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Kingdee Summary

Core Content

This report from DBS Group Research provides an equity analysis of Kingdee, focusing on its financial performance, strategic initiatives, and valuation. The report recommends a BUY with a target price of HK$6.8, which represents a 36% upside from the last traded price of HK$5.01. The main catalyst for the recommendation is the growth in cloud revenue and profitability, as well as the strategic investment from JD.com and cooperation with Amazon AWS.

Key Highlights

Company Overview

• Kingdee is the second largest Chinese provider of ERP software, with a focus on small and medium enterprises (SMEs).
• The company is part of the Software & Computer Services sector within the Technology industry.

Strategic Investments

• JD.com invested HK$1.3 billion for a 10% stake in Kingdee at HK$4.6 per share on 26 May 2015.
• This investment will help Kingdee expand its customer base and develop e-commerce and enterprise internet products.
• JD.com’s integration with Kingdee's ERP solutions will enhance its supply chain management.
• The share issuance to JD.com diluted the company's EPS for FY15 and FY16 by 11% and 8%, respectively.

Strategic Cooperation with Amazon AWS

• Kingdee entered into a Global Strategic Cooperation Agreement with Amazon AWS on 23 April 2015.
• The partnership aims to support Kingdee's ERP cloud services with Amazon's cloud technologies.
• Kingdee plans to expand its ERP cloud services to over 50,000 enterprises within three years.

Financial Performance

• 1Q15 results showed slight revenue growth and improved profitability, supporting the full-year earnings growth.
• Net profit narrowed to RMB13m from RMB19m in 1Q14, indicating improving margins.
• The cloud business is expected to contribute 20-30% of total revenue by FY17.

Financial Forecasts

• Revenue is projected to grow from RMB1,547m (2014A) to RMB2,274m (2017F).
• Pre-tax profit is expected to increase from RMB226m (2014A) to RMB508m (2017F).
• EPS (HK$) is forecasted to rise from HK$0.10 (2015F) to HK$0.18 (2017F).
• EPS growth is anticipated at 19.7% (2015), 31.2% (2016), and 22.0% (2017).

Valuation Metrics

• PE (X) is expected to decrease from 43.5 (2015) to 27.2 (2017).
• P/Cash Flow (X) is projected to fall from 22.4 (2015) to 16.3 (2017).
• EV/EBITDA (X) is forecasted to decline from 16.2 (2015) to 11.5 (2017).
• P/Book Value (X) is expected to drop from 3.3 (2015) to 2.8 (2017).
• The target price of HK$6.8 is based on a 45x FY16PE, which is 1 SD above the historical average PE of its A-share peer Yonyou (600588 SS).

Main Points

• Growth Drivers: Cloud initiatives, strategic partnerships with JD.com and Amazon AWS, and the increasing demand for ERP solutions in e-commerce.
• Valuation Discount: Kingdee is currently discounted relative to its A-share counterparts, but this is expected to narrow with the HK-Shanghai Connect.
• Earnings Growth: Net profit is expected to grow by 35% and 32% in the next two years due to revenue growth and operating leverage.
• Market Sentiment: Improved market sentiment and potential premium for cloud and internet+ development justify the higher multiple used in valuation.
• Risk Factors: Cyclical uncertainties and potential slowdown in product demand due to economic conditions.

Key Information

• Target Price: HK$6.8 (36% upside from last traded price).
• Earnings Revisions: Lower than consensus for FY15 and FY16 due to share dilution.
• Cloud Revenue: Expected to contribute 20-30% of total revenue by FY17.
• EPS Growth: Expected to be 19.7% (2015), 31.2% (2016), and 22.0% (2017).
• Market Capitalization: Kingdee's market cap is HK$14,490m (or US$1,869m).
• Shareholder Structure: Major shareholders include Xu Shao Chun (26.9%), JD.com (10.0%), and Credit Suisse Group AG (8.4%).

Investment Thesis

• Rationale: Continued upside for business software in China, driven by increased e-commerce activity and ERP adoption.
• Valuation: The BUY recommendation is based on a 45x FY16PE, reflecting improved market sentiment and potential valuation convergence with A-shares.
• Risks: Cyclical uncertainties and economic activity slowdown could affect product demand.

Financial Ratios and Metrics

• Gross Margins: Expected to increase from 75.3% (2013A) to 84.0% (2017F).
• Operating Profit Margins: Projected to rise from 14.9% (2013A) to 24.0% (2017F).
• Net Profit Margins: Anticipated to grow from 7.9% (2014A) to 19.0% (2017F).
• ROAE (%): Expected to increase from 10.5% (2014A) to 10.7% (2017F).
• Dividend Payout Ratio: Consistent at 15.0% for FY15 to FY17.
• Net Debt/Equity: Reduced from 0.1 (2014A) to CASH for FY15 and onwards, due to capital raising.

Conclusion

The report highlights Kingdee's strategic moves and future growth potential in the cloud and e-commerce sectors. Despite lower earnings forecasts compared to consensus, the strategic investment from JD.com and cooperation with Amazon AWS are seen as positive catalysts. The target price of HK$6.8 reflects a higher valuation multiple, accounting for market sentiment, valuation discount narrowing, and cloud growth. The BUY recommendation is based on long-term growth expectations and improved financial performance.