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Guizhou University
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Date: 12/10/2018
Kingdee International Software Group Company Limited
1.00 CNY:1.20 HKD
Ticker:
0268.HK
Sector: Software and Service
Stock Exchange: HKEx
Industry: Utility Software-ERP
Current Price: 8.95 HKD (21/9/2018)
Target Price: 8.99 HKD
Recommendation: HOLD
Summary
Kingdee International Software Group Company Limited is the leading provider of enterprise
management software and cloud services in China. Kingdee is mainly composed of 5 affiliated
companies, (Appx.2) and its main business is concentrated in China. Revenue of the company
mainly comes from two parts: one is the software license sales and subsequent implementation,
maintenance fee of the traditional ERP business, and the other is the annual fee of cloud service
business.
Highlights
We issue a HOLD rating on Kingdee with a target price of 8.99 HKD after 12months, representing
0.45% upside from its September 21st, 2018 closing price of 8.95 HKD. Our valuation is based on a
50/50 mix of relative valuation and absolute valuation methods. We give our recommendation
Source: Company Data & Team Analysis
based on the following key points:
Changes in Market Environment Will Erode the Competitiveness of Kingdee's Main Products (EAS)
Revenue Divided by Areas
Cloud service products gradually penetrate in the high-end ERP market. EAS contributed 45% of
total revenue in 2017. The high sales growth rate of EAS will remain in the short term but will
gradually decrease with the continuous improvement of SaaS products and policy-oriented growth.
Although the Cloud Business Is Growing at a High Speed, It Faces Increased Competition. CR5
only represents 45% in cloud ERP market. Kingdee’s R&D investment has no superiority over its
competitors, making its leading position unstable. Especially the development of high-end cloud
ERP market is the key to determine the final competitive landscape of the industry.
Second-Generation Cloud Product Is Difficult to Have Explosive Growth in the Short Term. Highend cloud ERP products are relatively leading, but the product functions can’t completely replace
traditional ERP products. Referring to SAP’s similar product development history, secondSource: Company Data
generation cloud products can’t raise explosively in 2018 and 2019.
Valuation
Cloud Products Can’t Gain Profit in the Short Term, Traditional ERP Business’s Growth Rate Is
FCFF Target Price (50%)
8.01 HKD Stable. We predict that the cloud service business can’t turn losses into profits until 2021. The
Multiples Target Price (50%) 9.97 HKD growth rate of ERP business will decrease moderately in next few years from 2019.
Investment in Facishare. Kingdee invested in Facishare strategically, but cloud products cooperated
Target Price (12 months)
8.99 HKD
by the two companies has not been produced.
Current Price
8.95 HKD Investment Risks. It comprises market, finance, business and operational and other risks. We
estimated possibility and influence of those risks separately presenting in risk matrix. Besides, we
Target change
0.44%
use Monte Carlo simulations to characterize the possible effects of changes in the model’s key
Source: Team Analysis
Key Financials
2017 2018F 2019F 2020F variables and perform sensitivity analysis.
Revenue Growth
23.7% 24.2% 23.2% 24.9% Valuation method. We adopted two methods. One was to choose free cash flow of the Group to
Net Profit (millions CNY) 310.0 340.3 379.7 545.9
calculate Discounted Cash Flow (DCF). Another was to adjust the value according to the market
EBITDA Margin
33.84% 31.63% 27.34% 26.66%
valuation multiples by relative valuation method P/E and P/S to value traditional ERP and cloud ERP
EPS (CNY)
0.11
0.10
0.12
0.17
business respectively. We attributed the same weight (50%) to two methods above, and finally
OCFPS
0.28
0.30
0.36
0.40
obtained a target price of 8.99 HKD.
Source: Company Data & Team Analysis
Business Description
Figure 1: Revenue Structure 2017 Kingdee International Software Group Company Limited (0268.HK), established in 1993 and listed
in Hong Kong in July 2005 (Stock Code: 0268), is China's leading provider of enterprise management
software and cloud services. It commenced reforming and designed cloud business in 2011. Its
current business is comprised of three portions: (1) ERP business including permission, implement
and maintenance, virtually opens up the whole ERP industry chain, (2) cloud services and (3) new
business. The rapid growth of cloud service, which is believed to be Kingdee’s future, mainly
includes Kingdee Cloud (KDC), Jingdou Cloud (JDC) and Guanyi Cloud (GYC) (Figure1&Figure2).
1. ERP Business (ERP On-Premise/Traditional ERP)
Source: Company Data
Figure 2: Business Structure
Source: Company Data
Figure 3: Sales of Software
License Model
It provides enterprise users with management software license, and follow-up implementation and
maintenance make up 75.3% of the revenues in 2017. The sales of EAS directly affect 62.3% of
income in ERP business (18H1).
Sales of Software License: mostly referred KIS, K/3, and EAS, sold by indirect and direct selling
(Figure3).
KIS is an administration software designed for small and micro enterprises, containing 12 optional
modules, and unit price of each module is around 3750 CNY. KIS is merchandised by distribution,
and the wholesale price of the distributor is 2255 CNY per module.
Differently, K/3 is a kind of management software with eight modules, designed for the growing
large and medium enterprises of which revenue is less than 50m CNY. And the price of each user
mostly is between 0.2 to 0.5m CNY. K/3 is mainly sold by the distributors who purchase the bulk
products with the wholesale price from the company which is 40% off from the retail price.
EAS is designed to provide the comprehensive group management plan for the large group
enterprises with more than 1.5b CNY annual revenue of which main fields focus on the finance
shared service, digital marketing and smart manufacturing. EAS adopts direct selling mode. The
average sales price is around 1m CNY.
Implementation: K/3 and EAS need the procedure of deployment. The distributors need six months
to one year to deploy K/3, while EAS is deployed by the company by one to two years. The company
only gains income by selling the permissions from K/3. The EAS contributes most of revenue of
deployment of software to the company due to the direct selling mode.
Maintenance: K/3 and EAS need maintenance. They are maintained by distributors and Kingdee
respectively. The customers of K/3 are charged for the fee of maintenance on the first year which
is 5-10% of the price of permission. The major income from the maintenance of the company is
contributed by the EAS.
2. Cloud Service Business. (SaaS Service/Cloud ERP)
The cloud service is comprised by the KDC, JDC and GYC which will be introduced below. The
charging mode has been converted to the mode that the customers are charged in advance by their
accounts, service models and duration of usage. Cloud revenue accounts for 24.7% of the total. The
Kingdee Cloud contributes 70% of cloud revenue. Moreover, the company announced Kingdee
Cloud Cosmos (KDC II), the second-generation product of Kingdee Cloud, in August 2018.
Source: Company Data
Kingdee Cloud: The first generation of Kingdee Cloud named Kingdee Cloud Galaxy (KDC I) which
Figure 4: The Distribution of KDC is benchmarked to K/3 converts the offline traditional ERP software to cloud service. The average
annual fee is around 50-100k CNY which is completely attributed to the direct selling income of the
company. The sales commission of the new customer in the first two years is 30% and 8% of the
annual fee respectively, which becomes zero from the third year. (Figure 4&Appx.26)
KDC II: KDC II benchmarking EAS provides SaaS and PaaS service to the large and medium
enterprises of which unit price is 300-500k CNY annually.
Jingdou Cloud: It is a one-stop cloud service platform designed for the cloud service of financial
and accounting of the small and micro enterprises. The annual fee is 500 CNY. The renewal rate is
more than 70%.
Guanyi Cloud: It provides the whole process of digital marketing on SaaS ERP including order
organization and warehouse management to the small and medium-sized e-commerce companies.
Source: Company Data & Team Analysis
The annual fee is 10k CNY.
3. Innovation Business
Cargeer provides the "ERP+Cloud Service" solutions for the car dealers.
Figure 5: Equity Structure
Kingdee has released the first cloud-based supply chain financial product named as “Kingdee Credit
Payment” to solve the financing issues of the small and macro-sized enterprises which are the
downstream business of the core clients of the Kingdee.
Kingdee Tianyan offers digital infrastructure solutions and operational service to the users. It has
provided software infrastructure and services to more than 10k government and industry
customers and 1k partners.
Corporate Governance
Equity Structure
Source: Wind
100% of the shares of Kingdee International (KDI) are tradable shares. As of June 2018, Chairman
Xu Shao Chun holds a 23.92% stake in Kingdee International by the wholly-owned Oriental Gold
Limited, Billion Ocean Limited and individual shares. The remaining directors and senior executives
held 0.22% of the company's shares. Also, an international investment giant FMR LLC and Kingdee's
strategic partner Jingdong Group respectively holds 6.37% and 8.78% of Kingdee's shares
respectively (Figure 5).
Figure 6: China IT Expenditure
Corporate Governance
Source: Wind & Team Analysis
Company Management
Figure 7: 2017—2022China ERP
Market Share and Forecasting
KDI's board of directors consists of 4 members, and the board has set up four specialized
committees, namely the audit, remuneration, nomination, and corporate governance and strategy
committee. Besides, three independent directors are hired to supervise the operation. The shares
of the company are coequal. Directors may not vote on matters of significant interest alone. The
company has set up a long-term share award scheme for directors and executives. It also disclosed
the compensation policies and the benefits for the management team. (Appx.30)
Mr. Xu Shao Chun, the chairman of the board of directors and chief executive officer, contributes
to the stable and healthy development of the company by his long office term. The company has
formed a cooperative cloud business development framework by optimization and adjustment
strategy organization, which guarantees the healthy and sustainable development of business
operations. To reduce the marketing risk of the new business, the Company has established a
significant marketing review procedure.
Company Strategy
Source: IDC Semiannual Public Cloud Services Tracker
Adhering to the core values of "Acting in all Conscience, with Integrity and Righteousness", the
company is committed to serving enterprises and strives to provide them with the most reliable
services platform. In addition to making relentless efforts to drive the development of the cloud
business, the Group will persistently enhance the ecosystem of its enterprise cloud services.
Social Responsibility
Figure 8: China ERP Market-Scale KDI established the Kingdee Aid Foundation to support the improvement of primary education and
announced that it would donate 0.1% of the revenue from Kingdee Cloud in the coming two years
to help the charitable project “Teach for China”. KID established CFO for a Conscientious institution
to advance the innovation and development of China's financial management.
Industry Overview & Competitive Position
Industry Overview
Source: IDC Semiannual Public Cloud Services Tracker
Figure 9: Market Size of China
Public Cloud SaaS
Source: IDC Semiannual Public Cloud Services Tracker
ERP market can be divided into two sub-markets: traditional ERP software market and cloud ERP
market. China's IT expenditure (Appx.18) has steadily increased (Figure 6), which increases the
demands for ERP software and rebounds the market growth of ERP business in the short run.
However, the growth rate will gradually slow down due to the competition from the cloud service
business in the long term. The proportion of cloud service business in the entire ERP industry
market will increase progressively with the maturity of the downstream technology, the gradual
improvement of its products and policy support (Figure 7&Appx.19).
1. ERP Industry Market Size
The growth rate of the market scale was 11.8% in 2017, and the CAGR of 11.5% is predicted in the
next five years (Figure 8&Appx.17).
Cloud ERP: Cloud ERP market, whose market size increased by 76.5% in 2017[1]. The domestic
public cloud SaaS market has maintained a growth rate of more than 30% in the past three years.
According to the IDC report, the domestic SaaS market will reach 5.817b USD in 2022(Figure 9), and
Figure 10: Proportion of ERP
Market Share in 2017
Source: Wind
Figure 11: Growth Rate of
Chinese GDP
Source: National Bureau of Statistics
Figure 12: Cost of Chinese
Human Resource
Source: National Bureau of Statistics
Figure 13: Number of Chinese
Companies
Source: State Administration for Market Regulation
Figure 14: On-Premise vs. SaaS
Source: Wind & Team Analysis
the CAGR will reach 26% in the next five years. The future of the market is very promising. (Appx.16)
Domestic On-Premise ERP Market Size
On-Premise ERP industry growth rate has rebounded significantly since 2016 with the increase in
the number of Chinese companies and the steady increase in IT investment, though not as fast as
cloud service business, making the scale of On-Premise ERP industry increase steadily (Figure 8). It
is expected that the On-Premise ERP market will reach 18.21b USD in 2022.
2. ERP Market Development Environment
The competitive advantage of cloud ERP to the traditional ERP is not obvious in the short term due
to the high cost of transfer from the traditional ERP to the cloud ERP. The cloud EPR, however,
shows significant attraction to the new users. Both ERP markets have same demand side,
enterprises, while the difference come from the upper stream. The software developers are the
upper stream for the traditional ERP market. Besides the developers, cloud ERP requires cloud
computation developer and IaaS supplier as the upper stream.
Downstream (Demand Side): It is mainly divided into small and micro enterprise, SME and large
enterprise (Figure 10&Appx.24). Due to the decelerated growth of Chinese economy (Figure 11)
and continuously rising labor cost (Figure 12), the CAGR of labor cost of Chinese enterprises has
reached 10% in the past five years, which increases the impulsion of enterprises to save cost and
improve efficiency. [2] With the promotion of Internet development and the "Made in China 2025",
enterprise managers pay more attention to using IT technology including ERP products to improve
management efficiency in recent years. (Appx.20) The five-year expenditure of cloud ERP products
is only 30% of that of traditional ERP, which makes it more competitive in the cost for companies.
The promising market cap of ERP is analyzed as below.
 Owing to the Rapid Growth of SME and Lower Deployment Ratio of ERP Products in SMEs,
Cloud ERP Products Have a Huge Market Space.
China’s CAGR of companies in the last five years was over 20% (Figure 13), and there were more
than 30m Chinese companies by the end of 2017. Small and micro enterprises accounted for about
82.5% of the total companies, while the proportion of SMEs was even nearly 97%. "Analysis Report
on the Status and Development Trend of SME Information Industry in 2017" reports that only
about 30% of SMEs in China have implemented ERP or CRM solutions.
Those cloud ERP products aimed at small and medium sized enterprises (SMEs) now have the
similar functions as the traditional ERP products with years of development. Moreover, they are
even cheaper and more flexible (Figure 14&Appx.20). Cloud ERP is more competitive in SMEs and
rapidly developing new business sectors of large enterprises.
 In the Short Term, Traditional ERP Will Still Dominate the Large Enterprises, But High-End
Cloud ERP Market of Large-Scale Enterprise Contributes Excellent Potential.
There are four difficulties to replace traditional ERP. (Appx.25) Firstly, the demands for management
software in large enterprises are complicated and diversified. However, cloud services are mainly
standardized products by now, which lack the customized development. The relatively fixed format
of product makes it challenging to meet the diversified demands of large enterprises for ERP
products. Secondly, nearly 90%[3] of large enterprises have implemented their own customized OnPremise ERP. Due to the relatively stable structure of these enterprises, the comprehensive
migration from the traditional EPR to the cloud one in those enterprises is assumed to be costly.
Thirdly, based on international development experience, large enterprises are more inclined to
apply the SaaS services of hybrid cloud [4] since the hybrid cloud can meet the requirements for
data security and cost savings of the enterprise. (Appendix) The usage rate of SaaS services of
hybrid cloud in their Chinese counterparts, however, is only 7.2%.(Appx.22) Finally, SaaS products
of the public cloud are still being developed, which fails to benchmark the whole functions of the
traditional ERP. [5]
However, the cloud service market of large enterprises is potential owing to the urgent desire of
enterprises to reduce costs, continuous improvement of SaaS service products and the background
of national policy support. Even facing to those challenges, we are still confident to the deployment
of SaaS service in the large enterprises due to the urgent demand to reduce operating expense, the
fast development of the SaaS product and the policy bonus from the government.
Upstream (Supply Side):
Figure 15: R&D Investment of
TOP5 in ERP Industry
Source: Wind & Team Analysis
Figure 16: CR5 Market Share
Talent: The R&D investment of China's ERP industry continues to increase, which contributes
to the sustainable accumulation of R&D teams. The TOP companies of the ERP industry have
invested in R&D for more than 67b CNY in 2017 (Figure 15).
 The Infrastructure of the Cloud Services Are Being Improved, and the Price of IaaS
Products Keep Decreasing.
The cost of SaaS service supplier has been reduced by the development of the underlaying IaaS
technologies like auto Scaling, virtualization technology, distributed architecture and Multi-tenant
and the cheap upstream product. By the first half of 2018, global IaaS market has been monopolized
by Amazon, Microsoft, Google, and Ali, which leads to the continuously decreasing price by the
scale effect, [6] for instance, AWS has cut the prices by 65 times in the last ten years. (Appx.23). It
reduces the cost of SaaS software vendors and improves their profit margin.
3. Policy Environment
The government released “National Informatization Development Strategy Outline” in 2016 to
promote the localization of the ERP software, and “Guidelines for Promoting Enterprise Cloud
Implementation (2018-2020)” in 2018 is formulated to encourage 1m enterprises to apply the
cloud service nationwide by 2020. Besides, the provincial governments have successively
formulated the policies to encourage the application of cloud service. Those supports from the
policy makers will significantly promote the rapid development of the ERP industry, especially the
cloud ERP industry. (Appx.21)

Competitive Position
Source: Wind & Team Analysis
Figure 17: Porter 5 Forces
Source: Team Analysis
Figure 18: Sales Growth Rate of
EAS
Source: Company Data & Team Analysis
Figure 19: R&D/Revenue
Source: Wind & Team Analysis
As of 2017, the domestic cloud ERP market share is so dispersed that the CR5 only accounts for 45%
of the market size [7], demonstrating that the domestic cloud ERP market is in the growing period.
In the meanwhile, CR5 in the On-Premise ERP industry has been gradually stabilized in the past 3
years, which occupies 87% of the total as of 2017(Figure 16), indicating that the market has entered
a maturity period.
The main cloud service of Kingdee is dominated by the SaaS standard development service while
there is only a small part of the customized service in the company. And it does not go deeply into
the upstream of the industrial chain. Kingdee has covered the whole industrial chain of the ERP
business from the development of the software to the deployment of the serves and finally to the
maintenance. Since the marker of the traditional ERP has entered the maturity period, it is difficult
for Kingdee to expand its market size. As the leader of the industry, Kingdee is facing relatively
gentle pressure from its peers. Though it is still the TOP 1 in the market share, Kingdee’s SaaS
business is being challenged by other competitors (Figure 17&Appx.13).
Investment Summary
1. Changes in Market Environment Weaken the Competitiveness of Kingdee's Main Products (EAS)
Kingdee has ranked TOP 3 in the Chinese ERP market share for many years, and its market share is
still growing steadily. The sales of major product, EAS, has achieved 10% CAGR in the past five years,
which is the main income of the implement and maintenance of the company and contributes 45%
of total revenue in 2017. The development and the government support for the localization of
enterprise management accelerated the growth of EAS sales to 27% in 2018H1. The launching of
KDC II and the similar products based on the cloud service from the competitors, such as SAP S4
HANA Cloud, may not impact the sales of EAS in the short time due to the complexity and diversity
of the demands of the large enterprises. However, the threats from the high-end cloud products
will be increased since it is developing fast and enjoying the policy support.
Therefore, we estimate that the sales rate of EAS will keep a high growth in the next two years and
gradually decrease from 29% in 18H1 to 8% in 2022 (Figure 18).
2. The Cloud Business Is Growing at High Speed, But Facing to the Increasing Competition
For cloud services, Kingdee mainly competes with these company: YonYou, Inspur, SAP, Oracle, etc.
Though revenue of cloud business of Kingdee snowballs with 43.8% CAGR in the recent three years,
other competitors also report comparable growth rate. However, Kingdee's R&D investment is
much lower than those of YonYou and well-known foreign companies, and its ratio of R&D in
revenue is also lower than that of YonYou (Figure 19). The high demand to the technical
accumulation in the software development and cloud service decides that the leading role of
Kingdee is unstable. Cloud service product for SMEs can meet the requirements of the customers
Figure 20: Surveys on worries to now. But the competition to the profitable cloud market of the large enterprises has not started
SaaS
yet. The lucrative market of the high-end cloud service with high user viscosity determines the final
winner of this game. The competition will be fierce with the intense releases of the high-end cloud
services from the competitors.
Source: Gartner
Figure 21: SAP Product
Source: Team Analysis
3. The Second-Generation Cloud Products Need to Strengthen its Competitive Power, Then an
Explosive Growth is not Expected in the Short Time.
KDC II supports hybrid cloud and targets at the high-end market. Currently, the high-end cloud ERP
Source: SAP China & Team Analysis
products for large group enterprises only are KDC II and S/4HANA Cloud from SAP. SAP estimates
Figure 22: Progress of SAP Cloud
that 75% of customers need at least 6 months to migrate to S/4HANA Cloud, and numerous highly
Product
customized developments will extend the duration. The cases of application of the cloud service in
the standard working flowsheet also requires the long-term tracking development and the
solutions from ISV on its PaaS platform [8] (Figure 20). In the early releasing versions of SAP’s
products for the large enterprises and high-end market, the private cloud part can cover around
80% of functions of On-Premise ERP while the public cloud part can only meet about 20% (Figure
21). KDC II are updated every 2 months [9]. Based on the experiences of the SAP (Figure 22), we
estimate that Kingdee also needs several versions. We also predict that the main jobs of Kingdee in
the recent 2 years are the development of public cloud solution and the market promotion. The
Source: SAP China
explosive growth will happen in 2020.
Figure 23: Key Indicators of
4. Cloud Products Can’t Profit in the Short Term, Traditional ERP Business’s Growth Rate Is Stable.
Kingdee Cloud Products
KDC is the core product of cloud service products, which accounts for more than 70% of the
revenue from the company’s cloud business. Renewal rate of KDC has kept above 80% in the past
three years, and the CAGR of customer number was 55%. The LTV/CAC of KDC was 3.24 in
2017(Figure 23), which comply with the industry’s guiding standards (3) [10]. (Appx.11). Comparing
to NetSuite, (Appx.12) in US (Where the SaaS industry developed earlier than that in China by 4
years),(Appx.15) in the same developing period, the growth rate of users’ number of KDC is higher
while its renewal rate and LTV/CAC is lower (Figure 24). With the second-generation cloud product
Source: Company Data & Team Analysis
stepping further in the market for large enterprises and taking Workday during the same
progression stage into account, we predict that Kingdee’s LTV will start to increase greatly in 2020.
Profit of Kingdee Cloud
Besides, the cloud service business is expected to turn losses into profits in 2021. (Appx.3) Stable
growth of ERP business brings steady cash flow to the company helpful to the colud transition. The
CAGR of ERP business’ revenue was 7.5% in the past three years. We predict that the traditional
ERP business will develop at med-low speed, which can supply stable cash flow to Kingdee.
5. The Strategic Investment to Facishare
In early 2018, Kingdee implemented strategic investment to Facishare, which can strengthen the
layout of the company's Cloud Strategy in the CRM market. By the end of 2016, there were 500,000
corporate users and 10,000 paid users in Facishare [11]. The integration of Kingdee cloud products
Source: Company Data & Team Analysis
and Facishare CRM products will significantly enhance the breadth and competitiveness of Kingdee
Figure 24: KDC vs. NetSuite
cloud services business.
Valuation
Source: Company Data & Team Analysis
Kingdee’s income comprises of two parts, the ERP business and the cloud service business. Since
company's operating cash flow was hard to segment, we used the Discounted Cash Flow method
and the multiple relative valuations of the segment with equal weights, then gave the target price
as 8.99 HKD. Meanwhile, we used the Monte Carlo simulation to predict the possible impacts of
changes for critical variables.
Discounted Cash Flow Valuation（DCF）
Figure 25: WACC Calculation
WACC Computation
Risk free rate
2.38%
Beta
1.06
Market risk premium
5.89%
Cost of equity
8.62%
Cost of debt
3.57%
Effective tax rate
14.09%
Weight of equity
60%
Weight of debt
40%
WACC
6.40%
Source: Team Assessment
Figure 26: Beta Calculation
Beta Analysis
Beta (Days)
1.22
Beta (Weeks)
1.26
R-squared
0.44
R-squared
0.46
Standard error
0.06
Standard error
0.12
Beta (Company)
1.24
Industry Reference
Beta (Days,5-years)
0.88
Beta (Industry)
0.88
Beta (Average)
1.06
Relative Valuation Method
Source: Team Assessment
Figure 27: DCF Valuation
DCF Valuation Assumption
PV of the first stage（millions）
3090.9 CNY
PV of the second stage（millions）
33905.7 CNY
The total PV（millions）
36996.6 CNY
Predicted stock price：
8.01 HKD
Source: Team Assessment
Figure 28: Relative Valuation
P/E Valuation
EPS
0.22 HKD
P/S Valuation
Cloud
Revenue/Shares
0.41HKD
P/E
18.5x
P/S
14.4x
Predicted Price
4.07 HKD
Predicted Price
5.90 HKD
Predicted stock price:
9.97 HKD
Source: Team Assessment
Since Kingdee’s traditional software business which brought stable profit is in a mature stage, and
unprofitable cloud business was in a growth period, we used P/E method to predict the price of
On-Premise marketing and P/S method to evaluate cloud business with the foreign valuation for
SaaS companies as a reference [13]. The price of 9.97 HKD was the sum of two portions of the
valuation result (Figure 28).
P/E: We identified the seven most appropriate listed companies which had similar market value
and enterprise value as Kingdee, then we got the average market P/E through the comparable
company’s P/E. To make the valuation more reliable, we adjusted the index. We divided the seven
companies into three categories according to market. Circuits in H-share, to which KDI belongs, has
a stronger reference. The multiples were influenced by their growth and financial index, which was
the crucial point. The Comparable company's P/E contained P/E of the new business, which would
overrate the P/E. We derived the results of P/E 18.5x from the above reasons and finally calculated
the price as 4.07 HKD.
P/S: Since A-share and H-share have been no pure SaaS companies listed on, five US-based SaaS
companies with similar market value and corpora value were selected. We calculated the average
value of the PS of the five companies in the last 3 years as the market average. Referring to the P/E
method to make appropriate adjustments to the indicators, we obtained the adjusted P/S as 14.4x,
and the price as 5.90 HKD. (Appx.10)
Risk to Target Price
Figure 29: Monte Carlo
Simulation Summary
Simulation Statistics
Median
9.13
SD
1.32
25th Percentlie
8.58
Mean
9.13
75th Percentile
9.67
Source: Team Assessment
We first evaluated the whole management benefits for Kingdee to predict the free cash flow and
discount to the present. We divided the model into two stages, the first one to 2022 with a 5-yeardetailed prediction and the second one in which we presupposed a sustained growth rate of 4.5%.
Discounting the two phases and summing up, we got a discounted free cash flow of 36996.6m CNY,
which gave the target price as 8.01 HKD (Figure 27&Appx.8).
Weighted Average Cost of Capital (WACC): The risk-free rate (2.38%) was based on the current
yield of 10-year government bonds. The beta of 1.06 was obtained by regression analysis between
the company's historical return rate and Hang Sheng Index (HIS). We then compared it with a 5year beta of the same industry as a reference for the adjustment (Figure 26). The market risk
premium of 5.89% was based on the sum of the HIS’s 10-year expected rate of return and Hong
Kong’s 10-year average dividend yield. Applying CAPM to the components above resulted in a cost
of equity of 8.62%. After-tax debt cost was 3.57% by setting the average tax rate for the past five
years as a composite tax rate and comparing the average interest expense of the past 5 years to
the average debt of the past 5 years. Finally, we derived the WACC of 6.4% (Figure 25&Appx.9).
Capital Structure: After predicting the 2018 and 2019 asset-liability ratios in the financial analysis,
we estimated that the debt-asset ratio would be 40% without a large number of leveraged buyouts
in 12 months' time.
Sustainable Growth Rate: After the completion of Kingdee’s strategic transformation, the longterm growth of cash flow will depend more on the cloud service. Since the cloud service brought
stable and sustainable cash flow, the forecasting sustainable growth rate would be 4.5% with the
expected inflation of 2.3% [12].
Monte Carlo Simulation
We executed a Monte Carlo Simulation to analyze the company’s share price after changing the
relevant variables affecting the future growth of Kingdee. (Appx.27) Thus, we tested variables
including growth rate of revenue from Kingdee’s cloud service business and ERP business, tax rate,
and growth rate of OCF. Besides, changes of risk-free rate and GDP’s growth rate were considered.
Finally, after running the simulation for 2000 times, we observed that the probability for the share
price in the range of 10% above and below its current price (8.95 HKD) is 71% (Figure 29 & Figure
30).
Sensitivity Analysis
The result of Monte Carlo Simulation has shown that the growth rate of cloud service business and
ERP business, as well as tax rate have significant impact on share price of Kingdee. When the
revenue growth of cloud service business exceeds 44% and the CAGR of ERP business keeps 9% as
predicted, we can raise investment rating of Kingdee, which also apply to the situation in which tax
rate falls to 15%. Conversely, if revenue growth of cloud service business is below 34%, the stock
rating should be degraded (Figure 31&Appx.28).
Figure 30: Monte Carlo Simulation
Source: Team Assessment
Source: Team Assessment
Figure 31: Sensitivity Analysis
Financial Analysis
Figure 32: Revenue and Growth
Source: Company Data & Team Assessment
Figure 33: Revenue and Growth
of Two Main Business
Source: Company Data & Team Assessment
Figure 34: China ERP Market
Multiple Analysis
Source: Wind & Team Assessment
Figure 35: Operating Expenses
Source: Company Data & Team Assessment
Revenue Grows Consistently: Though affected by the deterioration of the macroeconomy and its
own transformation, income of Kingdee had no significant change in 2013-2015. Kingdee's revenue
grew consistently in 2016 and 2017 with the overgrowing cloud serve and the rebound of the
traditional ERP service. In the latest 3 years, the CAGR has been 13.2% (Figure 32).
The company divides its sales into the two business segments: ERP (75% of total sales in FY2017)
and cloud service (25%). In the future, the cloud service business will contribute more and more to
the company and its revenue is expected to account for 56% of total revenue in 2022.
Since 2013, Kingdee's cloud business has improved rapidly, the CAGR in its revenue was 58% in
recent five years and its revenue growth was 67% in 2017. The primary downstream market of
cloud business is large and medium-sized enterprises and SMEs. The KDC II was launched by the
company in August 2018 ahead of the similar products from the other domestic competitors, which
represented that Kingdee officially began to expand the high-end cloud business market of large
enterprises. Taking Salesforce and Workday as references, we can find that the speed of
improvement of cloud business slowed down in the first two years when the enterprise expanded
high-end cloud business market of large enterprises. Besides, the competition in cloud market will
intense. Thus, the growth rate of revenue from cloud service business is expected to decrease to
40% in 2018 and then raise faster.
Since the ERP business has stepped into a mature stage, the CAGR in revenue has been 7.5% in the
latest three years. Kingdee is at the second-echelon in On-Premise ERP market, leading to the
limitation of developing space. So, we forecast that the CAGR of ERP business will be 9.5% in the
next five years (Figure 33 & Figure 34).
Above all, we predict that Kingdee's CAGR in revenue will reach 21% in the next five years.
The Cost/Income Ratio First Increases and Then Falls: Kingdee's operating expenses mainly consist
of sales expenses, administrative expenses and R&D expenses. The three expenses in 2017
accounted for 53.7%, 15.0%, and 13.9% in revenue respectively. In the past 5 years, Kingdee's sales
expenses have been maintained at more than 50%, mainly due to the company's promotion
activities and advertising expenditures as well as high sales commissions during the cloud
transformation process. Currently, there is still an ample space for Kingdee’s cloud business in the
market. And with the release of KDC II, the development will continue to be maintained in the
future. With the brand effect of cloud business gradually forming, sales expenses are expected to
drop to 47.2% in 2022. The R&D expenses must be invested to update the current version after
transformation to the cloud business. Combining the data of the mid-year report and the
company's strategy, we predict that R&D expenses will be over 400m CNY in 2018. R&D investment
is believed to be maintained at a high level due to the necessity of updating cloud products, building
PaaS+SaaS cloud ecosystem, and the track of the rapid progress of cloud computing technology. So,
the proportion of R&D expenses in revenue is expected to raise at the rate of 0.3%. Administrative
expenses accounted for 14% of revenue in 2017. Kingdee has no plan for large-scale expansion of
the administrative staff. We predict that administrative expenses will account for 14% of revenue
in 2018, and the proportion will decrease gradually in the next few years. Therefore, we predict
that Kingdee's operating expenses will increase to around 85% in 2018 and 2019 due to the increase
in sales expense ratio. After that, with sales expenses down, operating expenses are predicted to
drop to 77% in 2022 gradually (Figure 35).
Strong Profitability: Kingdee's last five years average EBITDAR Margin has been the second higher
among its peers and higher than the industry average, 33.81% Kingdee vs. 22.28% Industry (Figure
36). Kingdee's profitability is optimistic and relatively advantageous. According to Kingdee's pre-tax
Figure 36: 5yrs. Average EBITDA
Margin
Figure 41: Risk Matrix
Source: Wind & Team Assessment
Figure 37: Gross Margin
Source: Wind & Team Assessment
Figure 38: OCF and FCF
Source: Wind & Team Assessment
Figure 39: Receivables Turnover
Ratio
profit, depreciation and amortization, EBITDA Margin is expected to be above 30% in 2018. The
gross profit margin has remained at a high level of over 80% since 2014. Light asset operating model
has shown good business results. In the next 5 years, the ERP market is supposed to improve
consistently, and cloud business will proliferate. Then this indicator will remain above 80% (Figure
37). The scale of cloud business continues to expand, and Kingdee is now in a period of high growth
of cloud business. Revenue grows faster than the asset, so asset turnover rate increases. With the
increase in net profit, ROE will grow steadily in the next few years, and the number is expected to
reach 11.89% in 2020. (Appx.7)
The Cash Flow Improves, and The Net Interest Rate Is Steadily Increasing: Because of the growth
of revenue (operating income), we foresee the growth rate of net profit is 9.8% in 2018, higher than
7.6% in 2017. The CAGR of Kingdee’s FCF in the past three years has reached 21%, mainly due to
the decrease in capital expenditure and the increase in net profit. We predict that FCF will grow at
a rate of 10% every year with the growth of net profit and OCF (Figure 38).
The Rapid Growth of Cloud Business’ Revenue Has Made Receivables Smaller: Cloud business
uses first-paid and service-providing model which can bring more cash flow and improvement of
the quality of profit as well as revenue to Kingdee. A receivable turnover ratio of Kingdee has been
maintained at 10 to 13.7 (larger than the ERP industry average level, 5.72). When it began prepaid
system，this ratio quickly rose to 15.7 (larger than the industry average, 5.79, in the same period)
in 2017. In the future, with the assumption that Cloud ERP business is continuously updated to
meet customer demand and the market environment is getting better, we predict that receivable
turnover ratio will increase by more than 10% (Figure 39).
Capital Structure is Gradually Optimized: Since 2015, Kingdee's asset-liability ratio has been lower
than the industry average. In 2017, the asset-liability ratio was 40.6% (lower than the industry
average, 44.7%) (Figure 40). The reasons are the profit Kingdee's cloud business brought after the
transformation in recent years and the company's emphasis on its control of financial leverage.
According to historical data and recent plans, we predict that the asset-liability ratio of Kingdee will
decline in the next few years, and the asset-liability ratio in 2018 is expected to be 36.3%. However,
the development of Salesforce and Workday is accompanied with the large-scale acquisitions and
strategic investments. If Kingdee also conducts acquisitions and strategic investments in the future,
it will cause the increase of its asset-liability ratio. Due to the unpredictability, this part of the debt
increase is not reflected in the forecast balance sheet.
Investment Risks
Market Risks
Source: Wind & Team Assessment
Figure 40: Assets-Liability Ratio
Source: Wind & Team Assessment
M1: SaaS Market does not Grow as The Expectations (Huge Effect and Low Possibility)
According to the regression, the growth rate of Kingdee’s cloud business has a positive correlation
with that of China's SaaS market. The support from policy [14] (Figure 41&Appx.21) and demand for
cooperates to reduce management and labor costs will ensure rapid growth of the SaaS market.
 Solution: Increase customer stickiness and value-added services.
M2：Cloud ERP Market Competition Intensified (Huge Effect and High Possibility)
The Chinese cloud ERP market is still in its infancy with 45% as CR5. Industry standards are still in
progress. The intensification of competition will inevitably lead to price wars. Then enterprises with
advanced capital, such as SAP, Oracle, and YonYou, will cut their sales price to gain market share，
which definitely will increases Kingdee’s operating pressure and deficit.
 Valuation: Assume sales of Kingdee cloud products in a CAGR below the rate of the last five
years.
 Solution: Focus on the high-end products and the enterprises with high requirements for the
final product but low sensitivity to the price like financial, telecommunications, aviation and
other industries [15].
M3: Usage Price of IaaS Raises (Moderate Effect and Little Possibility)
The increased price of IaaS products will directly raise the operating cost and reduce the
profitability of Kingdee’s cloud services. Though the current SaaS service providers continue to
reduce usage fees, the tendency of the IaaS market to be monopolized can strengthen operators'
bargaining power, which may significantly increase the cost of IaaS products.
 Solution: Kingdee tries to become the highest-level cooperative partner of AWS.
Financial Risks
Figure 41: Policy Supports
Source: Team Assessment & Company Data
F1：Trade War Intensify (moderate effect and possibility)
Most of Kingdee's business is in mainland China. However, the underlying IaaS provider of KDC is
US AWS. If Washington prohibits AWS from offering SaaS products to China, Kingdee will face the
risk of massive data migration.
 Solution: Prepare the alternate supply that can be used when AWS cloud services are not
available. Moreover, the new product should support API interfaces for multiple IaaS vendors.
F2: Tax Risk (Huge Effect and Little Possibility)
If the tax preferences to Kingdee’s subsidiaries are canceled, tax fee of the company will increase.
However, according to China's tax cuts and the transition of the cloud computing business of
Kingdee, it is less likely for Kingdee to lose preferential tax rates.
F3：Rising Debt Costs (Moderate Effect and Possibility)
In the context of credit contraction and deleveraging policy, finance cost will increase. In the control
of financial leverage, Kingdee’s financial leverage ratio decrease year by year. In the future,
Kingdee’s debt financing demands are relatively small with its sufficient cash flow.
Business and Operational Risks
Figure 42: Risks Matrix
Source: Team Assessment
Figure 43: Risks and Strategies
Risk
Stragtegies
Market Risk
SaaS market not
Improve value-added
meeting
services
expectations
Market competition
Step further into the
intensifies
large and high-end
market
Cost of IaaS raises
Enhance cooperation
with IaaS company
Financial Risk
Trade war
Support API to
intensifies
different IaaS vendors
Business and Operational Risk
Core developers or
Equity incentives
executives leave
Data security issues
Strengthen data
security and increase
R&D expenditures
Technology
Increase R&D
iteration speeds up
expenses
Source: Team Assessment
B1：Renewal Rate of Users Drops (Colossal Effect and Moderate Possibility)
Users’ stable renewal income constitutes a significant portion of revenue. A decline of renewal rate
will reduce lots of revenue and increase sales expenses to attract more users.
 Valuation: Refer to the renewal rate of Salesforce and Workday, we predict the rate of Kingde
will be between 79% and 81%.
B2：Core Developers or Executives Leave (Huge Effect and Moderate Possibility)
The leave of developers for core products may result in the delay or stagnation of updating and
iteration for products, which will impact Kingdee's industry competitive position significantly. In
2008 and 2012, Kingdee has the executive resignation. The executive and technical talent team are
generally stable. Kingdee’s employee turnover rate was 9.3%, a relatively low rate in 2017 [16].
 Solution: Implement a talent training system and equity incentives for core technical teams
and senior executives.
B3：Cloud Business Payback Period Extended(Moderate Effect and High Possibility)
Kingdee cloud business lost 136m CNY in 2017. Continued losses may affect the confidence of
company shareholders and lead management to make some short-sighted decisions. As our
prediction, cloud service business can achieve break-even in 2021.
Solution: The management should insist on the strategy of developing cloud services and make up
for the loss of cloud service business by the cash flow from the traditional ERP business.
B4:Data Security Issues (Huge Effect and Moderate Possibility)
Data security issues, which may impact Kingdee’s reputation and renewal of cloud products,
include subjective data breaches by internal staff and data loss issues in data centers. In the event
of data security issues, Kingdee’s cost of rebuilding the reputation system will be enormous.
 Solution: Improve security agreements with customers and downstream IaaS providers, and
strengthen data security R&D expenditures
Other Risks
O1：Downtime of Cloud Service Server (Moderate Effect and Possibility)
The downtime of cloud server may affect operation by making SaaS service unavailable. Frequent
downtime will take a negative reputation to Kingdee. AWS experienced a five-hour downtime in
2015, and the same situation appeared in Alibaba Cloud for one hour. However, with the
continuous improvement of hardware and IaaS technology, the possibility of downtime will be
minimized.
O2：Technology Iteration Speeds up (Moderate Effect and High Possibility)
Acceleration of technology iteration requires more R&D investment to keep updating products,
which leads to increasing expenses and falling profits. Besides, this acceleration will bring more
alternative products, which is a threaten to previous products of Kingdee. According to the report
[17], cloud computing technology updates every five years.
 Valuation: The ratio of R&D expenses to Kingdee’s total revenue is supposed to be increased
by 0.5% per year.
Appendix 1: Glossary
Industry Metrics





ERP: Enterprise resource planning (ERP) is business management software—usually a suite of integrated applications—that a
company can use to store and manage data from every stage of business.
CRM: Customer relationship management (CRM) is a model for managing a company’s interactions with current and future
customers.
SaaS: Software as a service is a software delivery model in which software and associated data are centrally hosted on the
cloud. SaaS is typically accessed by users using a thin client via a web browser.
IaaS: In the most basic cloud-service model, providers of IaaS, infrastructure as a service, offer computers-physical or virtual
machines—and other resources. IaaS clouds often offer additional resources such as a virtual—machine disk image library, raw
(block) and file-based storage, firewalls and so on.
PaaS: Platform as a service (PaaS) is a category of cloud computing services that provides a computing platform and a solution
stack as a service. Along with SaaS and IaaS, it is a service model of cloud computing.
Abbreviations





LTV: Lifetime value (LTV), means cumulative value of $1 annual fee over expected life (LTV=$1/attrition)
CAC: Customer Acquisition Cost (CAC), represents cost to acquire $1 annuity
ARPU: the average amount of money that a company makes during a period from an individual customer or product. Average
revenue per user is a calculation used especially by mobile phone and television companies.
CAGR: Compound annual growth rate (CAGR) is the rate at which an economy, investment, company, etc. grows over a period of
years, based on growth over the previous year
SME: SME is an abbreviation for small and medium enterprise: a company, or companies considered as a group, that are neither
very small nor very large
Appendix 2: Structure of The Group
Appendix 3: Profit of ERP and Cloud Service Business
ERP Business Profit
Source: Company Data & Team Assessment
Cloud Service Business
Source: Company Data & Team Assessment
Appendix 4: Income Statement
In CNY Millions
2013
2014
2015
2016
2017
2018F
2019F
2020F
2021F
2022F
1602.1
1546.5
1586.2
1862.2
2303.5
2860.2
3522.9
4398.7
5640.3
7408.0
56.8
106.0
191.0
340.0
568.0
793.5
1115.2
1689.6
2648.0
4155.1
Kingdee Cloud
18.1
41.7
110.1
209.3
393.4
601.9
902.9
1399.4
2239.1
3582.5
Jingdou Cloud
12.0
19.1
21.0
35.7
61.9
86.0
99.0
168.4
277.8
430.6
Guanyi Cloud
26.7
45.2
59.9
70.8
98.0
90.2
97.4
105.2
113.6
122.7
24.2
14.7
15.4
15.9
16.7
17.5
19.3
Revenue
Cloud Service
Others
ERP on Premise
1545.3
1440.5
1395.0
1521.0
1735.0
2066.6
2407.8
2709.1
2992.3
3253.0
EAS
197.5
205.0
230.4
267.5
312.9
391.2
477.2
548.8
620.1
682.2
K/3
249.4
247.1
198.5
192.1
191.7
210.9
217.2
219.4
217.2
215.0
KIS
204.9
246.0
253.9
270.5
327.3
392.8
437.9
481.7
520.3
561.9
Implement
431.2
326.3
321.3
346.7
405.7
486.8
584.2
671.8
772.5
865.2
Operation and Maintenance
333.3
321.6
326.9
378.5
427.7
513.2
615.9
708.2
779.1
841.4
Others
129.0
94.5
64.1
65.7
69.7
71.8
75.4
79.2
83.1
87.3
Operating cost
(396.2)
(270.7)
(294.1)
(348.0)
(427.0)
(512.8)
(655.4)
(817.1)
(1048.5)
(1377.1)
Gross profit
1205.9
1275.8
1292.1
1514.3
1876.5
2347.4
2867.6
3581.6
4591.9
6031.0
Selling expenses
(827.9)
(784.5)
(854.6)
(1002.4)
(1235.9)
(1585.0)
(1933.0)
(2320.4)
(2819.7)
(3495.9)
Administrative expenses
(205.0)
(202.2)
(257.8)
(277.7)
(320.2)
(406.1)
(493.2)
(607.0)
(767.1)
(992.7)
Research and development costs
(232.9)
(223.5)
(234.8)
(283.6)
(345.3)
(437.6)
(549.6)
(699.4)
(913.7)
(1222.3)
1.1
4.5
17.6
33.9
96.4
103.3
71.6
74.5
78.8
82.0
Other income and gains-net
297.5
229.7
266.3
264.4
349.3
406.2
474.9
563.7
685.2
853.4
Operating profit
238.6
299.9
228.8
248.9
420.8
428.0
438.4
592.9
855.4
1255.5
Finance costs-net
(101.9)
(73.5)
(64.3)
(22.0)
(27.1)
(31.9)
3.6
42.5
55.9
70.5
Share of losses of associates
(0.1)
(0.6)
(2.2)
(17.6)
(15.2)
Profit before income tax
136.6
225.8
162.3
209.3
378.4
396.1
441.9
635.4
911.2
1326.0
Income tax
(17.2)
(25.5)
(56.8)
6.0
(54.8)
(55.8)
(62.3)
(89.5)
(128.4)
(186.8)
119.4
200.4
105.5
215.2
323.6
340.3
379.7
545.9
782.8
1139.2
379.7
545.9
782.8
1139.2
Fair value gains on investment
properties
Profit for the year from continuing
operations
Profit for the year from
73.7
discontinued operations
Minus：Non-controlling interests
(7.0)
3.3
(0.3)
0.7
13.6
Net profit
126.4
197.1
105.8
288.2
310.0
340.3
Source: Company Data & Team Analysis
In CNY Millions
2013
2014
2015
2016
2017
2018F
2019F
2020F
2021F
2022F
1545.3
1440.5
1395.0
1521.0
1735.0
2066.6
2407.8
2709.1
2992.3
3253.0
Direct sale
303.4
205.5
211.0
221.6
257.8
317.1
380.5
430.0
473.0
520.3
Indirect sale
446.7
546.6
516.0
552.8
620.3
713.3
770.4
832.0
898.6
952.5
Service
ERP business
764.5
647.8
648.2
725.2
833.5
1000.2
1200.2
1380.3
1552.0
1707.1
Operation
431.2
326.3
321.2
346.7
406.5
487.8
585.4
673.2
774.2
867.1
Maintenance
333.3
321.6
326.9
378.5
427.0
512.4
614.8
707.1
777.8
840.0
30.7
40.5
19.8
21.4
23.4
36.0
56.6
66.8
68.8
73.1
Cloud service business
56.8
106.0
191.0
340.0
568.0
793.5
2457.1
2827.3
3172.7
3487.2
The total
1602.1
1546.5
1586.2
1862.2
2303.5
2860.2
3522.9
4398.7
5640.3
7408.0
Others
Source: Company Data & Team Analysis
In %
2013
2014
2015
2016
2017
2018F
2019F
2020F
2021F
2022F
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
3.55%
6.85%
12.04%
18.26%
24.66%
27.74%
31.66%
38.41%
46.95%
56.09%
Kingdee Cloud
1.13%
2.70%
6.94%
11.24%
17.08%
21.04%
25.63%
31.81%
39.70%
48.36%
Jingdou Cloud
0.75%
1.24%
1.32%
1.92%
2.69%
3.01%
2.81%
3.83%
4.93%
5.81%
Guanyi Cloud
1.67%
2.92%
3.78%
3.80%
4.25%
3.15%
2.76%
2.39%
2.01%
1.66%
1.30%
0.64%
0.54%
0.45%
0.38%
0.31%
0.26%
Revenue
Cloud Service
Others
ERP on Premise
96.45%
93.15%
87.95%
81.68%
75.32%
72.25%
68.35%
61.59%
53.05%
43.91%
EAS
12.33%
13.26%
14.53%
14.36%
13.58%
13.68%
13.55%
12.48%
10.99%
9.21%
K/3
15.57%
15.98%
12.51%
10.32%
8.32%
7.37%
6.17%
4.99%
3.85%
2.90%
KIS
12.79%
15.91%
16.01%
14.53%
14.21%
13.73%
12.43%
10.95%
9.22%
7.59%
Implement
26.91%
21.10%
20.26%
18.62%
17.61%
17.02%
16.58%
15.27%
13.70%
11.68%
20.80%
20.80%
20.61%
20.33%
18.57%
17.94%
17.48%
16.10%
13.81%
11.36%
8.05%
6.11%
4.04%
3.53%
3.03%
2.51%
2.14%
1.80%
1.47%
1.18%
Operating cost
-24.73%
-17.50%
-18.54%
-18.69%
-18.54%
-17.93%
-18.60%
-18.58%
-18.59%
-18.59%
Gross profit
75.27%
82.50%
81.46%
81.32%
81.46%
81.43%
81.40%
81.42%
81.41%
81.41%
Selling expenses
-51.68%
-50.73%
-53.88%
-53.83%
-53.65%
-55.42%
-54.87%
-52.75%
-49.99%
-47.19%
Administrative expenses
-12.80%
-13.07%
-16.25%
-14.91%
-13.90%
-14.20%
-14.00%
-13.80%
-13.60%
-13.40%
-14.54%
-14.45%
-14.80%
-15.23%
-14.99%
-15.30%
-15.60%
-15.90%
-16.20%
-16.50%
0.07%
0.29%
1.11%
1.82%
4.18%
3.61%
2.03%
1.69%
1.40%
1.11%
Other income and gains-net
18.57%
14.85%
16.79%
14.20%
15.16%
14.20%
13.48%
12.82%
12.15%
11.52%
Operating profit
14.89%
19.39%
14.42%
13.37%
18.27%
14.96%
12.44%
13.48%
15.17%
16.95%
-6.36%
-4.75%
-4.05%
-1.18%
-1.18%
-1.12%
0.10%
0.97%
0.99%
0.95%
Share of losses of associates
-0.01%
-0.04%
-0.14%
-0.95%
-0.66%
Profit before income tax
8.53%
14.60%
10.23%
11.24%
16.43%
13.85%
12.54%
14.45%
16.16%
17.90%
Income tax
-1.07%
-1.65%
-3.58%
0.32%
-2.38%
-1.95%
-1.77%
-2.03%
-2.28%
-2.52%
7.45%
12.96%
6.65%
11.56%
14.05%
11.90%
10.78%
12.41%
13.88%
15.38%
11.90%
10.78%
12.41%
13.88%
15.38%
Operation and
Maintenance
Others
Research and development
costs
Fair value gains on
investment properties
Finance costs-net
Profit for the year from
continuing operations
Profit for the year from
3.96%
discontinued operations
Minus：Non-controlling
interests
Net profit
Source: Company Data & Team Analysis
-0.44%
0.21%
-0.02%
0.04%
0.59%
7.89%
12.74%
6.67%
15.48%
13.46%
Appendix 5: Balance Sheet
In CNY Millions
2013
2014
2015
2016
2017
2018F
2019F
2020F
2021F
2022F
Assets
3927.8
4393.2
5484.2
5977.3
6802.1
7888.4
8639.3
9558.5
10590.1
11707.5
Current assets
1580.0
2103.1
3074.0
2956.7
3533.6
3677.6
4328.0
5125.8
5998.8
6927.1
Cash and cash equivalents
858.5
1261.6
1527.6
1464.8
1056.7
1488.2
1658.0
1901.2
2179.3
2430.5
1.3
12.9
Financial assets at fair value
through profit or loss
Other
short-term
140.5
284.9
769.1
758.6
1708.2
1268.9
1565.9
1942.3
2409.3
2961.9
Receivables
137.4
116.5
141.4
147.0
150.7
187.7
200.5
200.6
207.9
222.4
Other receivables
435.4
429.0
527.7
564.0
601.7
725.0
893.7
1068.8
1185.9
1291.6
Inventories
3.9
3.9
4.1
6.3
14.1
7.8
9.9
12.9
16.5
20.7
Other current assets
4.4
7.0
102.8
3.3
2.3
Non-current assets
2347.8
2290.1
2410.2
3020.6
3268.5
4210.8
4311.4
4432.7
4591.3
4780.4
Fixed assets
760.2
728.2
731.8
796.3
510.2
528.9
561.8
607.9
672.5
758.6
2.1
1.5
24.2
25.8
31.4
32.4
33.3
34.3
35.4
36.4
150.2
50.1
investments
Investments in associates
Available-for-sale financial
assets
Other
long-term
852.4
851.2
924.2
1101.1
1790.1
2207.2
2260.4
2315.2
2371.7
2429.8
Intangible assets
597.5
577.1
601.2
775.2
817.3
840.2
867.7
901.2
951.7
1009.6
Land use rights
135.5
132.1
128.8
125.4
69.4
602.1
588.0
574.0
560.0
546.0
46.6
0.1
investments
Other non-current assets
Liabilities
2172.9
2395.0
2237.5
2441.2
2759.0
2861.2
2412.8
1911.2
1942.9
2117.6
Current liabilities
951.9
1029.4
918.7
922.7
1404.9
1571.1
1735.5
1232.6
1237.6
1351.8
payables
43.9
34.3
22.3
19.4
18.5
31.0
34.4
42.0
56.8
72.6
Tax payables
57.8
66.0
72.1
86.8
104.3
128.7
158.5
197.9
253.8
333.4
420.2
545.6
243.5
80.7
155.0
596.8
650.0
47.9
43.1
38.8
Other current liabilities
430.0
383.5
580.8
735.9
1127.0
814.6
892.5
944.7
883.9
907.0
Non-current liabilities
1221.0
1365.6
1318.8
1518.4
1354.1
1290.1
677.4
678.7
705.3
765.8
Long-term borrowings
1155.0
1291.4
1213.0
1415.6
1193.5
1129.4
479.4
431.4
388.3
349.5
66.0
74.2
105.7
102.8
160.6
160.7
198.0
247.2
317.0
416.3
1754.9
1998.2
3246.7
3536.2
4043.1
5623.0
6224.6
7644.4
8643.3
9584.9
Share capital
64.4
65.2
72.0
72.6
71.6
79.3
79.9
80.2
80.4
80.6
Share premium
482.0
537.9
1682.8
1765.3
1681.3
2807.2
2839.9
2884.2
2922.9
2945.3
Other reserves
1116.1
512.1
512.8
400.2
694.7
228.3
1015.7
1858.2
2049.4
1848.6
Retained earnings
87.9
873.8
949.6
1237.8
1547.8
1866.4
2239.7
2776.4
3546.0
4666.0
Non-controlling interests
4.5
9.3
29.7
60.4
47.7
5027.2
6226.5
7647.3
8647.2
9589.9
3927.8
4393.2
5484.2
5977.3
6802.1
7888.4
8639.3
9558.5
10590.1
11707.5
Short-term
borrowings
Other non-current liabilities
Equity
Total equity and liabilities
Source: Company Data & Team Analysis
Note: In September 2018, Kingdee has purchased land use rights in Qingdao, which leads to a liability increase of 532.6m CNY.
Appendix 6: Cash Flow Statement
In CNY Millions
2013
2014
2015
2016
2017
2018F
2019F
2020F
2021F
2022F
Net profit
126.4
197.1
105.8
288.2
310.0
340.3
379.7
545.9
782.8
1139.2
Depreciation and amortization
293.7
275.4
274.5
363.9
361.8
429.0
469.1
515.1
555.7
610.6
Working capital changes
(7.7)
4.7
143.4
107.5
186.2
(39.3)
64.0
110.6
66.7
119.6
Other non-cash adjustments
2.8
29.6
32.8
(147.5)
(34.3)
258.5
243.7
135.2
45.3
(288.3)
415.1
506.7
556.4
612.1
823.7
988.4
1156.5
1306.8
1450.6
1581.1
16.3
7.3
1.9
8.9
2.1
5.1
4.0
3.0
2.0
1.0
338.8
277.3
302.4
476.2
378.9
458.9
514.5
579.6
656.6
739.5
Decrease in investment
4.2
901.9
25.8
0.4
604.2
2100.0
Increase in investment
131.3
1020.5
678.2
43.9
762.4
2227.5
100.0
150.0
200.0
250.0
(4.1)
(2.0)
28.4
(50.2)
(435.9)
(690.5)
(1030.2)
(1258.5)
(932.1)
(673.1)
(453.8)
(390.7)
(924.5)
(561.0)
(970.9)
(1271.8)
(1640.6)
(1985.2)
(1786.7)
(1661.6)
Increase in debt
385.0
1156.6
450.0
272.8
106.5
106.5
Decrease in debt
402.3
883.1
896.6
310.1
80.3
155.0
130.0
5.3
4.8
4.3
Increased share capital
16.4
33.2
1108.4
23.8
18.2
71.3
33.3
44.6
38.9
22.7
17.0
133.1
Net cash flows from operating
activities
Proceeds from disposal of current
assets
Capital expenditure
Net cash flows from other
investment activities
Net cash flows from investing
activities
Decreased share capital
Pay dividends
30.0
Net cash flows from other
financing activities
Net cash flows from financing
activities
(0.9)
43.0
(19.5)
12.0
(94.1)
(40.8)
735.0
644.1
882.4
580.1
313.3
287.2
643.8
(124.7)
(236.0)
714.9
654.0
921.6
614.2
331.7
(9.8)
10.8
(25.0)
4.4
Effect of exchange rate changes
on cash and
cash equivalents
Cash and cash equivalents at
beginning of the year
Net increase in cash and cash
equivalents
Cash and cash equivalents at end
of year
Source: Company Data & Team Analysis
898.0
858.5
1261.6
1527.6
1464.8
1056.7
1488.2
1658.0
1901.2
2179.3
(39.6)
403.2
266.0
(62.8)
(408.1)
431.5
169.8
243.2
278.1
251.2
858.5
1261.6
1527.6
1464.8
1056.7
1488.2
1658.0
1901.2
2179.3
2430.5
Appendix 7: Key Financial Ratios
2013
2014
2015
2016
2017
2018F
2019F
2020F
2021F
2022F
Gross margin
75.27%
82.50%
81.46%
81.32%
81.46%
81.43%
81.40%
81.42%
81.41%
81.41%
Net interest rate
7.89%
12.74%
6.67%
15.48%
13.46%
11.90%
10.78%
12.41%
13.88%
15.38%
ROE
7.59%
10.54%
4.06%
8.61%
8.30%
6.77%
6.10%
7.14%
9.05%
11.88%
ROA
3.20%
4.74%
2.14%
5.03%
4.85%
4.31%
4.40%
5.71%
7.39%
9.73%
EBIT Margin
15.01%
20.61%
14.85%
14.27%
18.59%
16.63%
14.02%
14.95%
16.51%
18.14%
EBITDA Margin
32.88%
37.79%
31.43%
33.10%
33.84%
31.63%
27.34%
26.66%
26.36%
26.38%
Current ratio
1.66
2.04
3.35
3.20
2.52
2.34
2.49
4.16
4.85
5.12
Cash ratio
0.90
1.23
1.66
1.60
0.75
0.95
0.96
1.54
1.76
1.80
55.32%
54.52%
40.80%
40.84%
40.56%
36.27%
27.93%
20.00%
18.35%
18.09%
2.18
3.05
2.81
3.99
6.85
5.98
9.49
29.75
46.81
75.08
Asset turnover
0.42
0.39
0.34
0.34
0.37
0.36
0.41
0.46
0.53
0.63
A/R turnover
10.90
12.18
12.30
12.91
15.48
16.90
18.15
21.93
27.61
34.43
Inventory turnover
100.67
68.86
73.77
67.57
42.05
46.93
74.23
71.85
71.43
74.01
EPS(CNY)
0.05
0.08
0.04
0.10
0.11
0.10
0.12
0.17
0.24
0.35
BPS(CNY)
0.69
0.78
1.11
1.20
1.39
1.55
1.91
2.35
2.66
2.95
OCFPS(CNY)
0.16
0.20
0.19
0.21
0.28
0.30
0.36
0.40
0.45
0.49
Profitability
Liquidity
Solvency
Assets-Liability Ratio
Interest Coverage
Turnover ability
Equity ratio
Appendix 8: DCF Valuation Analysis
In CNY Millions
2018F
2019F
2020F
2021F
2022F
Operating cash flow
Free cash flow
WACC
Discounted value
988.4
529.5
6.4%
529.5
1156.5
642.0
6.4%
603.4
1306.8
727.2
6.4%
642.3
1450.6
794.0
6.4%
659.1
1581.1
841.6
6.4%
656.6
In CNY Millions
Sustainable growth rate
FCF
WACC
Present value of the second stage
4.5%
879.5
6.40%
33905.7
The first stage
total
3090.9
DCF Valuation Result
36996.6m CNY
PV of the company
Value of stock right
22197.9m CNY
Total share capital
3287.05m
Forecast stock price
8.01 HKD
A. Management Benefits
Cloud Business: The proportion of income for which the public cloud accounted increased to 80% in 2018, and the compound growth
rate of customers in three years was 76.5%. Since the launch of KDCⅡ will lead to the uncertainty of the retention to KDCⅠ，and the
decrease of the renewal ratio for KDCⅠ, we predict the customer growth rate will drop to 70% and the customer unit price will increase
to 61k gradually. In the recent five years, the income CAGR of Kingdee cloud is close to 85%, but its CAGR will almost slide to 50% with
the prediction of fierce competition and increased user base in the next two years. With the improvement of Kingdee’s competitiveness
in the high-end cloud business market of large-size enterprise, Kingdee’s income growth rate will reach 60%.
Jingdou Cloud and the Guanyi Cloud: The CAGR in three years of JDC users is 31.4%, while GYC has a lower customer growth rate. We
predict customer growth rate is 30%,20% respectively. The fully standardized ARPU varies little by 0.41k, 10k.and the renewal rate of
JDC has been stable at an ideal 70%, and considering the CAGR of small and micro enterprises in the past five years (20%), and the
support of the country's on-cloud policy, we predict the income growth rate is between 60% and 70% in the next five years. The
LTV/CAC of GYC dropped from a relatively good 2.72 in 2016 to 1.08 in 2017, which contributed to the slowdown in the growth of the
number of customers
Traditional Software Business: The sales of KIS began to accelerate in 2016. We predict that it will continue to maintain a high growth
rate of 20% in 2018. With the development of cloud business and the reduction of company's investment in KIS, its revenue growth in
the next five years will decline to 8% of the space growth rate of the traditional ERP market.
Sales of K/3 are relatively stable, and business growth is much affected by the replacement relationship of Kingdee Cloud products.
We forecast a gradual decline in sales growth and begin to experience negative growth by 2020.
The sales of EAS licenses are directly related to the revenue of implementation and maintenance. As Kingdee has gradually established
itself in the large enterprise market and the short-term cloud products have little substitute for EAS, we predict the revenue growth
rate of EAS license of 25 % and the implementation and maintenance revenue growth rate (20%). With the gradual improvement of
high-end cloud products and the development of China's hybrid cloud market, high-end cloud products will also begin to erode the
market space of EAS. Thus, we predicted that EAS's revenue growth would start to decline from 2019 and gradually decline to 10% in
2020. Correspondingly, the growth rate of revenue from implementation and maintenance will decrease.
B. Free Cash Flow
In CNY Millions
2013
2014
2015
2016
2017
2018F
2019F
2020F
2021F
2022F
Operating cash flow
415
507
556
612
824
988.4
1156.5
1306.8
1450.6
1581.1
Net profit
126
197
106
288
310
340.3
379.7
545.9
782.8
1139.2
Depreciation and amortization
294
275
275
364
362
428.9
469.1
515.1
555.7
610.6
Working capital changes
（8）
5
143
107
186
(39.3)
64.0
110.6
66.7
119.6
Capital expenditure
339
277
302
476
379
458.9
514.5
579.6
656.6
739.5
Free cash flow
76.4
229.4
254.0
135.9
444.8
529.5
642
727.2
794.0
841.6
1.Operating Expenses
In CNY Millions
Operating expense
2018F
2019F
2020F
2021F
2022F
(2428.7)
(2975.8)
(3626.8)
(4500.5)
(5710.9)
Prediction base
When a salesperson sells a product or service of
Selling expenses
(1585.0)
(1933.0)
(2320.4)
(2819.7)
(3495.9)
cloud business, he or she will be awarded 30% of
the sales, and 8% for the second year, and no
commission will be paid for the subsequent years.
Kingdee has no plan about large-scale expansion of
Administrative expenses
(406.1)
(493.2)
(607.0)
(767.1)
(992.7)
the administrative staff. The proportion of
administrative expenses in revenue will decrease
gradually in the next few years.
Research and
development costs
Kingdee's investment in research and development
(437.6)
(549.6)
(699.4)
(913.7)
(1222.3)
will not decrease to ensure update of product, so
research and development expenses will increase.
2. Interest, Tax and Net Income
In CNY Millions
2018F
2019F
2020F
2021F
2022F
Operating profit
428.0
438.4
592.9
855.4
1255.5
Finance costs-net
(31.9)
3.6
42.5
55.9
70.5
Prediction base
Interest income and interest on borrowings that should
be returned.
Some subsidiaries of Kingdee enjoy a preferential tax
Income tax
(55.8)
(62.3)
(89.5)
(128.4)
(186.8)
rate of 10%, some 15%, and the rest 25%. The adjusted
actual tax rate is 14.1%.
Net profit
340.3
379.7
545.9
782.8
1139.2
3. Depreciation and amortization, Net working capital and Capital expenditure
In CNY Millions
2018F
2019F
2020F
2021F
2022F
Prediction base
The straight-line depreciation method is adopted in accordance with
Depreciation
and
international accounting standards. Building are depreciated for 25
428.9
469.1
515.1
555.7
610.6
amortization
years and the remaining fixed assets for 5. Land use rights are
amortized over 50 years, development costs over 3, and the
remaining intangible assets over 5.
Working capital
changes
Capital
expenditure
Changes in working capital refer to the Kingdee Capital Management
(39.28)
64.01
110.56
66.70
119.60
Measures that accumulate and exclude non-cash effects in asset
liabilities.
Expense that Kingdee spends on fixed assets such as buildings and
458.9
514.5
579.6
656.6
739.5
equipment purchase, as well as intangible assets such as land use
rights and self-use computer software and so on.
Appendix 9: WACC Analysis
Variable
Value
Prediction base
2.38%
The current yield of 10-year government bonds
1.06
regression analysis between the company's historical return rate and Hang Sheng Index (HIS) returns
Market risk premium
5.89%
The sum of the HIS’s 10-year expected rate of return and Hong Kong’s 10-year average dividend yield
Cost of equity
8.62%
Cost of debt
3.57%
Comparing the average interest expense of the past five years to the average debt of the past five years
Effective tax rate
14.09%
Setting the average tax rate for the past five years as a composite tax rate
Weight of equity
60%
Weight of debt
40%
Risk free rate
Beta
WACC
6.40%
Regressive analysis and beta value of Kingdee
Beta (Days)
1.22
Beta (Weeks)
1.26
R-squared
0.44
R-squared
0.46
Standard error
0.06
Standard error
0.12
Beta (Company)
1.24
Industry reference
Beta (Days,5-years)
0.88
Beta (Industry)
0.88
Beta (Average)
1.06
A. Risk free rate (2.38%) is based on the yield of 10-year government
bonds of HK on 13rd, Sept, 2018.
B. Beta—regression analysis between the company's historical return
rate and Hang Sheng Index (HIS) returns comparing with a 5-year beta
of the same industry as reference.
C. Market risk premium—The sum of the HIS’s 10-year expected rate of
return and Hong Kong’s 10-year average dividend yield
Appendix 10: Relative Valuation Analysis
The major two businesses of Kingdee are in diffident industry cycle. The ERP business is during mature stage of the industry and
revenue from it is stable, which leads the low probability of dividends distributing. Hence, we adopted P/E valuation method for this
business. Meanwhile, the cloud service business is in developing stage, having a rapid growth but not achieving profitability. Therefore,
we use P/S valuation method for it. In this method, we picked growth rate of revenue and market value of similar SaaS company to
operate regression analysis and the result showed that the PS of Kingdee is positively correlated with its stock price.
Multiples Valuation Abstract
P/E of ERP business
P/S of cloud service business
P/E adjusted
18.5x
P/S adjusted
14.4x
P/E valuated
4.07 HKD
P/S valuated
5.90 HKD
Share price predicted
9.97 HKD
A. Selection of peers
Considering the two valuation methods are used for the different industry, we selected two groups of comparable companies. We used
the P/E of seven peers and P/S of five and all these peers have similar market value and enterprise value as Kingdee. Because A-share
and H-share have been no pure SaaS companies listed on, we picked comparable companies from US stock and referred to their P/S.
B. Market Average
Market
A-share
H-share
US stock
Company
Kingdee
YonYou
Hundsun Technologies Inc
Chanjet
Inspur
China soft International
SAP
ORACLE
Average
P/E(3 years)
42.20
112.75
56.78
10.40
29.05
21.01
26.98
19.58
42.74
Market
Company
Kingdee
Salesforce
Netsuites
Servienow
Workday
Zendesk
US stock
P/S(3 years)
5.52
9.16
19.07
20.86
23.86
15.73
15.70
Average
C. Adjustment of indicators
P/E
P/S
Market Average
42.74
15.70
Adjusted multiplier
18.5
14.4
The seven comparable companies we chose for the P/E method are from three different stock markets.
We decided to use average financial indicators for past three years of these companies as reference for adjustment and draw on future
financial changes of Kingdee. The reasons for this decision are as follows. Firstly, H-share’s value premium is lower than that of A-share
and US stock, so the companies listed in H-share are more informative. Secondly, the seven companies’ PE are from not only traditional
business but also innovation business. Finally, multiples of valuation are affected by growth.
The five comparable companies picked for the P/S method are all listed in US stock market, however, value premium of H-share is lower
than that of US stock. Thus, we used average financial indicators for past three years of these companies as reference for adjustment
and draw on future financial changes of Kingdee.
1. P/E Adjustment
ROE
EBITDA
Revenue
Net profit
Net profit
Asset-liability
Margin
growth
growth
margin
ratio
Current ratio
Dividend yield
ratio
Kingdee(ERP Business)
6.99%
33.84%
6.65%
56.40%
20.10%
40.73%
3.02
0.20%
China soft International
11.17%
11.15%
28.02%
41.93%
6.15%
41.80%
2.09
0.40%
Hundsun Technologies Inc
11.91%
14.68%
25.52%
802.02%
11.34%
41.43%
1.31
0.60%
Chanjet
-0.81%
5.86%
13.92%
14.38%
-2.83%
17.11%
6.56
0.00%
Inspur
2.97%
14.83%
14.93%
88.45%
4.34%
33.05%
1.87
0.00%
YonYou
5.33%
15.49%
13.50%
5.64%
7.08%
47.96%
1.27
0.50%
SAP
14.25%
26.05%
10.28%
9.71%
16.15%
41.33%
1.20
1.02%
ORACLE
14.84%
42.28%
1.44%
-21.53%
19.78%
61.18%
3.59
1.54%
The Kingdee’s average P/E(ERP Business) in recent three years is 21.
Average financial ratio in the
next three years
Kingdee(ERP Business)
ROE
6.67%
EBITDA
Revenue
Margin
growth
29%
24.01%
Net
Net
profit
profit
growth
margin
21.71%
11.69%
Asset-liability ratio
Current ratio
Dividend yield ratio
28.10%
3.00
0%
2. P/S Adjustment
Revenue
Revenue
growth
（2017）
Kingdee(Cloud Servie Business)
75.10%
568
Salesforce
24.95%
72094.1
33%
741.15
Servienow
38.82%
13297.67
Workday
39.56%
14742.47
Zendesk
50.58%
2961.44
In CNY Millions
Netsuites(2015)
Average financial ratio in the next three years
Kingdee（Cloud Servie Business）
Revenue
Revenue
growth
（2020F）
43.92%
1689.65
D. Predicted Price
P/E Valuation
P/S Valuation
EPS
0.22 HKD
P/E
18.5x
Predicted Price
Predicting stock price:
4.07 HKD
Cloud Revenue/Shares
0.41HKD
14.4x
P/S
Predicted Price
9.97 HKD
5.90 HKD
Appendix 11: Calculation of LTV and CAC of Kingdee Cloud Service
The cloud service business consists of Kingdee Cloud, Jingdou Cloud and Guanyi Cloud. We calculate their LTV and CAC separately due
to their different ARPU and renewal rate.
Firstly, we split the marketing costs of Kingdee that didn’t be mentioned in annual report of KDI. We calculated the marketing expense
ratio of management software business by averaging three-year average sales cost of ERP industry (26.6%, according to Wind) and that
of Kingdee (51.9%).
The KDC Mentioned below Represents KDC I Since There Is No Data for KDC II.
Marketing Costs of ERP Business=Income of ERP Business*Marketing Expense Ratio of ERP Business
Marketing Costs of Cloud Business=Total Marketing Cost-Marketing Cost of ERP business
Customer Life Cycle =1/ Churn Rate (When calculating Kingdee Cloud, it should also be multiplied by the proportion of public clouds.)
ARPU= Total product revenue/number of customers
LTV=ARPU* Customer Life Cycle
CAC=Marketing costs/ Number of New Customers
According to reports and data from Wind, we found that the marketing costs of KDC accounted for over 70% of that of cloud business,
and calculated the proportion of GYC (20%-25%, inferred from that of KDC and GDC (5%-10%)). In addition, the revenue of KDC is
divided into 2 parts: public cloud and private cloud. The private cloud along with On-Premise is one-time fee, while the public cloud
can bring continuous income for the company. Therefore, we removed cost of private cloud in the calculation of customer life cycle.
In CNY Thousand
Renewal
Kingdee Cloud
Churn Rate
Date
Number of
ARPU
customers
Proportion of
Number of New
Customer Life
public clouds
Customers
Cycle
LTV
CAC
LTV/CAC
2016
90%
10%
2500
38
40%
1600
4
220
177
1.3
2017
90%
10%
5500
55
70%
3250
7
385
119
3.2
In CNY Thousand
Jingdou Cloud
Renewal
Churn
Number of
Date
Rate
customers
2016
75%
25%
2017
70%
30%
ARRU
Number of New Customers
87200
0.41
37700
150000
0.413
88960
In CNY Thousand
Customer Life
LTV
CAC
LTV/CAC
4
1.64
0.80
2.04
3.3
1.3629
0.47
2.92
Cycle
Guanyi Cloud
Renewal
Churn
number of
Date
Rate
customers
2016
90%
10%
2017
70%
30%
ARRU
Number of New Customers
5180
13.7
1805
6200
15.8
2574
Customer Life
LTV
CAC
LTV/CAC
10
137
50.44
2.72
3.3
52.14
48.35
1.08
Cycle
Notes:
 The products of Jingdou Cloud are all standardized and unit price is between 598 and 1098 CNY. Previously, for promotion, the
company gives 5% off from the price when the customers purchase two-year service while 20% off for five-year service. As
predicted, with customer stickiness increasing, discount decreasing and the launch of value-added services, the ARPU of Jingdou
Cloud will raise.
 As mentioned before, the sales expenses of Jingdou Cloud accounted for 5%-10% of the cloud business, and we adopted 7.5%.
Then, 22.5% of Guanyi Cloud was calculated.
 With Kingdee Cloud's modules of public cloud improving and the issue of second-generation product, which has higher ARPU, the
ARPU of Kingdee Cloud will increase.
Appendix 12: Comparison Between Kingdee and Foreign ERP SaaS
SaaS industry in USA started earlier. According to the report, the development of American SaaS companies are ahead of companies
in China. Therefore, we compare data from 2011 to 2015 of Kingdee to that of SaaS companies. The products from NetSuite (in US) are
similar with KDCⅠproviding solutions to SMEs. And the products from Workday (in US) are similar with KDC II.
KIngdee Cloud
2016
2017
2018H1
2.5
5.5
7.5
90%
90%
ARPU
38
CAC
LTV
LTV/CAC
（CNY ）
Customer
volume
(thousands)
Renewal Rate
Workday
2011
2012
2013
(thousands)
0.259
0.400
0.600
80%
Renewal Rate
91%
91%
91%
55
——
ARPU
342.2
475.8
590.3
177
119
——
CAC
358.98
437.73
493.43
220
385
——
LTV
2843.8
4196.4
5277.2
1.3
3.2
——
LTV/CAC
7.92
9.59
10.70
Netsuite（USD）
（USD）
Customer
volume
2011
2012
2013
2014
2015
12
16
20
24
30
Renewal Rate
91%
91%
91%
91%
91%
ARPU
16.6
15.8
16.7
18.6
19.7
CAC
30
19.3
26.3
36.4
32.4
LTV
152.1
146.8
154.6
173
183.2
LTV/CAC
5.06
7.61
5.89
4.76
5.66
Customer volume (thousands)
Appendix 13: Porter’s Five Forces
1. Threat of Substitutes-Very Low (1)
The competition of ERP business market became less fierce with the maturity of the industry. The main substitute of traditional ERP is
cloud ERP. Large and medium-sized enterprises commonly adopt custom local deployed ERP, while SMEs, especially small and micro
enterprises, prefer Cloud ERP since it is more convenient and cost-saving. In the broad market of SMEs, cloud service business is widely
accepted. Kingdee has promoted SaaS products on cloud and ranked 1st of market share in the domestic public cloud SaaS industry.
So, we assumed that the company were able to control the risk.
2. Bargaining Power of Suppliers-Low (2)
The bargaining power is represented in two aspects below. For one thing, the biggest cost of software enterprises is labor cost. Talents
play a core part in the development of the software industry, so the preferential treatment and attraction of talents is a major part of
bargaining power of suppliers. For another, the major supplier of SaaS industry is the underlying platform of IaaS, such as AWS, Ali
Cloud and Kingsoft Cloud. As for treatments of talents, KDI has the advantage of equity incentive plans, but the salary of talents is far
less than other IT enterprises. Kingdee adapts different suppliers for its different cloud products, and the core product KDC is based on
AWS. KDC now becomes the carefully selected partner of HUAWEI Cloud and China’s top partner of AWS. However, Kingdee cannot
develop IaaS by itself, and additionally, AWS is in a relatively monopolistic position in the underlying cloud computing industry, which
makes the cost of changing underlying IaaS suppliers enormous. Based on the points above, we infer that there exists bargaining risk.
3. Rivalry within the Industry-High (4)
The main cloud serve of Kingdee is dominated by the SaaS standard development service while there is only a small part of the
customized service in the company. And it does not go deeply into the upstream of the industrial chain. Kingdee has covered the whole
industrial chain of the ERP business from the development of the software to the deployment of the serves and finally to the
maintenance. Since the marker of the traditional ERP has entered the maturity period, it is difficult for Kingdee to expand its market
size. As the leader, ranked TOP1 in market share, of the industry, Kingdee is facing relatively gentle pressure from its peers.
4. Threat of New Entrants-Moderate (3)
There are several industry barriers for ERP business below:
 High cost of shifting suppliers. It is fixed cost of system migration for customers. For instance, if a company migrates its business
from Kingdee ERP product to YonYou ERP, it must restart the work progress and re-import data, which leads to the loss of time,
money and maybe the data. Besides, there is also the cost for the users and maintainers to be familiar to the new software.
 High requirements for capital. The new entrants must obtain talents from incumbents by generously salary for the long-time and
large-scale development cycle of management software. The finished software needs to gain corresponding qualification license
and be qualified in performance test. It also should be equipped with perfect distribution and direct sales channels. Those above
are associated closely with huge capital.
 The benefit from large-scale of demand side. All the software is accompanied with bug. The more users will lead to the higher
stability of the software with the identification of bugs. So customers prefer to products with higher market share to reduce risk.
 The inequality of gaining distribution channel. The major channel providers have contracts with incumbents in the management
software market, which means that new entrants will cost a lot to gain distribution channel.
However, the industry barrier of SaaS is relatively easy to break. For the second-generation of KDC is open source product, it is easy for
other enterprises to imitate the SaaS model of Kingdee, which threatens the dominate role in SaaS industry of Kingdee.
Besides, the industry is growing up in a reshuffle stage that aggravates the threat of new entrants. In conclusion, we believe that new
entrants will bring about great threat.
5. Bargaining Power of Customers-Moderate (3)
The products of ERP business has entered a mature stage. Price sensitivity ranges among different industries, for example, those
enterprises with high requirements for the final product and value chain like financial, IT, oil industry, the business of which depend on
information system and produce lucrative profits, show less sensitive to price. ERP enterprises pay great attention to the competition
for enterprises mentioned above. The major customs of Kingdee, with the background of building material, retail, IT and service
industry, have strong bargaining power.
For SaaS product KDC, there are less mature products in the industry, which lead to price instability. Main promotional objects of KDC
are large and medium-sized enterprises with strong bargaining power. Kingdee’s other products for SMEs conduct less promotional
activities with relatively stable price, facing less pressure from bargain of customers. We consider that Kingdee has moderate bargaining
power.
Appendix 14: SWOT Analysis
Appendix 15: US SaaS Market Development vs. China SaaS Market
US SaaS service development history
Global Market Distribution of Cloud Computing (2017)
US vs. China (SaaS Market)
China vs. America (Public Cloud)
Source: IDC & Team Assessment
Source: IDC & Team Assessment
Appendix 16: SaaS Market Growth Rate Comparison
Source: Wind & Team Assessment
Appendix 17: Global ERP Market vs. Chinese ERP Market
Source: IDC & Team Assessment
Appendix 18: Global IT and
Enterprise Software (ES) Expenses
Appendix 19: IT Expenses of
Enterprises
Source: IDC & Team Assessment
Source: Gartner & Team Assessment
Appendix 20: Comparison between SaaS and Traditional On-Premise
SaaS
Deployment
Charge mode
Product iteration
Safe and controllability
The cost of usage
Implementation cycle
Customization
On-Premise
SaaS suppliers finish the deployment, and
Users deploy the software locally with hardware and
users access via the internet
maintenance staff’s help
Pay as needed (subscription fee or
Charge for the software license, secondary development
valuable added service)
and implementation
Fast iteration (updated every 2or3
months)
Controllability is not enough, and safety
of data exists risk
Lower cost for users (30% of cost of OnPremise)
Iteration frequency is low (updated more than a year)
Safer and more controllable
Complicated structure of cost and high initial investment
Short implementation cycle (commonly
Long Implementation cycle (at least a few months and
within one month)
sometimes can be more than one year)
Can't meet the demand for personalized
and complex business.
Can meet the personalized need
Procurement risk
low risk
high risk
customer relations
Rental or long-term service relationship
Sales relationship
Source: Team Analysis
Comparisons of On-Premise and SaaS Expenses
Source: Wind & Team Assessment
Appendix 21: Kingdee Cloud Supports
Government Policies in Corporate
Cloud Migration
Appendix 22: Number of Chinese
Large Enterprises Adopted Cloud
(2017)
Source: Report from Ali Cloud & Team Analysis
Appendix 23: IaaS Products of Amazon AWS
Added Functions and Services of AWS
Price-Cuts Frequency of AWS
Source: Amazon & Team Analysis
Source: Amazon & Team Analysis
Appendix 24: Enterprise's Consideration of ERP
Business Complexity
Demand for Function
Organization
Demand for Customization
Worry About Safety
Requirement for System Stability
Demand for Business Expansion
Investment In IT
SME
Low
Low
Simple
Low
Low
High
Median
Low
Medium-Sized
Median
Median
Median
Median
Low
High
High
Median
Large-Sized
High
High
complex
High
High
High
Low
High
Source: Wind & Team Analysis
Appendix 25: Capability of Enterprises’ Transition to Cloud Service
Appendix 26: The Distribution of SaaS Market
The Distribution of KDC
The Chinese hotspot Area of SaaS Market
Appendix 27: Monte Carlo
min
Industry Factories
Company Factories
35%
40%
50%
Enterprises Management Software CAGR
6%
10%
14%
Domestic Management Software Scale
CAGR
4%
6%
8%
IT Expenditure CAGR
3.0%
5%
8%
Traditional Business Revenue CAGR
4%
10%
30%
5%
2%
7%
7%
9.5%
14%
40%
6.50%
2.28%
10%
13%
13%
18%
60%
8%
2.56%
13%
19%
Cloud Business Revenue CAGR
GDP Growth Rate
Inter-Bank Market Rate
Chinese Average Wage CAGR
Corporate Profit CAGR
Source: Team Analysis
Appendix 28: Sensitivity Analysis
Source: Team Analysis
max
SaaS's Market Scale CAGR
Composite Tax Rate
Valuation Factories
base
Appendix 29: Risk Matrix
Market Risk
M1
M2
M3
SaaS Market Unexpectations
Market Competition Intensifies
Usage Price of IaaS Raises
Financial Risk
F1
F2
F3
Trade War Intensify
Tax Risk
Risk Debt Cost
Business and Operational Risk
B1
B2
B3
B4
Renewal Rate of Users Drops
Core Developers or Executives Leave
Cloud Business Payback Period Extended
Data Security Issues
Other Risk
O1
O2
Source: Team Analysis
Source: Team Analysis
Downtime of Cloud Service Server
Technology Iteration Speeds up
Appendix 30: Group Executive Committee and Board of Directors
Name
Position
Information
Chairman of the Board
and CEO
Founder of the Group;
Awarded the Government Special Expert Allowance by the State Council;
Degrees in Computer Science, Accounting master and EMBA;
Vice President of China Software Industry Association.
Bo Lin
CFO, Vice President and
Executive Director
Degree in Computer Science;
Past General Manager of the Company in Fujian Province Region and Operation
Management Department;
Extensive experience in strategic planning, marketing management and financial
management.
Canlin Zhou
Company Secretary
A member of the Institute of Chartered Accountants of Scotland;
A member of the Hong Kong Institute of Certified Public Accountants.
Yanfei Sun
President of Kingdee
China
Degree in Scievce and Technology and MBA;
Past General Manager of Nanjing Branch and Southern District of China.
Yong Zhang
Senior Vice President of
Kingdee China
Past General Manager of Shanghai Branch and Eastern Region of China;
Extensive experience in marketing, sales and team work management.
Guangxue Li
President of Kingdee
Deeking
Mainly responsible for the Company’s cloud services for micro and small-sized
enterprises business.
Liangjie Zhang
Chief Scientist
Outstanding scientist;
With 40 invention patents and more than 140 scientific papers published.
Mingzhu Dong
Non-executive Director
Master’s Degree of Business Administration;
The chairman of the board of Gree Electric Appliances, Inc. of Zhuhai Co., Ltd.
Yuanqing Shen
Non-executive Director
Master’s Degree in Computer Science;
The president of JD Cloud;
An independent director of Insigma Technology Co.;
A non-executive director of Inspur International Limited.
Gary Clark Biddle
Independent
non-executive Directors
Degrees in MBA and PhD;
The Accounting Chair and PCCW Chair Professor at the University of Hong Kong;
An independent non-executive director of Shui On Land Limited.
Jiayong Liu
Independent
non-executive Directors
The director of Institute of Global Entrepreneurship & Innovation (Hong Kong);
The management practice Professor of Guanghua School of Management, Peking
University;
Ph.D. in International Entrepreneurship and Strategic Management and Human
Resource Management;
Postdoctoral research in Department of Strategic Management.
Yangfeng Cao
Independent
non-executive Directors
Master’s Degree of Business Administration;
Previous general manager of Green and Associates;
Rich experience in Hi-Tech marketing, business strategy planning and global
corporation management.
Shaochun Xu
Source: Company Data
Appendix 31: Endnotes
(1) China Software Industry Association (2017). Chinese Cloud ERP Market Study Report.
(2) Guan Weihua, (2016). Research on the Impact of ERP Implementation on the Performance of China's Listed
Companies. Modern Trade Industry, 37(20), pp.124-125.
(3) ERP Market Study Report (2017). iResearch.
(4) Key Industry Applying Cloud Computing Study Report (2017). China Academy of Information and Communications Technology.
(5) SAP.
(2018). SAP
S4
HANA
Cloud
Product
Report.
[online]
Available
at:
https://www.sap.com/china/index.html?campaigncode=CRM-CN18-PPC-BRDBZFCBZP&source=PPC-CNBaidu_BrandZone-BZ-Title.
(6) IaaS Report (2017). Gartner
(7) Behind the Innovations in SAP S/4HANA Finance Cloud (2016). Constellation Research.
(8) IDC Semiannual Public Cloud Services Tracker (2017). IDC.
(9) Kingdee Cloud Cosmic Solutions Book. [online] Available at: http://www.kingdee.com/products/firmament.
(10) SaaS Metrics 2.0- A Guide to Measuring and Improving what Matters (2017). David Skok.
(11) http://www.ebrun.com/20170818/243193.shtml
(12) Everbright SaaS Securities Report (2016). Everbright Securities.
(13) Zh.tradingeconomics.com. (2018). [online] Available at: https://zh.tradingeconomics.com/china/inflation-cpi.
(14) Ministry of Industry and Information Technology of the People’s Republic of China (2018). Promote Enterprise Using Cloud
Guide Implementation Guide (2018~2020).
(15) Ji Xiao feng, (2009). Research on Differentiated Competitive Strategy of Oracle Software China. Fudan University.
(16) Kingdee Governance Report 2017. [online] Available at: http://www.kingdee.com/company/ir/.
(17) China Enterprise SaaS Industry Research Report (2017). iResearch.