20220527-招银国际-Software_localization_to_benefit_China_ERP_51页_3mb

CMB International Global Markets | Equity Research | Sector Initiation

Core Content

This report provides an equity research initiation on the China Software & IT Services sector, with a focus on Enterprise Resource Planning (ERP) and its SaaS (Software as a Service) transformation. It highlights the opportunities for domestic ERP companies such as Kingdee and Yonyou in the context of IT infrastructure localization (known as "Xinchuang") and enterprise digitalization.

Main Points

• ERP is relatively ready for localization compared to other industrial software like EDA/CAD, due to long-term development and adoption since the 1990s.
• China's digital economy plan (14th Five-Year Plan) aims to increase the share of the core digital economy in GDP from 7.8% in 2020 to 10% by 2025, with the software and IT services industry expected to grow at 11.4% CAGR, reaching RMB14tn in 2025.
• SAP and Oracle still dominate the high-end ERP market in China, with 33% and 20% market shares respectively in 2020.
• ERP SaaS migration is complex and time-consuming, due to high customization, integration challenges, and security concerns. This contrasts with vertical-specific tool-based software like Adobe, which has seen faster SaaS adoption.
• Kingdee is seen as a strong early mover in the SaaS ERP space, with its Cloud Galaxy platform launched in 2014. It has a strong presence in the medium-sized enterprise market, where customers are more open to subscription models.
• Yonyou is a latecomer to SaaS ERP, launching its cloud-native platform in 2019. While it has a larger cloud revenue base, its ARR (Annual Recurring Revenue) is lower than Kingdee's, suggesting less customer adoption of the subscription model.
• Government initiatives, such as the State-owned Assets Supervision and Administration Commission (SASAC) encouraging SOEs to adopt ERP systems, are expected to drive growth in the sector.

Key Companies

• Kingdee (268 HK):

  • Rating: BUY
  • Target Price: HK$18.31
  • ARR Contribution: 38% of FY21 revenue
  • Revenue CAGR: 20% (FY21-24E)
  • Strengths: Early mover in cloud ERP, strong foothold in SMEs and large enterprises due to domestic substitution, higher subscription revenue contribution.

• Yonyou (600588 CH):

  • Rating: HOLD
  • Target Price: RMB19.58
  • ARR Contribution: 18% of FY21 revenue
  • Revenue CAGR: 18% (FY21-24E)
  • Weaknesses: Late to cloud ERP, cloud customers are mainly large enterprises which are less willing to accept subscription models.

• Glodon (002410 CH):

  • Rating: BUY
  • Target Price: N/A
  • Revenue CAGR: 19% (FY21-24E)

• MYC (909 HK):

  • Rating: HOLD
  • Target Price: N/A
  • Revenue CAGR: 13% (FY21-24E)

• Kingsoft Office (688111 CH):

  • Rating: NR (No Rating)
  • Target Price: N/A
  • Revenue CAGR: 31% (FY21-24E)

Key Information

• ERP Market Growth: Expected to grow at 10-15% YoY from 2021-2025, driven by digitalization and IT localization.
• Software Localization: The "Xinchuang" initiative is pushing for reduced reliance on US technology, creating opportunities for domestic ERP providers.
• SaaS Transition Challenges: ERP migration is more complex than tool-based software, with SAP's subscription revenue only at 30% of total revenue after 9 years of transformation.
• Valuation Trends: SaaS companies with subscription revenue contribution below 40% trade at 4-8x EV/sales, while those with over 80% trade at 6-12x.
• Catalysts for Growth: Government support for IT localization, continued digital transformation, and increased adoption of SaaS models.

Summary Table

Conclusion

The report concludes that Kingdee is a better SaaS ERP player than Yonyou due to its early cloud transition and strong customer adoption of the subscription model. While Yonyou is expected to grow, its late entry into SaaS and limited subscription model acceptance by large enterprises may hinder its performance. The domestic substitution trend and government support are key drivers for the ERP sector, with Kingdee being the preferred choice for investment.