Summary

Kingdee International software group company limited (Kingdee or the company) is a complex management software supplier with main products of ERP (Enterprise Resource Planning), Middleware, Youshang.com and the newly developed E-government business. In 2009, the company began its second changing in business to restart its high speed development. According to the management, Kingdee plans to accomplish this with three strategy transitions.

Overall speaking, we think Kingdee has entered into a new stage of transition and its EPS is expected to get RMB0.111 and RMB0.145 in FY2010 and FY2011. Meanwhile, outlook certainty of its high growth will expand its up room of valuation, we give it Buy rating and 12-month TP of HK3.20.

Slow growth is expected to re-accelerate

Kingdee's full year performance in FY09 was still at low due to the lag of this software sector, though Chinese economy reversed with a V-sharp successfully in 2009. The company recorded total revenue and net profit of RMB441million and RMB75million in 1H09, increasing 4.3% and 41.1% respectively. But, after excluding the revaluation of property investment, the net profit adjusted was only RMB25million, 53.6% plump y/y.

The backwardness was, easy to see, mainly due to rocketed employee cost resulted from expansion during the harsh environment as well as sales promotion` adding. In 1H09, the employee welfare expenses amounted to RMB285million, 23.1% increased.

Yet, we believe, with the fast rebound of companies` IT expense driven by economic warm, Kingdee will be rewarded well in the next 2-3 years. At meantime, we expect it will re-accelerate to grow in 2010 driven by the positive acquisition effect.

Production structure tends to mature, with Middleware supported by the government

Chinese enterprises are in the turning point of transition and upgrade, also enter into the EPR software accepting stage. In this circumstances, Kingdee will expand different customer targets in all the industries with its new generation of EAS, K/3,and KIS, among which the EAS, targeting to high end market, performs well with 50% increased, yet till low in market share.

Furthermore, Kingdee's Middleware business continues to be supported by the government, obtaining RMB10million subsidy, much bigger than that in FY08. Given that, this is the only basic software to compete with foreign brands, the government is expected to further strengthen support, indirectly guaranteeing it growth room in the next future years.

Acquisition begins to speed, leading to a long way in integration

Driven by the rejuvenation plan of electronic industry, Chinese software sector speeded to reshuffle in 2009. Meanwhile, the government also wants to make several leading ones in this sector to end the dissatisfaction of “many without one leading.”

Under this background, Kingdee begins to speed expansion outward, planning to finish at least 4 major acquisitions in FY2010 with total sum of RMB100million. Up to March, 8th, the company has accomplished the acquisition of Shenzhen Jiama, Guangzhou Puwei, breaking into real estate and PLM production fields.

Though it has some difficulty in latter integration, Kingdee's expansion is still under its reasonable control. So we think it has the ability to improve the purchased asset's inner valuation, and to release the synergy in the next 2-3 years.

Youshang.com will become the new growth point

According to Analysys International, SaaS management market in 3Q09 had obtained 77,000 paid subscribers in mainland, 30.9% q/q, continuing its high growth momentum. The Kingdee Youshang.com, covered 28.2% of the total, rating No. 1. Given the strengthening internet effect, we expect Youshang.com will expand its market share.

Furthermore, Kingdee once again launched the E-government affairs business to help establish the expert statue of a serving government. Wise location brings wide market, and we are very positive to the business outlook of Youshang.com and the E-government affairs business. Meanwhile, the management also plans to spin out these two businesses to list in GEM (Growth enterprise market) separately.

Risks

Up risk:

1. ERP market rise beyond the expectation.

2. The Youshang.com and E-government business develop better.

3. Integration of acquisition performs well.

Down risk:

1. Human resources cost brings much more press.

2. ERP market share adding fails to expectation.

Entering into a new stage of transition, with up room for its valuation

In 2009, Kingdee began its second changing in business to restart its high speed development. According to the management, it plans to accomplish this target with three transitions. First, it will speed acquisition to integrate more software companies and sales channels in this sector. Second, it will change itself into service oriented model from production guided one, accordingly, to supply management design from products. And third, it will expand its oversea market, first in Asia, to output the successful Chinese management model.

Overall speaking, we think Kingdee has entered into a new stage of transition and its EPS is expected to get RMB0.111 and RMB0.145 in FY2010 and FY2011. Meanwhile, outlook certainty of its high growth will expand its up room of valuation, we give it Buy rating and 12-month TP of HK3.20.

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