Summary of Kingdee International Software Group's 1H25 Results Company Overview - **Company**: Kingdee International Software Group - **Industry**: Greater China IT Services and Software - **Stock Rating**: Equal-weight - **Price Target**: HK$14.20 - **Current Price (as of August 11, 2025)**: HK$17.47 - **Market Capitalization**: Rmb56,969.4 million Key Financial Results - **1H25 Revenue**: Rmb3.2 billion, representing an 11.2% year-over-year increase, which is 1.6% above Morgan Stanley's estimate [2] - **Traditional ERP Business Growth**: Increased by 8% year-over-year, outperforming the estimate of 2% [2] - **Cloud Revenue Growth**: 11.9%, accounting for 84% of total revenue; cloud subscription revenue grew by 22% year-over-year [2][6] - **Annual Recurring Revenue (ARR)**: Reached Rmb3.7 billion, an 18% year-over-year increase, slightly below the full-year guidance of 20% [2] - **Gross Margin**: 65.6%, exceeding the estimate of 64.1%, attributed to a higher mix of traditional ERP revenue [3] - **Operating Expenses**: Increased by 6% compared to estimates, primarily due to one-off severance costs [3] - **Net Profit**: Reported a net loss of Rmb98 million, a 55.1% decrease year-over-year [6] Strategic Insights - **Market Expectations**: The market may have overly optimistic expectations regarding the AI contributions to Kingdee, reflected in its elevated price-to-sales (PS) multiple [1] - **Path to Profitability**: The company is on track to reach breakeven in 2025, with a strong long-term margin outlook as the revenue mix shifts towards subscriptions [3] Risks and Opportunities - **Upside Risks**: - Faster cloud revenue growth - Effective management of implementation offloading - Accelerated revenue growth from large enterprises [9] - **Downside Risks**: - Slowdown in China's economy - Execution risks in cloud transition - Increased competition in the midsize enterprise market [9] Valuation Methodology - **Valuation Approach**: Utilizes a 10-year discounted cash flow model with a WACC of 10.9% and a terminal growth rate of 3% [7] Additional Metrics - **Subscription Gross Profit Margin**: 96% - **Non-Subscription Gross Profit Margin**: 31% - **Contract Liabilities**: Grew by 25% year-over-year [2][3] Conclusion Kingdee International Software Group's 1H25 results indicate a solid performance amidst a challenging macroeconomic environment, with significant contributions from its cloud services. However, the company faces potential risks that could impact its growth trajectory, particularly in the context of economic conditions and competitive pressures. The current market valuation suggests a cautious outlook, with the company needing to manage expectations regarding its AI initiatives effectively.