24H1 revenue growth has slowed and losses have narrowed. The company discloses its 2024 semi-annual report. 24H1 achieved operating income of 2.87 billion yuan, an increase of 11.9% year on year; net profit loss to mother was 0.218 billion yuan, a year-on-year decrease of 23.2%, mainly due to the gradual implementation of the scale effect of large enterprise businesses. The 24H1 sales/management/R&D expenses rate was 42.7%/8.7%/28.1%, respectively, a year-on-year decrease of 1.9 pct/0.6 pct/0.9 pct.

The transformation of cloud subscriptions continues to advance. The 24H1 cloud service business achieved revenue of 2.39 billion yuan, up 17.2% year on year, accounting for 83.2% of the group's revenue; annual recurring revenue (ARR) of cloud subscription services was about 3.15 billion yuan, up 24.2% year on year; and contract liabilities related to cloud subscription services increased 28.2% year on year.

Large enterprises maintained high growth in business revenue and contract amounts. ① Large enterprise business: Kingdee seizes opportunities for large enterprises to accelerate digital transformation and localization replacement. 24H1 Kingdee Cloud Sky and Kingdee Cloud Xinghan earned 0.546 billion yuan, up 38.9% year on year; contract amount increased by about 63% year on year, subscription ARR increased 29% year on year, and net renewal rate 97%. ② Medium-sized enterprise business: Kingdee seizes new opportunities for Chinese companies to go overseas. 24H1 Kingdee Cloud's revenue was 1.054 billion yuan, up 14.3% year on year; subscription ARR increased 24% year over year, net renewal rate 95%, and number of customers reached 0.042 million. ③ Small and micro enterprise business: 24H1 Xiaowei Finance Cloud's revenue was 0.588 billion yuan, up 17.3% year on year, and subscription ARR increased 31% year over year; among them, Kingdee Cloud Star's revenue increased by about 70.8% year on year, and the net renewal rate was 92%.

Upgrade next-generation enterprise-grade AI platforms and accelerate AI applications. In the first half of 2024, Kingdee continued to promote innovation in AI applications. Kingdee Cloud was upgraded to a next-generation enterprise-level AI platform, and Cosmic, a super intelligent AI management assistant, was launched. Kingdee Cloud has evolved from cloud native to AI native foundation with big models as the core, providing large model capabilities for enterprise management, supporting the integration of large third-party models, enabling low/no-code development of AI agents, supporting large, medium, and small product lines, and providing AI applications in various fields such as finance, manpower, supply chain, manufacturing, and development. As of the first half of 2024, financial and human resources AI applications have been verified in large enterprises such as Hisense Group, Wen's Co., Ltd., China Jinmao, and C&D Real Estate. At the same time, Kingdee continues to deepen cooperation with Baidu, Microsoft, AWS, Tencent, etc. in the field of AI models to jointly explore intelligent applications in new scenarios.

Profit forecasting and investment advice. We expect the company's revenue for 2024-2026 to be 6.532/7.602/8.938 billion yuan, up 15.0%/16.4%/17.6% year-on-year; net profit to mother - 0.095/0.015/0.168 billion yuan. Referring to comparable companies, the company was given 5-6 times PS in 2024. Based on HKD1 = RMB0.92, the reasonable market value range was HK$35.5-42.6 billion, and the corresponding reasonable value range was HK$9.90-11.88 per share, maintaining a “superior to market” rating.

Risk warning. Downstream demand falls short of expectations; AI implementation falls short of expectations; market competition intensifies.