Our country's bleh_scummm AR industry Y] is still in the early stages of development, and HCM software has broad prospects for the future. According to Insight Consulting data, judging from the penetration rate, China's HCM software penetration rate was only 5.1% in 2021, and there is still plenty of room for improvement compared to the 37.3% HCM penetration rate in the US; in terms of market space, China's HCM industry is about 27.2 billion yuan in 2023, which is expected to reach 59 billion yuan by 2027, and the CAGR for 2023-2027 is about 21.4%.

Cloud deployment, multi-product matrix integrated play is the development direction of the HCM industry. China's cloud HCM market is 5.5 billion yuan in 2021, and is expected to grow at a CAGR of 32.9% to 34 billion yuan in 2027. The company is the only cloud vendor in China that provides all major HCM modules. Through Upsell/CrossSell, the company's ARR continued to increase. The average customer ARR increased from 78,700 yuan in FY2019 to 1312,000 yuan in FY2024H1, and the ARR share of the company's multi-module subscription customers also increased from 51.8% in FY2019 to 71.4% of FY2024H1.

The company has been deeply involved in HCM for many years and has made precise efforts, and its market share is constantly increasing. The company was founded in 2002, released Internet evaluation cloud products in 2003, and continued to expand the range of products, releasing the PaaS platform in 2015. The company does not compete for highly customized on-premise deployments, but instead focuses on standardized products in the cloud. According to Insight Consulting and IDC data, the company's market share of cloud HCM increased from 11.6% in 2021 to 15.3% in 2023H1, and has been ranked first in the HCM SaaS market in China for 7 consecutive years since 2016.

Recently, some PE shares were transferred to long-term investors, and factors suppressing stock prices were eliminated. On December 27, 2023, Sequoia sold 39.1777 million shares of the company off-market at an average price of HK$3.3 per share. Hong Jing led Gaosheng Capital, which focused on SaaS investment, took over. The factors that the market previously feared by the Sequoia holdings reduction suppressing stock prices have been eliminated.

Investment advice: We expect FY2024-FY2026 (the fiscal year ending 2024, 2025, and March 31, 2026) to achieve revenue of $8.75/10.55/ 1.301 billion, up 16.59%/20.52%/23.28% year over year; achieve net profit to mother of -32.42/-3.46/ -203 million yuan, up -24.75%/89.33%/41.45%. FY2027 is expected to achieve break-even. Referring to Workday and Kingdee International, we gave the company a 5.5 times PS valuation for FY2025, corresponding to a market capitalization of HK$6.377 billion. There is still plenty of room compared to the current market value. Covered for the first time, a “gain” rating was given.

Risk warning: HR SaaS penetration rate falls short of expectations; market competition intensifies; stock prices rise too fast or there is a technical correction; liquidity risk, etc.