Core views
As a leader in cloud transformation in the domestic industry, Kingdee International has accumulated enough resources to account for more than 80% of cloud revenue, and profits are about to be released. On the one hand, the ERP industry has benefited from the release of demand driven by the triple “digitalization+localization + AI”; on the other hand, after years of investment and refinement of cloud products, the SME product line has gradually entered a period of steady release of profits. The large enterprise market continues to break through, and its own advantages are gradually highlighted. We expect the company to achieve net profit of -0.092/0.045/0.542 billion yuan in 2024-2026, and net operating cash flow of 0.897/1.463/2.008 billion yuan, respectively. Considering that the company's net profit has reversed losses and maintained rapid growth, operating cash flow will continue to be optimized to maintain a “buy” rating.
Status: The cloud accounts for more than 80%, and the total contract debt has been the number one company in the Chinese software industry that has been deeply involved in the ERP field for decades. It has gradually completed the cloud SaaS transformation, and 24H1 cloud accounts for 83.2% of revenue. On the product side, Cangqiong & Xinghan earned 0.981 billion yuan in 2023 and signed a contract amount of 1.4 billion yuan; Starry Sky was IDC's largest growing enterprise application software market share for 19 consecutive years, with revenue of 1.952 billion yuan in 2023. The company's core cloud product revenue and orders continued to grow. As of 24H1, the contract debt had reached 3.367 billion yuan, ranking first in the Chinese software industry.
Industry driving force (beta): digitalization+localization+AI, triple driving demand release 1) Digitalization: In 2022, China's data economy reached 50.2, and ERP systems directly benefited as a core tool for enterprise digital management; 2) Localization: Considering the current high-end domestic ERP market, overseas manufacturers such as SAP still account for a high proportion of products. Based on the perspective of supply chain security, there is still plenty of room for domestic soft ERP replacement in large enterprise markets; 3) AI: On the one hand, AI is responsible for data analysis and process execution They all have good integration with ERP products, which can improve user experience and efficiency. On the other hand, the cloud deployment requirements of the big AI model also promote the increase in enterprise acceptance of public clouds, which is beneficial to cloud ERP vendors.
Self-advantage (Alpha): Cloud capabilities have accumulated and developed, and the large enterprise market continues to break through 1) The SME market is a basic market, and profitability has increased after the cloud stabilizes. Starry Sky 2024H1 achieved a net renewal rate (NDR) of 95% and an operating profit margin of 20%; Jingdou Cloud 2024H1 achieved a net renewal rate (NDR) of 87% and an operating profit margin of 40%, all higher than in the software era.
2) In the large enterprise market, the company achieved breakthroughs through product lines such as Cangqiong and Xinghan. 2024H1 achieved 275 new signed customers, signed a new contract amount of 0.9 billion yuan, and an ARR subscription growth rate of +29%. Through breakthroughs in the large enterprise market, the overall revenue ceiling was raised.
Profit expectations and comparable company valuations: 1) Based on current financial processing methods, it is expected to achieve break-even in 2025; 2) Based on our profit forecasts, Kingdee International's 2024-2026 P/S valuation is 3.15/2.79/2.42x, and the comparable company's 2024-2026 average P/S is 6.76/5.55/4.58x; Kingdee International's 2024-2026 P/OCF valuation is 22.39/13.72/10.00x, and the 2024-2026 average of comparable companies P/OCF is 33.61/24.82/20.17x.