Earnings Alert: 1H22 results in line; long-term prospects intact despite short-term macro headwinds
- 1H22 cloud services revenue increased 35.5% y-o-y, in line with preliminary results
- Cloud services revenue contribution lifted to 76.4%, up by 10.3ppts y-o-y
- Remain positive about company’s long-term growth prospects despite short-term macro headwinds
- Maintain BUY for strong cloud service revenue growth, despite a lower TP of HK$26.4
1H22 results highlights
Revenue grew by 17.3% y-o-y to Rmb2,197m in 1H22, driven by 35.5% y-o-y expansion in cloud service revenue to Rmb1,677m. Cloud service revenue contributed 76.4% of total revenue in 1H22, up by 10.3ppts y-o-y. Subscription annual recurring revenue (ARR) and subscription-related contract liabilities surged 46.5% and 56% y-o-y, respectively. Revenue from ERP and other businesses decreased by 18.1% y-o-y.
Revenue from Kingdee Cloud Cosmic and Constellation increased 77.6% y-o-y to Rmb284m and dollar retention ratio remained stable at 100%. 476 customers were signed in 1H22, including 194 new customers, such as Shandong Heavy Industry, China General Technology Group, Minmetals International and etc. Cosmic and Constellation have helped 122 enterprises to complete localisation substitution.
Revenue from Kingdee Cloud Galaxy increased 16.1% y-o-y to Rmb786m, with stable dollar retention ratio of 89%. Subscription ARR for Kingdee Cloud Galaxy expanded by 53% y-o-y. Kingdee Cloud Galaxy signed more than 300 national and provincial novel elites of SMEs in 1H22, including DONG FANG ZHEN XUAN, Zhoushan Boeing, Shanghai Mabwell and etc. Operating margin for Kingdee Cloud Galaxy was 20%+.
Gross profit increased by 13.3% y-o-y to Rmb1,331m, with gross margin declining 2.1ppts to 60.6% due to increasing implementation costs from large enterprise model projects. Operating loss for cloud service rose by 18.8% y-o-y to Rmb515m.
Net loss expanded by 43.7% y-o-y to Rmb356m due to rising R&D expenses as well as the lower project delivery efficiency, owing to the COVID-19 resurgence in China. No interim dividend was proposed in 1H22, the same as last year.
Outlook
Going forward, the company has reiterated its subscription ARR growth target at a 50% CAGR in FY21-23, supported by favourable national policies for enterprise digitalisation and new product launches. The strong growth in ARR and subscription-related contract liabilities underpin promising cloud services revenue growth in the future. The overall profitability would gradually improve with the increasing operating margin from the cloud segment.
National policies are supportive of enterprise digital transformations. In Mar 2022, the State?owned Assets Supervision and Administration Commission (SASAC) issued the Guiding Opinions on Accelerating the Construction of a World-class Financial Management System by Chinese Central State-owned Enterprises (?????????????????????????). We expect it to accelerate the digitalisation of central state-owned enterprises and increase Kingdee’s penetration in the large enterprise market. In Aug 2022, the Ministry of Industry and Information Technology (MIIT) and the Ministry of Finance jointly issued the Notice on Implementing Pilot Work of Financial Support for the Digital Transformation of Small and Medium-sized Enterprises (????????????????????????). The financial support will boost the digitalisation of SMEs amid the macro headwinds in China.
In May 2022, Kingdee officially launched its blockbuster HR SaaS product, Kingdee Cloud Constellation HR Cloud. The Constellation HR Cloud is built on Kingdee’s Cosmic PaaS platform with Huawei as a prototype customer. Leveraging on Huawei’s global HRM practice, the Constellation HR cloud would benefit Kingdee in the domestic HR SaaS field.
We cut our revenue estimates by 3% and 4%, respectively, for FY22 and FY23 to factor in impact from the macro headwinds in China. We forecast revenue to grow by 22%, 25%, and 24% for FY22, FY23, and FY24, respectively. We maintain BUY for Kingdee for its promising long-term growth prospects despite short-term macro headwinds. Our TP of HK$26.4 is based on 12x FY23 P/S (previously 15x FY22 P/S).
