China Internet and Software:All eyes on cloud and Internet finance

Upside in China’s ERP and cloud adoption

Spending on software accounted for merely 5% of total IT spending in 2015 inChina, according to IDC, in contrast to the more developed US IT market wheresoftware, hardware and services each accounted for roughly one-third of the ITspending. In addition, China is behind the US in cloud adoption among smalland-medium sized enterprises. As China’s corporates are growing into a moremature stage and cloud becoming the de facto standard for software delivery,closely on the heels of the US, we expect further upside to ERP and cloudadoption in China.

Sales and implementation towards specialization

Shifting sales and implementation to third-party specialists is the trend in theChina ERP market, in line with the more sophisticated models of SAP andOracle in the developed markets. Yonyou adopted indirect sales for its ERPproducts for medium-sized enterprises, i.e., U8, in 2015 and looks to graduallyrely more on external specialists for its high-end products such as NC. Kingdeeis moving in the same direction. These transitions are positive to marginexpansion at the Chinese ERP players.

Internet finance still in early stage

After obtaining the payment business licence, Yonyou is engaged mostly in POSacquiring (processing of debit and credit card payments) and P2P financing.

Yonyou is also developing its Internet payment solutions for enterprises i.e.

Chanjet Payment acting as a gateway between enterprises and the financialinstitutions, offering a one-stop service platform to ERP customers. We see themerits of Internet payment solutions from ERP providers but the adoption byenterprises is still in the early stage. On the other hand, Kingdee has not got apayment licence yet.

Initiate with OP on Yonyou and reiterate OP on Kingdee

Yonyou. We are initiating coverage with an Outperform and a SOTP-based TP ofRmb29, with 50% upside to the current share price, on the back of 9% revenueand 26% earnings CAGRs in 2015-18E supported by fast-growing cloud andInternet finance. We expect revenue contribution from these two initiatives to growfrom 3% in FY15 to 18% in FY18E. We value Yonyou’s ERP at 40x FY17E P/E, inline with A-share software peers and its historical median, and value enterpriseInternet/cloud and Internet finance at 9x FY17E P/S, in line with peers.

Kingdee. Its mobile office Cloud Hub will face more intense competition fromDing Ding and the emerging Enterprise Weixin with strong social networking andupcoming third-party enterprise apps, in our view. We reduce our cloud revenuegrowth forecast from 80% to 70% for FY16 but maintain 50% for FY17-18, andthus trim FY16-18E revenue by 1%, earnings by 3%, and TP from HK$3.55 toHK$3.40. We transfer coverage from Jake Lynch to Hillman Chan. ReiterateOutperform.