consecutivebaidu

6June2014Page|1Rating:NeutralKingdeeInt'lSoftware((((268.
HK))))CostcontrolmoreimportantthanrevenuegrowthHONGKONG|SOFTWARE|COMPANYANALYSISMaintainedatNeutralKingdee's2013turnoverwasRMB1.
602billion,down9.
3%yoy.
GrossprofitfortheyearwasRMB1.
206billion,raisedby5.
1%yoy.
OperatingprofitandprofitattributabletoshareholdersturnaroundtoprofitasRMB239millionandRMB126millionrespectively.
Benefitedfromrecentgovernmentpolicyonsupportingthesoftwareindustry,andtheconcernsforthenetworkinformationsecurity,Kingdee'srevenueonsoftwareandsolutionimplementationservicesareexpectedtoreturntogrowth.
ThecompanywastransformingitsbusinessfromtraditionalERPbusinesstocloudservice.
Inthefutureitwillincreaseinvestmentinthedevelopmentofcloudservices.
TheGroup'srevenuefromcorebusinesswasinsufficienttopayallcostsandexpenses.
Ontheotherhand,theimpactofgoodcostcontroltoprofitabilitymayhaveevenmoreimpressiveresultthantherevenueincrease.
WemaintainKingdee"neutral"rating,withbusinessvaluationofHK$2.
36pershareandcashvalueofHK$0.
41pershare,targetpriceHK$2.
77.
KingdeeInternationalSoftwareGroupCo.
,Ltd.
wasfoundedin1993,whichwasabusinessmanagementsoftwareandInternetserviceproviderthatservedoveronemillionSMEsinChinaandtheAsiaPacificregion.
Itsenterpriseresourceplanning(ERP)softwarewasaleadingbrandfortheSMEmarketinChina.
Otherproductsincludedcloudservices,Youshang.
com,Kuaidi100mobileplatformandapplication,middlewaresoftwarebusinessandKingdeemedicalandhealthcaresoftware.
FinancialHighlightsKingdee's2013turnoverwasRMB1.
602billion(asbelow),down9.
3%yoy.
Amongthatthesalesofsoftwarefellby11.
8%toRMB770million;therevenueofsoftwareimplementationserviceswasRMB431million,dropped11.
4%yoy;andsoftwaresolutionconsultingservicesandothersdecreasedslightlyby1.
1%toRMB400million.
Duetothedecreaseincostofsales,grossprofitfortheyearwasRMB1.
206billion,raisedby5.
1%yoy,whilethegrossprofitmarginalsoincreasedsignificantlyfrom65%to75.
3%.
OperatingprofitandprofitattributabletoshareholdersturnaroundtoprofitasRMB239millionandRMB126millionrespectively.
Inaddition,itssubsidiaryKingdeeChinaannouncedfinancialfiguresforthefirstquarterof2014,whichturnoverwasRMB274million,up6.
18%yoy,whilethenetlosswasRMB18.
98million,narrowedfrom2012'sRMB68.
32millionloss.
InvestmentActionInconclusion,thefinancialstatementsshowedquitenegativefigures,thatthecompany'scorebusinesswastemporarilyunabletorecordpositiveearnings.
WeexpectKingdeerevenuegrowthwillreturnthisyear,particularlyforitscloudbusiness.
However,ifthegroupcannoteffectivelycontrolitscostsandexpenses,particularlyforthesellingexpenseswhicharedirectlylinkedtoturnover,therevenuegrowthwillbeoffsetbyitsexpenses.
Therefore,wemaintainKingdee"neutral"rating,withbusinessvaluationofHK$2.
36pershareandcashvalueofHK$0.
41pershare,targetpriceHK$2.
77.
Businessvaluationis28xofthe2015forecastedearnings.
KINGDEEINTLSFTRating3.
00Neutral-PreviousRating3.
00NeutralTargetPrice(HKD)2.
77-PreviousTargetPrice(HKD)3ClosingPrice(HKD)2.
66ExpectedCapitalGains(%)4.
1%ExpectedDividendYield(%)0.
0%ExpectedTotalReturn(%)4.
1%MarketCap.
(HKDmn)6,815EnterpriseValue(HKDmn)7,5593MAverageDailyT/O(mn)39.
252weekrange(HKD)1.
28-3.
69ClosingPricein52weekrangeKeyFinancialSummaryFYEMARFY13FY14EFY15EFY16ERevenue(RMBmn)1,6021,7741,9632156NetProfit,reported(RMBmn)127149179238EPS,adj.
(HKDcents)6.
207.
078.
4311.
28P/E(X)42.
837.
831.
423.
6P/B(X)3.
13.
02.
72.
4DPS(RMBcents)0.
00.
00.
02.
2DivYield(%)0.
0%0.
0%0.
0%0.
8%Source:Bloomberg,PSRest.
ValuationMethodPEResearchAnalystKayNgkayng@phillip.
com.
hk+852227767510%50%100%0204060801001201401601800.
000.
501.
001.
502.
002.
503.
003.
504.
00Jun-13Aug-13Oct-13Dec-13Feb-14Apr-14Jun-14Volume,mn(RHS)268.
HKEquity(LHS)HSI(LHS)0%50%100%KingdeeInt'lSoftware(268.
HK)6June2014Page|2Underthegovernmentsupportivepolicies,turnoverisexpectedtoreturntogrowthAsubsidiaryofKingdeewasrecognizedas"2013-2014nationalimportantsoftwareenterprises"andwasentitledtomaintainpreferentialenterpriseincometaxrateof10%.
Inaddition,theCompanywashonoredas"TheNo1MarketShareLeaderinChina'sSMEMarket"byIDCforthenineconsecutiveyears,whichindicateditsstrongrecognitioninthemainlandmarket.
Earlylastmonth,PRCGovernmentprohibitedthestatedepartmentsfrominstallationofMicrosoft'sWindows8operatingsystem.
Also,theGovernmentwasconsideringtheimpactonthenationalinformationsecurityofIBMserversandthusencouragingcommercialbankstoswitchtodomesticservers.
TherewasalsomarketnewsonGovernment'sscheduleonimplementationofinternetsecurityexaminationsystemtosafeguardthenationalnetworksecurity.
Benefitedfromrecentgovernmentpolicyonsupportingthesoftwareindustry,andtheaboveseriesofactionsforthenetworkinformationsecurity,Kingdee'srevenueonsoftwareandsolutionimplementationservicesareexpectedtoreturntogrowth.
Fig1Fig1Fig1Fig1RevenueMixEstimateRevenueMixEstimateRevenueMixEstimateRevenueMixEstimateSource:PSR,CompanyreportsCloudservicesstartedtoplayanimportantroleAccordingtotheGroup'smanagement,thecompanywastransformingitsbusinessfromtraditionalERPbusinesstocloudservice.
InthefutureitwillincreaseinvestmentinthedevelopmentofcloudservicesinordertoattractInternetusersinadditiontocorporatecustomers.
Cloudserviceiscurrentlyonlyconsistedof4%ofthetotalrevenue,whichisexpectedtoturnintohalfin2018,thesameasthetraditionalERPbusiness.
InMarch,thecompanyhadsetupamobileservicesplatform"BizChat"fortheVankeGroup,justsimilarto"theenterpriseWeChat".
IthadalsoactivelyworkingwithmajorInternetgiants.
Currently,Kingdee's"Kuaidi100"andBaiducarriesoutaseriesofcooperationinmobileservices,anditsfinancialsoftwareworkswithAlibaba'sTaobaotoprovideintegratedTaobao,TmallandAlipaydataservicestosellers.
FortheInternetfinancing,theGroupiscurrentlyplanningtocooperatewithmajorbankgroupstodevelopamobileapplicationtohelptheirbankcustomersinwealthmanagement.
KingdeeInt'lSoftware(268.
HK)6June2014Page|3CorerevenuewasnotenoughtocoverthecostsandexpendituresDespitethelossturnaroundintoprofit,revenueandexpenditurestructureshowedthattheGroup'srevenuefromcorebusinesswasinsufficienttopayallcostsandexpenses.
WhiletheannualturnoverwasRMB1.
602billion,thetotalcostplusexpensesreachedRMB1.
662billion,aRMB60milliongap.
Thoughitalreadynarrowedfromthegapsin2011and2012,asRMB235millionandRMB424millionrespectively.
Infact,thecompanyhadjuststartedtochangeitsdistributionmodel,makingsellingandmarketingexpensesdroppedsignificantlyby28.
2%yoytoRMB828million.
Sellingexpensestorevenueratiofellfrom65.
4%to51.
7%.
However,itwasstillaccountedformorethanhalfofthecompany'srevenuewhichwouldprobablyhadnegativeimpactonthefutureprofit.
Ontheotherhand,theimpactofgoodcostcontroltoprofitabilitymayhaveevenmoreimpressiveresultthantherevenueincrease.
Fig2Fig2Fig2Fig2CostsCostsCostsCoststotototorevenueestimatrevenueestimatrevenueestimatrevenueestimatesesesesSource:PSR,CompanyreportFig3Fig3Fig3Fig3CostsaspercentageofrevenueestimatesCostsaspercentageofrevenueestimatesCostsaspercentageofrevenueestimatesCostsaspercentageofrevenueestimatesSource:PSR,CompanyreportCurrentlytheGroupreliedonlyonnoncoreincome,suchasinvestmentonpropertiestomaintainprofitability.
Thoughthecorebusinessisexpectedtobreakeventhisyear,significantpositiveearningsoncorebusinessmayonlyappearin2016orlater.
Alsonotethat,sincetheatmosphereofthemainlandpropertymarketisnolongerpositive,ifthereisasubstantialadjustmentonthepropertyprice,itmaycausethefairvalueoftheGroup'spropertiestoreduceandthustheearnings.
KingdeeInt'lSoftware(268.
HK)6June2014Page|4Financialexpensesincreasedsignificantlyby67.
9%yoytoRMB111millionlastyear,mainlyastheinterestexpenseduetoincreaseincurrentliabilities.
Withstabilizedcurrentliabilitiesandobviousdecreaseinnon-currentliabilities,theinterestexpensewillgraduallyreduce.
Besides,theGroupkeepsinissuingconvertiblebonds,andgrantingstockoptionstoitsemployeesthroughshare-basedbonusscheme,theremaybringdilutiveeffecttothestockinthefuture.
ValuationInconclusion,thefinancialstatementsshowedquitenegativefigures,thatthecompany'scorebusinesswastemporarilyunabletorecordpositiveearnings.
WeexpectKingdeerevenuegrowthwillreturnthisyear,particularlyforitscloudbusiness.
However,ifthegroupcannoteffectivelycontrolitscostsandexpenses,particularlyforthesellingexpenseswhicharedirectlylinkedtoturnover,therevenuegrowthwillbeoffsetbyitsexpenses.
Therefore,wemaintainKingdee"neutral"rating,withbusinessvaluationofHK$2.
36pershareandcashvalueofHK$0.
41pershare,targetpriceHK$2.
77.
Businessvaluationis28xofthe2015forecastedearnings.
PotentialRisksThegrowthonCloudbusinessisnotasexpected;Costuncontrolled;Thedilutiveeffectfromstockoptionsandconvertiblebonds.
KingdeeInt'lSoftware(268.
HK)6June2014Page|5FY12FY13FY14EFY15EFY16EValuationRatiosP/E(X)(38.
5)42.
837.
831.
423.
6P/B(X)3.
43.
13.
02.
72.
4EV/EBITDA(X)(73.
4)31.
726.
424.
721.
7DividendYield(%)0.
0%0.
0%0.
0%0.
0%0.
8%Persharedata(HKD)EPS(0.
07)0.
060.
070.
080.
11DPS0.
000.
000.
000.
000.
02BVPS0.
780.
860.
900.
991.
10OutstandingShares(basic,mn)2,516.
342,523.
742,621.
802,621.
802,621.
80Growth&Margins(%)GrowthRevenue-12.
7%-9.
3%10.
7%10.
7%9.
8%EBIT-154.
1%-331.
8%19.
8%7.
0%13.
8%MarginsGrossprofitmargin65.
0%75.
3%75.
3%76.
0%76.
3%EBTmargin-9.
2%8.
5%10.
8%11.
4%12.
9%NetProfitMargin-7.
9%7.
9%8.
4%9.
1%11.
0%KeyRatiosROE(%)-8.
8%7.
2%7.
8%8.
6%10.
3%ROA(%)-3.
5%3.
2%3.
7%4.
2%5.
3%IncomeStatement(RMBmn)FY12FY13FY14EFY15EFY16ERevenue1,7651,6021,7741,9632,156Costofrevenue(619)(396)(438)(471)(511)Grossprofit1,1471,2061,3361,4921,645Selling&Marketingexpenses(1,154)(828)(841)(903)(940)Administrativeexpenses(217)(205)(227)(251)(263)R&Dexpenses(200)(233)(268)(308)(339)Otherincome,net260297290290280Fairvalueadjustmentsoninvestmentproperties611(5)(15)(35)Operatingprofit(103)239286306348Financeincome79111316Financeexpense(66)(111)(105)(95)(86)Associates&JVs00000EBT(162)137192224278Taxation(2)(17)(22)(22)(20)ProfitAfterTax(164)120170202258Minorityinterest247(21)(23)(20)NetProfit(140)127149179238EPS(0.
056)0.
0500.
0570.
0680.
091Source:Company,PSRKingdeeInt'lSoftware(268.
HK)6June2014Page|6PHILLIPRESEARCHSTOCKSELECTIONSYSTEMSWedonotbaseourrecommendationsentirelyontheabovequantitativereturnbands.
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2014PhillipSecurities(HongKong)LimitedTotalReturnRecommendationRatingRemarks>+20%Buy1>20%upsidefromthecurrentprice+5%to+20%Accumulate2+5%to+20%upsidefromthecurrentprice-5%to+5%Neutral3Tradewithin±5%fromthecurrentprice-5%to-20%Reduce4-5%to-20%downsidefromthecurrentprice20%downsidefromthecurrentpriceKingdeeInt'lSoftware(268.
HK)6June2014Page|7ContactInformation(RegionalMemberCompanies)SINGAPOREPhillipSecuritiesPteLtdRafflesCityTower250,NorthBridgeRoad#06-00Singapore179101Tel:(65)65336001Fax:(65)65356631Website:www.
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