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研究部 (Research Team)
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KINGDEE (268.HK) - Still in recovery stage, `Neutral` rating

Friday, February 28, 2014

8180

KINGDEE(268)

Recommendation on 28 February 2014
Recommendation	Neutral
Price on Recommendation Date	$2.930
Target Price	$3.000

Weekly Special - 3606 Fuyao Glass

Company Profile

Kingdee International is a company engaging in enterprise management software development and internet service in China and Asia Pacific region.

Investment rationales

9M2013 business results:

The 9M13 result was slightly below satisfactory, with a 2% decrease y-y in revenue to RMB 1,069 mn. However, there is a significant improvement in net profit, which stands at RMB 16 mn, recovering from a loss of RMB 286 mn in 9M2012. This could probably be attributed to successful cost controlling measures.

Government Recognition:

Two subsidiaries of the Group were recognized jointly by 5 Chinese government ministries as “2013-2014 National Important Software Enterprises”. This recognition allows the two subsidiaries to enjoy a 10% tax rate in the year 2013-2014. This will have a positive impact on the company's net profit.

Improving Profitability:

The product profitability will also be a determining factor in the future. The gross margin of indirect sales is approximately double that of direct sales. With expanding proportion of indirect sales, the margin level of the company is expected to benefit, and offset the slower-than-expected revenue recovery.

Outlook:

According to our view, Kingdee is still in the middle of a recovery. We expected that there will be a revenue growth of more than 10% in 2014. We estimated that the PE will be lowered to 24x by the end of 2014.

Major risks

- The pace of recovery might not be satisfactory.

- Rapid reaction is needed to ensure competitiveness in such an innovative industry.

Valuation

We give a target price of HK$3.00 based on a PE valuation. By applying 24x PE on the business and a forecasted EPS of RMB 0.1

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