Kingdee:Full steam ahead on cloud

1H16 revenue beat MQ and street by 6-11%, whereas net profit excluding taxcredits was largely in line. ERP revenue resumed growth to 6% YoY as KISgrowth accelerated and the K3 decline narrowed. Cloud revenue continued togrow strongly 138% YoY. We lift FY16/17 net profit by 26/5% to reflect one-offtax credit and a better ERP outlook. We lift our SOTP-based TP from HK$3.5to HK$3.7. Reiterate Outperform.

Top line beat expectation. Revenue grew 10% HoH and 20% YoY toRMb913mn, 6-11% ahead of MQ and consensus, as the ERP revenueresumed to 6% YoY growth after a 3% YoY decline in 2015 and cloudrevenue grew strongly 138% YoY. Cloud revenue accounted for 21% of totalrevenue in 1H16, up from 13% in 2H15. Net profit grew 47% YoY toRMB135mn, or declined 8% YoY to RMB84mn excluding the RMB51mnincome tax expense recognized in 2015, which was reversed in 1H16,compared to MQ/consensus of RMB71-96mn net profit.

ERP resumed growth. ERP revenue resumed to 6% YoY growth after a 3%YoY decline in 2015. Revenue growth of KIS for small enterprises acceleratedto 20% YoY in 1H16. Kingdee’s newly launched one-stop e-Commerce ERPsolution, covering omni-channel marketing, e-Commerce and supply chainmanagement for SMEs gained strong traction. Revenue growth of EAS forlarge enterprises remained robust at about 5% YoY, whereas the revenuedecline of K3 for medium-sized enterprises narrowed to -6% YoY in 1H16 asthe transition in distribution channels trends was better.

Cloud continued strong momentum. Cloud revenue grew strongly 138%YoY. Apart from CloudHub, Kuaidi100 and Kingdee Medical that wasdisposed in Jul 2016, Cloud ERP doubled YoY in 1H16 from last year andaccounted for 10%+ of total revenue. The retention rate of paying users ofpublic Cloud ERP remained at 98%. The company maintains guidance ofbreakeven in the cloud business in FY17.

Valuation discount to A-share peer. The A-share Yonyou (600588 CH,Rmb25.38, OP, Rmb29), as the no. 1 ERP player in China, is trading at72/60x FY17/18E PE vs Kingdee’s 34/26x FY17/18E PE. With the advent ofSZ-HK Connect and better outlook of Kingdee’s cloud, we believe thevaluation gap could potentially narrow.