Kingdee reported its 1H24 results: revenue was up 11.9% YoY (1H23: 16.8% YoY) to RMB2.87bn, 2% shy of Bloomberg consensus, which in our view can be attributed to a lengthened deal cycle and softer-than-expected growth amid macro headwinds (especially small and micro enterprises, whose YoY revenue growth slowed to 9% YoY in 1H24 from 19% in 1H23), while the net loss of RMB218mn implies a YoY reduction of 23% and was 20% narrower than consensus estimates, which demonstrated Kingdee's determination to improve operating efficiency. Core SaaS product Galaxy's ARR growth momentum remained healthy with 24% YoY growth in subscription ARR in 1H24 (1H23: +29% YoY). Meanwhile, large enterprise revenue growth of 38.9% YoY (1H23: 38.4%) remains solid, in our view. Although we still expect the demand recovery to take time, especially for small enterprises, we are expecting the second half to deliver results driven by healthy growth in Kingdee's contract value and the lengthened deal cycle. We lower 2024E revenue forecast by 4%, but expect 2H24 revenue growth to reaccelerate to 16%. We maintain BUY rating but lower target price to HK$10.8 per share (was HK$15.5), based on 4.4x 2024E EV/Sales (was 6.4x), in line with the one year mean.

Revenue contribution from cloud continued rising. In 1H24, cloud revenue grew 17.2% YoY to RMB2.4bn, and was 83.2% of total revenue (1H23: 79.5%), while license ERP revenue declined by -8.8% YoY. Net loss shrank to RMB218mn in 1H24 (1H23: RMB284mn), driven by GPM expansion (+1.3pp YoY to 63.2% in 1H24) aided by an increase in cloud revenue contribution. The continuously rising trend in cloud revenue contribution should help enhance operating efficiency, in our view.

Galaxy sustained healthy revenue growth and healthy profitability. In 1H24, Kingdee's core SaaS product Galaxy achieved revenue of RMB1.1bn, up 14.3% YoY (1H23: 17.3%), and Galaxy's subscription ARR was up 24% YoY (1H23: 29%). Dollar retention rate edged down to 95% in 1H24 from 96% in 1H23 due to macro headwinds. Customer acquisition for Galaxy was on track, in our view, with c.8,000 YoY net adds in 1H24, and the profitability of Galaxy remained healthy at c.20%.

Large enterprises: solid revenue growth contribution although facing a longer deal cycle. Benefiting from ongoing software localization demand, as well as enhanced product capability, Kingdee Cosmic & Constellation (C&C) revenue grew 38.9% YoY in 1H24 (1H23: 38.4% YoY) to RMB546mn (19% of revenue, as compared to 15% in 1H23). Kingdee signed up 275 new customers for C&C business during 1H24. Management highlighted a solid expansion trajectory for life time contract value (LTCV) of C&C customers from the initial contracts: in 1H24, the LTCV expanded to 5.3x/3.8x/2.9x/1.9x/1.8x/1.2x of initial value for the contracts signed in 2018/2019/2020/2021/2022/2023.

Guidance on OCF growth and breakeven point remains unchanged driven by efficiency improvement. Management's guidance on continued loss reduction and breakeven in 2025 remains unchanged. Although the overall pace of revenue growth is likely to be slightly slower than our previous expectation, but management's guidance on OCF of RMB900mn for 2024 remains unchanged as it is confident in driving operating efficiency improvement.