Kingdee reported 2023 financial results: revenue was RMB5.7bn, up 17% YoY (2022: 17% YoY), and net loss attributable to ordinary shareholders was RMB210mn (2022: loss of RMB389mn), both in line with our estimate and Bloomberg consensus. Kingdee's loss reduction effort was on track, with loss margin narrowing from -17.9% in 2022 to -12.1% in 2023, driven by 2.6ppt improvement in gross margin, on an increase in subscription revenue, cloud infrastructure cost optimization, as well as operating efficiency improvement. We remain positive that Kingdee is well-positioned to benefit from the domestic substitution trend, backed by strong and continuously enhanced product capability and partner ecosystem. We roll forward our valuation to 2024E, and our new target price of HK$15.5 (prior HK$15.1) is based on 6.4x FY24E EV/sales, in-line with the one-year mean. Maintain BUY.
2023 results in line with cloud contributing 79% of revenue. Kingdee delivered in-line 2023 results with revenue growth of 17% YoY to RMB5.7bn. Cloud revenue grew 21% YoY to RMB4.5bn (79% of revenue; +3ppt YoY). ERP business and others revenue also grew by 2% YoY (2022: 19% YoY decline), driven by one-off revenue from the implementation of some offline SOE projects. Although facing macro headwinds, the 34% YoY growth in ARR (2022: 36%) and 30% YoY growth in subscription contract liabilities (2022: 38%) still suggest Kingdee's solid SaaS growth outlook in 2024, in our view.
Small- and medium-sized enterprises: Galaxy maintained solid margin expansion. Kingdee's core SaaS product Galaxy achieved revenue of RMB2.0bn, up 16.3% YoY (2022: 18.4%). Galaxy recorded over 39,000 customers by end-2023, indicating over 8,000 YoY net adds (2022: 5,600), and saw 29% YoY growth in subscription ARR. Dollar retention rate remained stable at 97.2% in 2023, flat YoY. Management highlighted that the operating margin of Galaxy business further increased to 22% in 2023 (2021: 20%), and would be ~30% if excluding the impact from investment in the Galaxy Flagship version.
Large enterprises: expecting revenue growth to reaccelerate in 2024. Benefiting from ongoing software localization demand, as well as enhanced product capability, Kingdee Cosmic & Constellation (C&C) revenue grew 40.9% YoY to RMB981mn (17.3% of revenue). In view of a strong project pipeline and ARR growth (+48.7% YoY), management expects C&C revenue growth to reaccelerate in 2024E.
Update on financial guidance. Management guided for: 1) a 2023-2026E revenue CAGR of 15-20%; 2) a 2023-2026E subscription ARR CAGR of 30%; 3) at least RMB900mn in operating cash flow in 2024, indicating at least 38% YoY growth. Also, management vowed to continuously improve operating efficiency in 2024, and targets to achieve breakeven no later than 2025.