Key points of investment

Incident: On January 5, the company released its 2023 annual results forecast. It is expected to achieve revenue of 5.65-5.70 billion yuan for the full year of 2023, an increase of 16.2%-17.2% over the previous year; it is expected to lose 17—250 million yuan, a year-on-year loss of 14-220 million yuan. It is expected to achieve net operating cash flow of 63-670 million yuan in 2023, an increase of 68.3% to 78.9% year-on-year.

Driven by cloud transformation, ARR and cash flow indicators are impressive, and the company's losses continue to narrow. As the company deepens its cloud transformation strategy, the ARR of the Kingdee Cloud subscription service continues to increase. As of September 30, the ARR was about 2.67 billion yuan, an increase of about 40% year on year. The ARR is expected to reach about 2.85 billion yuan by the end of 2023, an increase of about 32.8% year on year, and there have also been improvements from month to month. Benefiting from this, the company's net operating cash flow is expected to reach 63-670 million yuan in 2023, a year-on-year increase of 68.3%-78.9%. At the same time, as the company develops a cloud subscription model for a long time, the quality of operations continues to improve, and the superposition cost control effect is good. It is expected that the company's losses will continue to narrow in 2023, and a break-even balance will be reached in 2025.

The cloud transformation has achieved remarkable results. By business, 1) For the large enterprise market, the company integrated AI technology, launched Sky GPT and financial models, and upgraded Star Han to version 6.0. As of June 30, Cangqiu & Xinghanyun's ARR subscription increased by about 95.9% year-on-year, and the NDR remained above 100%. This year, it signed a number of leading customers, including China Building Materials Group, Tongwei Co., Ltd., iFLYTEK, Belle Fashion, etc.; 2) Facing the medium-sized enterprise market, Starsky continued to expand the advantages of R&D, supply and marketing integration and deep financial integration, and launched new functions such as IPOs, new taxation, cost management, transparent workshops, etc., and summarized and refined solutions for 12 major industries including high-tech electronics and equipment manufacturing. As of June 30, the ARR for Starry Sky Cloud subscriptions increased by about 28.6% year-on-year, and the NDR remained above 95%, with new customers such as Jiangsu Security Technology, Jietai New Energy, Wagas, and Leifen Technology; 3) For the small and micro enterprise market, Star launched the flagship version, and Jingdou Cloud also launched the 2023 version. Benefiting from the continuous maturity of the products, the renewal rates of Star and Jingdou Cloud continued to increase rapidly. As of September 30, the NDR for Star Cloud and Jingdou Cloud's cloud subscriptions was 90% and 86%, respectively.

Sky GPT was released in a big way, and commercialization of large model applications began. On August 8, 2023, the company released the enterprise-level large model capability platform Cangqiu GPT. While connecting Baidu Wenxin and OpenAI to general-purpose big model capabilities, the company also provides enterprises with professional domain models in various fields, which can help enterprises achieve functions such as intelligent task orchestration, embedded AI assistants, idea generation, knowledge engines, analytical insight, and multi-model access scheduling. At the same time, the company built the first major financial model in China based on Sky GPT. The model sets 10 billion parameters, undergoes professional training and careful fine-tuning, and encapsulates Kingdee's 30 years of financial knowledge and successful practices in serving millions of customers, which can provide enterprises with comprehensive analysis, prediction, expert support, report generation and interpretation services. The financial model not only supports an “out-of-the-box” cloud service model, but also supports enterprises and Kingdee to jointly create a personalized and exclusive model.

On November 9, based on Sky GPT, the company launched Yunxinghan V6.0, a SaaS management focused on serving large enterprises. It has 8 leading architectures, 10 key new features, and 21 core product solutions. At the same time, the company has improved the functions of the big financial model such as intelligent customer service, financial index analysis, financial report generation, and understanding and review of large text attachments. Currently, the application of the big model has broken through customers such as Guangdong Airport and Hisense, and is expected to gradually contribute to performance growth in the future.

Investment advice: As a leading domestic ERP manufacturer, the company continues to deepen its cloud transformation strategy. In the future, as the financial model accelerates commercialization, the company will continue to benefit. The company is expected to achieve revenue of 56.88/70.52/8.649 billion yuan respectively in 23-25, and net profit to mother of -2.13/ -0.81/177 million yuan. This is the first coverage, giving the company an “increase in wealth” rating.

Risk warning: Product iteration falls short of expectations; AI commercialization is slow; industry competition intensifies; cloud transformation falls short of expectations; downstream customer demand falls short of expectations.