KINGDEE INTERNATIONAL(268.HK)：AWAITING SUBSCRIPTION AND AI MONETISATION IN THE LONG RUN

Core Viewpoint - Kingdee's share price dropped 8.4% due to profit-taking after its 1H25 results slightly missed expectations in terms of revenue and ARR, but the company shows a decent turnaround in profitability and operating cash flow [1] Financial Performance - 1H25 revenue grew by 11% YoY, with gross profit margin (GPM) improving by 2.4 percentage points YoY to 65.6% and operating profit margin (OPM) increasing by 5.6 percentage points YoY to -5.5% due to effective cost control in R&D, partially offset by one-time layoff compensation of around RMB80 million [1] - Net loss narrowed by 55% YoY to RMB98 million, missing consensus of RMB73 million mainly due to less interest income [1] - Net operating cash outflow reduced to RMB18 million from -RMB166 million in 1H24 [1] Cloud Subscription Business - Large enterprise business (Cloud Cosmic/Constellation) revenue increased by 41.1% YoY to RMB276 million, with a net dollar retention (NDR) rate of 108% [1] - Medium enterprise business (Cloud Galaxy) revenue grew by 19% YoY to RMB740 million, with total clients reaching 46,000 and an NDR of 94% [1] - SME business revenue grew by 23.8% YoY to RMB537 million, with NDR at 93% and 88% for Cloud Stellar and Jingdou Cloud respectively [1] - A new segment disclosure groups all non-subscription revenues, with management planning to outsource non-core business, which may slow group revenue growth but improve margins and profit [1] Positive Guidance - In 1H25, ARR was RMB3.7 billion, up 18.5% YoY, and cloud subscription contract liabilities were RMB3.4 billion, up 25% YoY [1] - Management maintains a breakeven target for 2025 with net operating cash expected to reach no less than RMB1 billion despite macro uncertainties [1] - Management anticipates subscription GPM to exceed the current 96.2% due to high platform reuse rates and paid AI solutions [1] AI Growth Potential - In 1H25, Kingdee's AI contract value exceeded RMB150 million, with AI Assistant reaching an active user base of 170,000 enterprises [2] - Management is confident in its latest AI agent, which received positive client feedback and secured over 800 advanced AI service orders [2] - Kingdee is positioned favorably to leverage proprietary data with clients to explore underlying value [2] Valuation Adjustments - Sales forecasts for 2025/26/27 were cut by 6%/9%/13% to reflect the outsourcing strategy, while EPS was raised by 4% and 21% in 2026/27 due to a smooth subscription transition and clear long-term AI upside [2] - The new target price is set at HK$18.08, down from HK$18.90, based on a sum-of-the-parts (SOTP) valuation approach [2]