20161222-东英亚洲证券-TOP_GLORY_INT_L-00268.HK-Top_SME_ERP_provider_riding_sky-high_on_cloud_30页_1mb

Equity Research Summary: Kingdee International (268 HK)

Core Content

Kingdee International (268 HK) is a leading provider of management and cloud-based information products in China, particularly renowned for its ERP solutions. The research initiates a BUY rating with a target price of HK$3.35, representing a 19% upside from the close price of HK$2.82 as of 21/12/2016. The analysis highlights the company's strong position in the SME ERP market, the growth potential of its cloud business, and the benefits from the disposal of non-core loss-making segments.

Main Points

1. Traditional ERP Business

• Market Position: Kingdee is the No.1 SME software provider in China with a 21.8% market share (2014), and No.4/2 ERP provider in the broader market.
• Growth Drivers: The traditional ERP business is recovering due to enterprise cost-saving demands. With the China ERP market expected to grow at 14.3% CAGR from 2014 to 2019E, Kingdee is well-positioned to benefit.
• Product Line: Offers KIS (small and micro enterprises), K/3 (small and medium enterprises), and EAS (large corporate groups).
• Performance: KIS sales are expected to grow at 14% CAGR from RMB246mn in FY15 to RMB367mn in FY18E, driven by strong demand and market leadership. K/3 sales are expected to grow at 3% CAGR, while EAS sales are projected to grow at 5% CAGR.

2. Cloud Business

• Growth Momentum: The cloud business is experiencing rapid growth, with a 52% CAGR from RMB191mn in FY15 to RMB670mn in FY18E, due to the increasing adoption of cloud computing by SMEs.
• Products Offered: Provides cloud ERP, finance cloud, mobile office, and e-commerce cloud solutions.
• Strategic Moves: Kingdee is penetrating vertical markets and expanding horizontally through distributors to capture larger segments of the market.
• Scale Effect: The scale effect is expected to start emerging from FY17E, contributing to margin recovery and NPM improvement from 6.7% in FY15 to 13.3% in FY18E.

3. Disposal of Non-Core Businesses

• Strategic Disposal: Kingdee disposed of three non-core loss-making businesses in July 2016, including 85% of CloudHub, 100% of Kuaidi100, and 100% of mobile internet hospital.
• Rationale: These businesses were loss-making, contributing a net loss of RMB112mn in FY15, and their disposal allows the company to focus on core ERP and cloud businesses with RMB107mn in cash.
• Impact: The disposal is seen as positive for operational efficiency and margin improvement.

4. Investment Recommendation

• BUY Rating: Initiated with a target price of HK$3.35, based on a 35x FY17E PE.
• Growth Projections: The company is expected to achieve 43% net profit CAGR from FY15 to FY18E, with revenue CAGR of 14%.
• Earnings Forecast: Diluted EPS is projected to increase from HK$0.045 in FY15 to HK$0.125 in FY18E.

Key Information

• Market Cap: RMB8,309.48 million (as of 21/12/2016)
• Issue Share: 2,946.62 million
• 3M Avg Daily Vol.: 18.99 million
• Major Shareholder: Xu Shao Chun (25.97%)
• GDP Growth: China’s GDP is expected to grow at 6% CAGR from 2017E onwards.
• Wage Growth: The average wage in urban China has been growing at double-digit rates since 2008, driving cost-saving demands for enterprises.
• ERP Market Growth: China’s ERP market is expected to grow at 14.25% CAGR from 2014 to 2019E.

Risks

• Slowdown in Cloud ERP Adoption: Potential decrease in demand for cloud ERP solutions.
• Fierce Competition: Intense competition in the ERP and cloud computing markets.

Financial Summary

Conclusion

Kingdee International is well-positioned for growth and margin recovery due to its dominant position in the SME ERP market, strong cloud business growth, and strategic disposal of non-core segments. The company is expected to deliver robust earnings growth and improve operational efficiency, making it an attractive investment opportunity. However, potential risks such as slow adoption of cloud ERP and intense competition must be considered.