The results for the first half of 2024 were more or less in line with our expectations

Kingdee International announced its results for the first half of 2024: revenue increased 11.9% year-on-year to 2.87 billion yuan, and net loss to mother narrowed from 0.284 billion yuan in the same period last year to 0.218 billion yuan, which is basically in line with our previous expectations.

In the first half of 2024, the company repurchased approximately 46.876 million shares on the Hong Kong Stock Exchange at a total cost of about HK$0.397 billion. The repurchased shares have all been cancelled.

Development trends

Large enterprises are making positive progress in signing orders, and micro, small and medium-sized businesses have maintained resilience. In the first half of 2024, the company's cloud subscription transformation accelerated, and the share of cloud service revenue increased from 79.5% in the same period last year to 83.2%; according to our estimates, the share of pure subscription revenue in the first half of the year was close to 50%. ARR for cloud subscriptions increased 24.2% year over year to 3.15 billion yuan, corresponding to a net ARR increase of 0.29 billion yuan in the first half of the year, a year-on-year decline of about 28%, mainly due to companies being cautious in making new signings and additional purchases in the context of macroeconomic uncertainty. Among them, ARR growth in core businesses showed some resilience. ARR for Cangqiu and Xinghan subscriptions increased 29% year over year, ARR for Starsky subscriptions increased 24% year over year, and ARR for Xiaowei Finance Cloud subscriptions increased 31% year over year, and the drag from non-core businesses (such as industry cloud) was even more obvious. In terms of renewal rates (NDR), the NDR for Sky and Xinghan was 97%, which both declined, mainly due to the impact on renewal cycles and additional purchase decisions of large enterprises in a weak macro-environment); Starry Sky NDR reached 95%, which was basically stable from the same period last month; and the NDR of Star and Jingdou Cloud was 92% and 87% respectively, both improving year over year. In terms of new signings, during the period, the company successfully signed contracts with large central state-owned enterprises and leading private enterprises such as CNPC, China Airlines Group, Dongwei Co., Ltd., and Beikong Water. The contract amount of Cangqiu and Xinghan increased by about 63% year-on-year to 0.9 billion yuan; during the Starry Sky period, 611 new national and provincial specialty enterprises and 121 overseas Chinese enterprises were signed.

Cloud transformation deepens, and business quality continues to improve. The company's gross margin increased 1.3 percentage points year-on-year to 63.2% in the first half of 2024, mainly due to the continued increase in the share of high-margin subscription and product revenue.

Operating losses narrowed from 0.388 billion yuan to 0.317 billion yuan in the same period last year, and the corresponding loss rate narrowed 4.1 percentage points year-on-year; among them, cloud business operating losses narrowed from 0.447 billion yuan in the same period last year to 0.347 billion yuan, and the loss rate improved sharply by 7.4 percentage points. The net operating cash flow outflow narrowed from 0.169 billion yuan in the previous year to 0.166 billion yuan. At the performance meeting, management reiterated the goal of achieving a net operating cash flow inflow of 0.9 billion yuan for the full year of '24 and achieving a break-even balance at the adjusted net profit level for the full year '25.

Profit forecasting and valuation

The profit forecast for 2024/2025 remains largely unchanged. Consider the company's growth resilience and cash flow level superior to its peers to maintain an outperforming industry rating; considering the decline in the valuation center, the target price was lowered by 15% to HK$8.5 (based on 4 times the 2024 market sales ratio). Currently, the company is trading at 3 times /2 times the 2024/2025 market sales ratio (or 21 times/13 times P/OCF), corresponding to 46% upside.

risks

Macro weakness; industry competition intensifies.