding non-recurring items, net profit would be RMB85-105mn, down 74.1-79.0% YoY.

• Impact of Factors:

  1. COVID Resurgence: Delays in project delivery and contract signing, especially in the 4Q, which usually accounts for 45% of annual revenue.
  2. R&D Spending: Increased due to the demand for digitalization and localization, and higher opex to support IT partners for large customer needs.
  3. One-off Gain: The FY21 disposal gain of RMB214mn is no longer present in FY22.

• Chanjet Performance:

  • Chanjet, a HK-listed subsidiary, issued a profit warning for FY22.
  • FY22 revenue for Chanjet was RMB661-697mn, up 12-18% YoY, with SaaS subscription revenue up 45% YoY.
  • Implied FY4Q22 revenue was RMB180mn, down 18% YoY.
  • Chanjet aims to achieve 30% YoY revenue growth and break-even in FY23E.

• Business Recovery:

  • Management indicated that the business is slowly recovering since January 2023.
  • Chanjet's performance suggests a RMB883mn revenue contribution to Yonyou, below the prior forecast of RMB1.1bn.

Key Information

• Cloud Migration Challenges:

  • Large enterprise customers (68% of revenue) are less willing to adopt standardized cloud models, leading to customization demands.
  • This customization results in higher R&D costs and limits scalability and margin improvements.
  • Yonyou increased its workforce by 4,000 people in FY22, raising total employees to over 25,000.

• Financial Metrics:

  • Revenue: FY22E is RMB9,818mn, with a YoY growth of 9.9%. FY23E is expected to grow by 23.1%, and FY24E by 18.1%.
  • Net Profit: FY22E is RMB217mn, with a YoY decline of 59%. FY23E is expected to increase by 33% to RMB560mn, and FY24E by 38% to RMB655mn.
  • EPS: FY22E is RMB0.06, down 59% YoY. FY23E is expected to rise to RMB0.16, a 33% increase, and FY24E to RMB0.19, a 38% increase.

• Valuation:

  • The target price is RMB22.27, down from RMB23.51.
  • The valuation is based on an unchanged 6.0x FY23E EV/sales multiple.
  • The company's EV/sales ratio for FY22E is 7.9x, decreasing to 6.4x for FY23E.

Operating Model

• Revenue Breakdown:

  • Software Business: 31% of FY22E revenue, declining to 19% in FY24E.
  • Cloud Service Business: 68% of FY22E revenue, increasing to 81% in FY24E.
  • Financial Service Business: 0% of FY22E revenue, expected to remain 0% in FY23E and FY24E.

• Margins:

  • Gross Margin: Declined from 61.0% in FY20A to 58.0% in FY22E, and is expected to remain around 58.5% in FY23E and FY24E.
  • Operating Margin: Dropped from 12.8% in FY20A to 1.4% in FY22E, expected to increase to 3.9% in FY23E and 4.1% in FY24E.
  • Net Margin: Decreased from 11.6% in FY20A to 2.2% in FY22E, projected to rise to 4.6% in FY23E and 4.6% in FY24E.

Shareholding and Performance

• Shareholding Structure:

  • Mr. Wang, the Chairman, holds 38.9% of shares.
  • HKSCC holds 7.2% of shares.

• Stock Performance:

  • 1-month: +1.4% absolute, -6.6% relative.
  • 3-months: +0.3% absolute, -16.2% relative.
  • 6-months: +17.6% absolute, +16.7% relative.

• Market Cap: RMB84,224.3mn.

• Average 3-months Turnover: RMB23.8mn.

• 52-week High/Low: RMB36.45/RMB16.73.

Valuation Comparison

• Yonyou:

  • EV/sales: 7.9x (FY22E), 6.4x (FY23E).
  • FCF margin: 5% (FY22E), 6% (FY23E).
  • Sales CAGR: 17% (FY21-24E).
  • EPS CAGR: n.a.

• Kingdee (268 HK):

  • Rating: BUY.
  • EV/sales: 9.8x (FY22E), 7.9x (FY23E).
  • FCF margin: 1% (FY22E), 7% (FY23E).
  • Sales CAGR: 19% (FY21-24E).
  • EPS CAGR: n.a.

• Kingsoft Office (688111 CH):

  • Rating: NR.
  • EV/sales: 30.9x (FY22E), 23.3x (FY23E).
  • FCF margin: 40% (FY22E), 41% (FY23E).
  • Sales CAGR: 28% (FY21-24E).
  • EPS CAGR: 28% (FY21-24E).

• SAP (SAP US):

  • Rating: NR.
  • EV/sales: 4.5x (FY22E), 4.2x (FY23E).
  • FCF margin: 16% (FY22E), 17% (FY23E).
  • Sales CAGR: 8% (FY21-24E).
  • EPS CAGR: n.a.

• Intuit (INTU US):

  • Rating: NR.
  • EV/sales: 9.6x (FY22E), 8.6x (FY23E).
  • FCF margin: 29% (FY22E), 29% (FY23E).
  • Sales CAGR: 18% (FY21-24E).
  • EPS CAGR: 27% (FY21-24E).

• Xero (XRO AU):

  • Rating: NR.
  • EV/sales: 11.7x (FY22E), 9.0x (FY23E).
  • FCF margin: -7% (FY22E), 2% (FY23E).
  • Sales CAGR: 26% (FY21-24E).
  • EPS CAGR: 63% (FY21-24E).

• Workday (WDAY US):

  • Rating: NR.
  • EV/sales: 8.4x (FY22E), 7.0x (FY23E).
  • FCF margin: 26% (FY22E), 20% (FY23E).
  • Sales CAGR: 19% (FY21-24E).
  • EPS CAGR: n.a.

• ServiceNow (NOW US):

  • Rating: NR.
  • EV/sales: 12.1x (FY22E), 9.9x (FY23E).
  • FCF margin: 29% (FY22E), 30% (FY23E).
  • Sales CAGR: 22% (FY21-24E).
  • EPS CAGR: 114% (FY21-24E).

• Salesforce (CRM US):

  • Rating: NR.
  • EV/sales: 6.3x (FY22E), 5.4x (FY23E).
  • FCF margin: 19% (FY22E), 20% (FY23E).
  • Sales CAGR: 17% (FY21-24E).
  • EPS CAGR: 9% (FY21-24E).

Conclusion

Yonyou's FY22 results were impacted by the resurgence of the pandemic, increased R&D costs, and the absence of a one-off gain from FY21. The company's cloud migration strategy faces challenges due to large enterprise customers' resistance to standardized models, which requires customization and adds to R&D expenses. Chanjet, a subsidiary, showed growth in SaaS subscription revenue but issued a profit warning for FY22. The overall business is recovering slowly, and the company has revised its revenue forecasts downward. The target price has been reduced to RMB22.27, with a HOLD rating based on a 6.0x EV/sales multiple for FY23E.