Inspur International is the top 3 local ERP company, currently accounting for about 12% of the domestic market share, second only to Youyou Network and Kingdee International among local manufacturers. However, over a long period of time, the company's market value has been low and market attention has also been weak. Our judgment is mainly due to the fact that the market lacks confidence in the competitive advantages of the company's long-term products, the cloud transformation process is not as good as that of comparable companies, and that the transition to the cloud and the pandemic have dragged down performance. We believe: 1) The characteristics of ERP products are complex, and the market is expected to show a relatively fragmented pattern in the long term. Inspur International has obvious advantages in customer resources and service capabilities in the medium and large government and enterprise markets; 2) Through the full implementation of the cloud ERP product architecture and the rapid completion of distribution channels, the company is currently progressing smoothly and will continue to rapidly advance the cloud-based process. Cloud service revenue in 2023 is expected to be on par with management software revenue. We used the SOTP valuation method and gave a target price of HK$4 per share, covering the “buy” rating for the first time. As the company's cloud-based progress continues to advance, we believe the market may accelerate the change of valuation methods, and the company's market capitalization level is also expected to achieve further breakthroughs.

Inspur International: A leading domestic ERP vendor, making every effort to promote cloud transformation. Inspur International was registered in 2003 and listed on the Hong Kong Stock Exchange in April 2004. It is a leading ERP software company in China. In 2017, the company released a cloud strategy to comprehensively promote the transformation of its software products to the cloud. Currently, it has formed three business segments, mainly cloud services, management software, and IoT solutions. The product portfolio covers large, medium and small enterprises. In 2020, the company achieved revenue of HK$2,557 million, of which cloud software products achieved revenue of HK$506 million, +30.53% year-on-year. In 2018, this figure was only HK$185 million. Cloud software products are gradually becoming the core driving force for the company's medium- to long-term revenue growth.

Global market: The ERP market is quite mature, and leading companies are struggling to switch to the cloud. In the past 5 years, the stock price performance of representative companies in the ERP field such as SAP and Oracle has been relatively average. The core reason is that their ERP products are slowly becoming cloud-based in large enterprises. As the core business system of an enterprise, ERP product logic is complex, involving business modules such as internal finance, manufacturing, and supply chain. Combined with the enterprise's concerns about data security and the resistance of the ERP system to expand to other business modules, etc., all of which hinder the ERP product cloud process to a certain extent. However, at the same time, some of SAP and Oracle's cloud-based practices are still worth referring to, including reconstructing the underlying code of the ERP system; supporting various deployment models, including local, private, hybrid, and public clouds; the product line is complete from front-end (CRM) to mid-back office (ERP, HRM, etc.); and user stratification to launch different products for large, medium, and small enterprise customers.

Domestic market: Enterprise digitalization and domestic production substitution bring obvious opportunities. According to data from the Forward-looking Industry Research Institute, China's ERP market in 2019 was only 30 billion yuan (40 billion US dollars worldwide during the same period), and the industry's medium- to long-term potential space is huge. As domestic enterprises pay more attention to management, the size of the domestic ERP market will maintain a continuous growth trend, and the growth rate is expected to be significantly higher than that of the European and American markets. Judging from market share, leading local manufacturers occupy most of the market share. In 2019, the market shares of Youyou, Inspur, and Kingdee were 33%, 13%, and 12% respectively. However, in the high-end ERP market, local companies are still in a weak position, and most of their share is occupied by overseas giants. At the same time, the demand for enterprise digital transformation and the acceleration of the cloud service process will drive the rapid development of the domestic cloud ERP market. According to IDC data, the domestic cloud ERP market exceeded 10 billion yuan in 2019, and will maintain a double-digit growth rate in the future. Looking at the long-term cycle, considering the active promotion of representative enterprises and the inclination of macroeconomic policies, etc., the domestic cloud ERP industry has long-term growth opportunities in the future. Leading vendors are expected to learn from the experiences and lessons of foreign vendors and seize trend dividends in their respective fields of expertise.

Company analysis: Product system construction completed, channel system rapidly expanded. 1) Product layout, for group enterprise customers, the company launched GS Cloud 3.0, a digital capability platform for large enterprises, to provide SaaS application services and the Inspur iGIX PaaS platform; for growing enterprises, the company's next-generation open source cloud ERP product InSuite. While providing standardized SaaS applications and low-code development platforms, it has built a “platform+ecosystem” partner system to integrate sales, consulting, delivery, integration, development and service partners to provide diversified services; For small and micro enterprises, the company provides online services The financial SaaS application Inspur Cloud Accounting provides customers with one-stop ERP solutions. 2) Marketing channels. For large enterprise customers, the company mainly uses direct sales channels. For growing enterprise customers, since the number of customers is higher and the demands are more scattered, the company needs to use the power of channel partners. Since the company's previous channel construction was relatively weak, the company is currently speeding up the construction of related distribution channels. There are about 500 cooperative distributors, and future plans are constantly improving.

For small and micro customers, the company provides services in the form of self-service.

Subsequent growth: product structure optimization, number of customers and ARPU growth, etc. 1) Continuously promote the cloud transformation process. Currently, the company's cloud product revenue accounts for 19.8% of revenue and is in a stage of rapid development.

According to the company's performance exchange presentation materials, the company expects cloud service CAGR of 47%-60% from 2020 to 2023, and cloud service revenue to reach the same level as management software revenue in 2023. 2) The number of customers and ARPU continues to rise. For large enterprises, due to the relatively limited customer base, continuous addition of modules and function substitution, continuous expansion from a single department & branch to multiple departments and other companies within the group system, and further increasing the level of ARPU is the main driving force for subsequent growth; for medium-sized enterprises, the number of medium-sized enterprise customers of the company's cloud products has just exceeded 400, compared to the total number of 9 million medium-sized enterprises in China (annual revenue exceeding 50 million). The penetration rate is only 0.04%. InSuite products for medium-sized enterprise customers have huge penetration opportunity. 3) Develop a partner and ecosystem. On the one hand, the abundance of partners and the maturity of the platform ecosystem can improve the company's delivery efficiency and reduce delivery costs. On the other hand, it will also use the development capabilities of ISVs and internal customer employees to serve long-tail needs that cannot be met by standardized products and enhance customer satisfaction.

Risk factors: Cloud service market development falls short of expected risk; industry competition increases risk; customer maintenance and expansion falls short of expected risk; SaaS business development falls short of expected risk; risk of loss of company core marketing and product technicians; risk of loss of company core marketing and product technicians; risk of major data breaches and operational accidents, etc.

Investment suggestions: Considering the broad growth space of the cloud ERP market in the domestic market and the company's accumulation of rich customer resources and service experience in the ERP field, we judge that the company's cloud-based process will continue to advance rapidly, which in turn will drive the company's overall performance to grow steadily. We expect the company's revenue for 2021-2023 to be HK$30.0/34.2/HK$4.0 billion, with a year-on-year growth rate of 17%/14%/17%, respectively; net profit of HK$0.2/0.5/150 million, respectively. We used the SOTP valuation method, where the traditional software business gave 10X PE (2021 E), the cloud business gave 4X PS (2021 E), and finally gave a target price of 4 HKD/share, covering the “buy” rating for the first time. As the company's cloud-based process progresses in the future, the market is also expected to accelerate the transition of valuation methods to comparable software SaaS companies.