Incident: On September 29, the People's Bank of China launched a seven-day reverse repurchase operation of 182 billion yuan using fixed interest rates and quantitative tenders, with an operating interest rate of 1.50%. Currently, the 7-day reverse repurchase operation has basically assumed the function of the main policy interest rate. Since this year, interest rates for 7-day reverse repurchase operations have been reduced by a total of 30 basis points.

Domestic macroeconomic recovery has accelerated the company's growth. In an environment of overseas interest rate cuts, Kingdee, as a leading SaaS company in China, cannot be ignored in valuation repair flexibility. As a domestic ERP leader, the company is anchored in high-end ERP replacement scenarios where overseas brands such as SAP and Oracle monopolize (2021 total domestic market share exceeds 50%). In terms of product form, it targets the leading SaaS cloud model represented by Salesforce. Considering the strong domestic manufacturing background and the continuous acceleration of the digitalization process of enterprises, and the favorable competitive pattern created by the domestic alternative background, the company is actually superior to comparable overseas companies that have reached maturity. Compared with the current valuation of overseas companies, as of September 30, 2024, Oracle/SAP/Salesforce PS-TTM was 8.77/8.05/7.27, respectively; when looking at the company's average market sales rate of 8.95 in the past three years, it is still at the bottom of historical valuation (the company's market sales ratio was 4.86 on September 30, 2024). As a leading SaaS company in China, Kingdee has accelerated fundamental growth combined with overseas interest rate cuts, and there is plenty of room for valuation repair.

Continuing to promote the transformation of cloud subscriptions, Sky & Star Han lead the growth. 2024H1, the company's cloud service revenue was 2.39 billion yuan (+17.2% year over year), accounting for 83.3% of revenue (+3.8pct year over year). Among them, the total revenue of Sky Sky and Xinghan was about 0.546 billion yuan (+38.93% year over year), ARR +29%, contract signing amount +63% year over year, net renewal rate 97% (-11pct); Starsky achieved revenue of about 1.054 billion yuan (+14.32% year over year), subscription ARR +24% year over year, and net renewal rate of 95% (-1pct year over year); Xiaowei Finance Cloud achieved revenue of about 0.588 billion yuan (YoY +17.3%), ARR +31 %. Among them, Star's revenue was +70.8% year-on-year, and the net renewal rate was 92% (+3pct year over year). Furthermore, the operating indicators of the company's cloud business are also impressive. The ARR scale of the cloud subscription business reached 3.15 billion yuan, an increase of 24.2% over the previous year; the size of contract liabilities related to cloud subscriptions increased by 28.2%.

The DCF model looks at a company's long-term value. 1) Molecular side: ① Business structure improvement: In recent years, the company has continued to reduce traditional project business, which has affected overall performance to a certain extent. Currently, along with the continuous narrowing of the scale of the project business, its interference with overall performance will further weaken, and the overall growth rate of performance will continue to move closer to the cloud business; ② Improved customer structure: The steady progress of Cang Sky & Star Han has brought about a continuous increase in the share of big customer revenue. As the 2027 Xinchuang node approaches, the ERP replacement process for central state-owned enterprises may be fully accelerated; superimposed companies continue to expand new tracks such as medical care and auto parts, and short-term profitability is expected to increase further; 2) The denominator side: the ability of large enterprises to pay (2023 Xinghan & Sky/Starsky/Star & Jingdou Cloud ARPU is 67.28/ 0.0501/0.003 million yuan, respectively) and the intention to renew (2024H1 Xinghan & Sky/ Starry Sky/ Starlight/ Jingdou Cloud NDR is 97%/97%, respectively)/ (87%) Shangdu is overall superior to small and medium-sized enterprises. Under the trend of increasing share, it is expected to gradually shift the company's business focus from epitaxial expansion to endogenous growth, further strengthening the certainty of high performance growth and improving business risk exposure on the basis of cost optimization.

The semi-annual repurchase amount reached HK$0.53 billion, focusing on shareholder returns and employee incentives. During 2024H1, the company repurchased a total of HK$0.53 billion of shares (including cancellation and employee incentives). Of these, the company purchased 0.014 billion shares on the stock exchange under the share award scheme, with a total value of HK$0.133 billion.

Profit forecast and investment advice: The company is currently at a critical stage of transformation from “cloud services” to “comprehensive cloud services”. Currently, as the industry becomes more mature, we reaffirm that the company's losses may continue to narrow and are expected to reverse losses in 2025, and the business monetization logic is being strengthened. We expect the company's total revenue for 2024-2026 to be 66.85/78.40/ 9.223 billion yuan, up 15.62%/17.27%/17.65% year over year; net profit to mother -0.24/ 0.219/0.451 billion yuan, corresponding to PS4.3/3.7/3.1, maintaining the “recommended” investment rating.

Risk warning: Enterprise IT spending falls short of expectations, AI applications fall short of expectations, and competition between traditional software and SaaS increases risk.