Yonyou reported (23 Aug) 2Q24 results: revenue was RMB2.1bn, up 9% YoY (2Q23: -16% YoY; 1Q24: 19% YoY), 4% short of Bloomberg consensus, which we attributed to slower-than-expected revenue growth in large enterprises due to elongated deal cycle. Although cost control remains stringent, the miss on revenue growth also translates into a miss on loss reduction: net loss attributable to ordinary shareholders was RMB341mn in 2Q24 (consensus: loss of RMB205mn). We remain positive that Yonyou will benefit from increasing digitalization demand nationwide over the long term, but reiterate concern regarding impact from macro headwinds in the near term. The slow increase in cloud services ARR contribution, as well as the rising R&D capitalization ratio still point to an uneasy loss reduction trajectory in the near term, and management may need to strive hard to reach its full-year target of turning into profitability in 2024, especially amid current macro backdrop. We maintain HOLD with a new target price of RMB9.08 (was RMB12.11), based on 3.1x 2024E EV/Sales (was 3.7x).

Macro headwinds and elongated deal cycle weighed on 2Q24 revenue growth. In 2Q24, cloud services revenue was RMB1.6bn, up 14% YoY (2Q23: -10%; 1Q24: 32%) and ERP revenue fell 10% YoY to RMB428mn. As a percentage of revenue, cloud services revenue contribution increased to 77% of total, up 3pp YoY. Revenue generated from large/mid-sized enterprise/small and micro sized businesses came in at RMB1.3bn/311mn/243mn for 2Q24, with respective growth of 5%/11%/33% YoY (2Q23: -20%/-6%/3%). Management attributed the slower-than- expected growth of large enterprises to elongated deal cycle, but noted a sequential recovery in contract value growth in Jul. We are positive on the revenue growth recovery of large enterprises, as Yonyou is making solid progress in new logos, and the launch of super version of YonBIP should provide additional support.

Recovery in GPM inline with management expectation, but continuous increase in R&D capitalization rate remains a concern. GPM improved by 1.8pp YoY to 54.0% in 2Q24, driven by increase in revenue contribution from cloud services, and was 1.2pp better than consensus. Management is confident on driving GPM back to over 55% in the coming quarters, driven by operating efficiency gains. As for operating expenses, S&M expenses grew 2% YoY in 2Q24 (30.8% of total revenue, -2.0ppts YoY), administrative expenses was flat YoY in 2Q24 (13.2% of revenue, -1.1ppts YoY), and R&D expenses was down 1% YoY in 2Q24 (25.1% of total revenue, -2.4ppts YoY). However, we noticed that R&D expense that capitalized increased to 51.3% of total in 1H24 (1H23: 47.7%; 2023: 50%), which partly aided the optimization in R&D expenses ratio.

Maintain HOLD with a new TP of RMB9.08. We lower 2024-2026E revenue forecast by 3-4% due to slower-than-expected revenue growth in large enterprises, and our new TP was based on 3.1x 2024E EV/sales, inline with one-year average minus 1 s.d (was 3.7x, inline with two-year average minus two s.d.).