-The wholly owned subsidiary Kingdee China reported operation figures for the first three quarters. Revenue slightly up 0.47% yoy and net profit surged 582% yoy.

-PRC government has announced to promote China’s cloud service to neighborhood countries in support to the “New Silk Road” strategic development, which expected as the future growing source of revenue.

-We give Kingdee “Accumulate” rating while lower the target price to HK$ 2.75, equivalent to 21.8x/20x of 2014 and 2015 forecasted EPS, plus HK$ 0.35 net cash per share in the first half.

Financial Highlights

The wholly owned subsidiary Kingdee China reported operation figures for the first three quarters. Revenue amounted to RMB 1,075 mn, slightly up 0.47% yoy. Net profit surged 582% yoy to RMB 109 mn. Net profit margin 10.13% was close to the Group’s 10.86% in the first half. Cash from operating activities sharply increased 168% yoy to RMB 211.5 mn.

How we view this

The figures were in line with our expectation while we believed this showed a similar picture for the Group’s performance. We forecast the Group’s revenue for 2014 would just slightly higher than last year. Though the cloud business is believed to have further growth in the last quarter as well as 2015 since the PRC government has announced to promote China’s cloud service to neighborhood countries in support to the “New Silk Road” strategic development. Kingdee is expected to be benefited. Meanwhile, the cost structure has improved as mentioned in the last reports, which increase in revenue would widen the profit margins.

Investment Action

We believe the cloud business would experience rapid growth in the next few years. Besides the New Silk Road, the government has frequently announced to promote the local software and servers. Thus, more large enterprise may try Kingdee’s enterprise software or cloud server in the future

However, refer to the 1H14 data, we adjust the estimates on the other incomes, which are mainly the subsidies from government, resulting in lower profit and forecasted EPS. We give Kingdee “Accumulate” rating while lower the target price to HK$ 2.75, equivalent to 21.8x/20x of 2014 and 2015 forecasted EPS, plus HK$ 0.35 net cash per share in the first half.

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