In the first half of 2021, Tide International realized operating income of 1.52 billion Hong Kong dollars (+ 30.3%), of which cloud business revenue was 320 million Hong Kong dollars (+ 41.7%), and cloud business revenue accounted for 23.8% (+ 1.9 pcts) of software revenue. Considering the broad growth space of the cloud ERP market in the domestic market and the company's rich customer resources and service experience in the field of ERP, we judge that the cloud process of the company will continue to move forward rapidly, which will lead to the steady growth of the company's overall performance. We use the SOTP valuation method, in which the traditional software business is given 10X PE (2021E); at the same time, taking into account the steady progress of the company's cloud process, we give the cloud business 6X PS (2021E), raising the target price to HK $5.50 per share, and continue to maintain the "buy" rating. With the advancement of the company's cloud process, the market is also expected to accelerate the switch from valuation to comparable software SaaS.

Matters: domestic Top 3 ERP manufacturer Wave International released the financial data of the 2021 mid-term report. Our comments are as follows:

Financial profile: cloud business continues to expand, and net profit becomes regular compared with the same period last year. In the first half of 2021, the company realized operating income of HK $1.52 billion (+ 30.3%, + 19.9% in RMB), including HK $320 million (+ 41.7%, + 30.4% in RMB) from cloud business, HK $1.02 billion (+ 27.0%, + 16.9% in RMB) from management software, and HK $180 million (+ 30.6% in RMB) from Internet of things solutions. + 20.1% in RMB). In terms of cloud progress, cloud business revenue accounted for 21.1% (+ 1.7pcts) of total revenue and 23.8% (+ 1.9pcts) of software revenue in the first half of the year. In the first half of the year, the company achieved an overall gross profit margin of 34% (+ 0.5pct). The management expense rate, R & D expense rate and sales expense rate were 11.0%, 12.6% and 16.3% respectively, compared with the same period last year-3.4pcts, + 0.4pct,-0.7pct, respectively, reflecting the significant improvement of management efficiency and the continuous increase of R & D investment. In addition, the company's other income and other net income in the first half of the year was HK $120 million (+ 76.5%, + 62.4% in RMB). This includes HK $28 million (+ 17.9%) in software tax rebates, HK $49 million (+ 569.8%) allocated by the government for transformation and HK $34 million (+ 10.3%) in investment property rental income. In terms of profit, the company achieved a pre-tax profit of HK $22 million and a return net profit of HK $19 million in the first half of the year, which was due to a year-on-year increase in operating profit in the management software business from 180% to HK $110 million, as well as a significant increase in other income and other net income.

Cloud business: products continue to iterate and customers expand rapidly. For the large enterprise market, the company released GSCloud version 2103 in March and won the "user satisfaction first" award at the IT user satisfaction conference hosted by CCW Research. At the same time, the company continued to optimize PaaS platform iGIX, officially released iGIX 3.5, and officially opened up the low-code modeling system UBML on January 26, jointly with universities, partners, ISV and community participants to build an open source ecology. In terms of HCM Cloud, during the reporting period, the company signed contracts for medium and large enterprises such as Sichuan Coal, Sichuan Tobacco Industry, Anyang Iron and Steel, ranking third in HCM SaaS market share; in terms of financial resources, the company continues to expand its cooperation with banks, extending the cooperation of funds sheet products to travel, online newspaper, finance, budget and other business scenarios. In cooperation with cloud, the company also signed contracts with Dongfang Electric, Sichuan Coal Group, Tianjin Energy, Henan Exchange and other enterprises during the reporting period. For the medium-sized enterprise market, the company released inSuite 1.2, providing online services around six categories of business scenarios: solutions, applications, implementation, interfaces, development and services, and vigorously developed channel partners to further open products and markets and strengthen the "platform + ecological" aggregation capacity. For the small and micro enterprise market, the company promotes the research and development of new versions of cloud accounting and cloud purchase, sales and storage, and develops features such as smart invoices, cloud coins, and smart account guides, actively promoting one-click filing of all taxes in batch for key cities across the country.

Management software business: a significant recovery in revenue. In terms of financial sharing, Chaochao Financial sharing uses RPA, OCR, natural language processing, knowledge graph, machine learning and other technologies to create new intelligent financial solutions, and newly signed customers such as Zhejiang Guoyun, Henan Shenhuo, Tongling Nonferrous, etc. In terms of intelligent manufacturing, the company officially launched the "intelligent manufacturing +" intelligent manufacturing overall solution, covering the core areas of digital supply chain, manufacturing, quality management, intelligent factory, edge intelligence, and so on. And in ships, shield machines and other large equipment manufacturing enterprises to carry out in-depth promotion and application.

In terms of operation and maintenance services, Tide Tianyuan Communications released cloud Rui iOSS2.0 series products, aiming at operator 5G and cloud network convergence business, realizing global end-to-end, automation, intelligent and agile support for network operation and maintenance, and expanding business to new business type operators in other industries, such as radio and television, Iron Tower, China Mobile Zhihang, China Mobile Internet, etc., to provide customers with intelligent operation and maintenance products and services.

Medium-term outlook: product structure optimization, customer number and ARPU growth, etc. 1) continue to promote the cloud process. At present, the company's cloud product revenue accounts for 21.1% of the business income, which is in the stage of rapid development. According to the company's performance exchange demonstration materials, the company expects cloud service revenue from 2020 to 2023 to reach the same level as management software revenue in 2023. 2) the number of customers and ARPU continue to improve, for large enterprises, due to the relatively limited customer base, continue to increase modules and functional substitution, from a single department-branch to multi-departments and other companies in the group system, and then improve the level of ARPU is the main driving force to promote subsequent growth. For medium-sized enterprises, the number of medium-sized enterprise customers of the company's cloud products has just exceeded 400. compared with the total number of 9 million medium-sized enterprises in China (with annual income exceeding 50 million), the penetration rate is only 0.04%. There is a huge penetration opportunity for medium-sized enterprise customers' inSuite products. 3) the development of partners and ecology, the richness of partners and the maturity of the platform ecology, on the one hand, can improve the company's delivery efficiency and reduce delivery costs, on the other hand, it will also borrow the development capabilities of ISV and customer internal staff to serve the long-tail needs that can not be met by standardized products, and improve customer satisfaction.

Risk factors: the risk that the development of the cloud service market is not as expected; the risk that the competition in the industry intensifies; the risk that customer maintenance and expansion is not as expected; the risk that SaaS business development is not as expected; the risk of loss of core marketing and product technical personnel of the company; the risk of major data leakage and operational accidents, etc.

Investment suggestion: considering the broad growth space of the domestic market cloud ERP market and the company's rich customer resources and service experience in the ERP field, we judge that the company's cloud process will continue to advance rapidly, which will lead to the steady growth of the company's overall performance. We maintain our previous revenue forecast and raise our profit forecast based on the improvement in the company's operating efficiency and the increase in government subsidies. We expect the company's operating income to be HK $30.0342 billion in 2021-2023, with a year-on-year growth rate of 17%, 14% and 17%, respectively, and net profit of HK $0.66 billion, respectively (the original forecast was HK $0.20.5 billion). We use the SOTP valuation method, in which the traditional software business is given 10X PE (2021E); at the same time, taking into account the steady progress of the company's cloud process, we give the cloud business 6X PS (2021E), raising the target price to HK $5.50 per share, and continue to maintain the "buy" rating. With the advancement of the company's cloud process, the market is also expected to accelerate the switch from valuation to comparable software SaaS.