china / hong kong industry focus china software …...jun 2015 420k enterprise customers as at sep...

ed-TH / sa- DL

Investing for future growth Expect traditional ERP business to resume revenue growth

in 2H15F as the restructuring of distribution channels has concluded; expect a high single-digit growth rate in 2016

Expect cloud business to grow at a CAGR of 80%+ in the next few years, accounting for c.30% of Kingdee’s and c.15% of Yonyou’s total revenue by FY17F

Step up investments for FY15-16F to build the enterprise user base and scale for the cloud business

Maintain BUY on Kingdee for the long-term potential ; and maintain FULLY VALUED on Yonyou due to its rich valuation

Expect a high single-digit growth rate for ERP business in 2016. The revenues from ERP businesses of Kingdee (268.HK, BUY) and Yonyou (600588.CH, FULLY VALUED) declined by 3-4% in 1H15. We expect them to resume growth in 2H15F as the restructuring of distribution channels from direct to indirect sales has concluded. The restructuring should lead to a lower revenue but improve the margins and overall profitability. In FY16F, we expect high single-digit revenue growth rates for the ERP businesses of Kingdee and Yonyou, due to more adoption of ERP by enterprises driven by the rapid development of e-commerce.

More aggressive investments needed to capture the cloud business opportunity. We expect the cloud businesses of Kingdee and Yonyou to grow at a CAGR of 80%+ in the next few years amid more new product launches and more marketing and sales initiatives to promote cloud applications. The cloud business will be the new growth engine, which is expected to account for c.30% of Kingdee’s and c.15% of Yonyou’s total revenue by FY17F. However, we believe intensive investments will be needed to build a large user base to capture the growth opportunity in the next few years. Accordingly, we have revised down our earnings estimates to reflect the higher investment costs in FY15-16F and we expect the cloud business to break even in FY17-18F.

Focusing on the long-term potential; maintain BUY on Kingdee. We are optimistic on the ERP business in the medium term and we believe the potential for cloud business is huge. The higher operating losses for growing the cloud business in the near term are justified by the future growth potential. We have revised up Kingdee’s TP to HK$4.2 from HK$3.8 by rolling forward to 30x FY17F PE (previously 30x FY16F PE), pegged to its A-share major peer Yonyou’s historical average. Maintain BUY on Kingdee. We maintain a FULLY VALUED rating on Yonyou as it now trades at a rich valuation of 40x+ FY17F PE. Our TP of Rmb14.0 for Yonyou is based on 30x FY17F PE, in line with its historical average.

HSI: 19,286

ANALYST Tsz Wang TAM CFA +852 2971 1772 [email protected] Chris KO [email protected]

Recommendation & valuation

Company Pric e T arget Ups id e Rec om 17FM k tc ap

Pric e % PE ( x ) US$m

Kingdee Int'l(268 HK)

HK$ 2.75 4.2 53 Buy 19.5 1,034

Yony ouNetworkTech.'A '(600588 CH)

RMB 20.39 14.0 (31)F ully

V alued43.9 4,579

Source: Thomson Reuters, DBS Vickers

DBS Group Research . Equity 22 February 2016

China / Hong Kong Industry Focus

China Software Sector Refer to important disclosures at the end of this report

Industry Focus

China Software Sector

Traditional ERP

Stable growth driven by e-commerce

ERP revenues of Kingdee and Yonyou declined in 1H15 but we expect them to resume growth in 2H15F as the restructuring of distribution channel has concluded. The restructuring from direct to indirect sales led to revenue decline but improvement in operating margin. It should improve overall profitability. Going forward, we are positive on the ERP business and expect a high single-digit growth rate p.a. The rapid development of e-commerce encourages the adoption of ERP by enterprises.

ERP revenue y-o-y growth %

T ot al Rev enue* (Rmb m) 1H14 1H15 % chg

Kingdee (268.HK) 705 676 -4.1%Yonyou (600588.CH) 1,469 1,425 -3.0%

Chanjet** (1588.HK) 186 189 2.1%

1H15 Rev enue segmenty - o- y Grow th

K ingdee Y ony ou Chanjet

Large enterprise segment 4.4% -7.5% naMedium enterprise segment -8.7% 3.6% na

Small enterprise segment 10.4% 2.8% 2.1%

Note: *the revenue includes software license and service

**Chanjet is a subsidiary of Yonyou

Source: Companies and DBS Vickers

E-commerce has become increasingly important to enterprises as there are more online buyers (and sellers) with significant transaction volume. According to iResearch, 300m people in China purchase online, representing a penetration rate of 48.9%. The market for e-commerce is estimated to be Rmb10tn and is expected to grow at 20% p.a. from FY14-17F. Various marketing strategies and business models (such as O2O) have arisen for e-commerce. Enterprises need to rely more on enterprise software and cloud technology to integrate and manage their sales channel, inventory, supply chain and customer details in order to effectively deliver a good customer experience and drive business growth.

The e-commerce business model will increase overall ERP penetration, in our view. In order to streamline the business process, some large e-commerce players have started pushing their suppliers or retailers to adopt ERP software which in turn can be integrated into their ERP systems. This will substantially

improve the supply chain and inventory management of the e-commerce players with real-time consolidation of sales and inventory data.

China enterprise software market growth

10%11%12%13%14%15%16%17%18%19%20%

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FY15

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Enterprise software revenue (LHS)Growth rate (RHS)

Rmb bn%

Source: iReseach

Cloud, P2P lending and third-party payments

Chinese ERP players have been extending their business to the cloud, peer-to-peer (P2P) lending and third-party payment areas (collectively the “new businesses”) by leveraging on their huge existing enterprise customer bases and product offerings. They have recorded rapid growth in the operating figures of the new businesses but the revenues are still insignificant, resulting in initial operating losses. However, we believe the market potential of the new businesses is huge and the companies will benefit in the longer term.

Industry Focus


New businesses of Kingdee and Yonyou

B usiness K ingd ee Y ony ouCloud 500k enterprise

customers as atJ un 2015

420k enterprisecustomers as at Sep

2015

P2P lending Mainly on tradefinance and

factoring business

- y y fax.com- Transaction v olumereached c.Rmb1.7bn

for 9M15- 119k customers

Third partypay ments

The company isconsidering to

obtain the licensethrough

acquisition

- Chanjet pay ment- Transaction v olumereached c.Rmb13bn

for 9M15- 13,716 customers


For Kingdee, the cloud revenue grew by 82% y-o-y from Rmb45m in 1H14 to Rmb82m in 1H15. The customer bases of their cloud products are growing with strong momentums. Cases in point are (1) the number of registered enterprises and organisations for Cloud Hub increasing by 400% y-o-y to more than 500k and (2) the number of paying enterprises for K/3 Cloud increasing by 250% y-o-y to more than 1,000. We expect the cloud revenue to grow at a CAGR of 80% from FY15-17F to account for c.30% of the total revenue by FY17F.

For Yonyou, the revenue from the new businesses in 9M15 reached c.Rmb82m while most of the products have been just launched for less than a year. The operating performance for Yonyou’s new businesses was also very strong with soaring number of users and transaction volume. The number of enterprise customers for the enterprise internet business has increased by 180% to 420k as compared to the end of FY14. The P2P lending business which was started in late 2014 has recorded c.Rmb1.7bn in transaction volume. The transaction

volume of Yonyou’s third-party payment business has also increased by 286% y-o-y to Rmb13bn as compared to the end of FY14. We expect the revenues from new businesses to grow at a CAGR of 100%+ from Rmb160m in FY15F to Rmb850m in FY17F and account for c.15% of the total revenue.

Investing for the future

We expect the investments by Chinese ERP players into cloud, P2P lending and third-party payment businesses to further increase. The investments include R&D expenses for product development and marketing & sales expenses to acquire enterprise customers and users. The initial revenue generated is insufficient to cover the investment costs, resulting in initial operating losses. In FY15F, we forecast the operating losses from the new businesses for Kingdee to be Rmb100-150m and that for Yonyou to be Rmb450-500m. In 2016, we believe the investments as well as operating loss for Kingdee's cloud business will increase by more than 50%, which is negative to the near-term earnings. For Yonyou's cloud business, we believe its operating loss will narrow in FY16F as the revenue growth outpaces investment growth.

Operating losses from new businesses for Kingdee and Yonyou

Bus iness K ingdee Y ony ou

F Y15F Rev enue for the newbusinesses

Rmb191m Rmb160m

F Y15F Operating loss from thenew businesses

Rmb100m-150m

Rmb450m-500m


Industry Focus


Kingdee - Cloud business operating summaries (1H15)

ProductCategory

Productname

Rank ing No. users No. of enterprisecustomers

Rev enue growth(y -o-y )

Mobile OfficeCloud

Cloud Hub No.1 Mobile Office Cloudin China

4.5m enterprise users(+125% y-o-y)

500k registered enterprises &organisations (+400% y-o-y)

+96%

Finance Cloud Youshang.com No.1 Accounting Cloud inChina

55k paying users (+30% y-o-y)

3m Wise Note customers

N/A SaaS revenue +75%

ERP Cloud K/3 No. 1 Online ERP Cloud inChina

63k paying users(+186% y-o-y)

1,000 paying enterprises(+250% y-o-y)

+100%

Industry Cloud Kuaidi100 No. 1 Express Data Cloudin China

5.8bn parcel searches in1H15 (+80% y-o-y)

N/A Industry Cloud revenue+76% y-o-y

Industy Cloud KingdeeHealthcare

No. 1 in Healthcarefinancial management

650k registered users(+1,900% y-o-y)

150 registered hospitals N/A

Source: Company and DBS Vickers

Yonyou - New businesses operating summaries (1H15)

Product Category Product name No. users No. of enterprise customers Rev enue growth (y -o-y )

Office cloud Enterprise internetserv ice

N/A 420k customers(+180% vs FY14)

c.Rmb32m

CRM cloud Yonyou Chaoke N/A 16k registered customersmore than a hundred payingcustomers

included in Enterprise internet serv ice

Cloud Platform iUAP 8,000 users 77 third party applicationdevelopers

N/A

P2P Lending yyfax.com 119k users N/A - Revenue: Rmb43m- Transaction volume: c.Rmb1.7bn(+1,338% vs FY14)

Third-party payments Chanjet Payment N/A 13,716 merchants - Revenue: c.Rmb7m- Transaction volume: Rmb13bn(+286% y-o-y)

Source: Company and DBS Vickers

Industry Focus


Cloud business

Cloud business is the major revenue contributor among the new businesses. Kingdee and Yonyou provide enterprises with management software and applications through cloud technology including software-as-a-service (SaaS) and SaaS platform. SaaS is a software provision model which provides software to customers via internet and is usually charged on a subscription basis. SaaS platform is based on SaaS model and provides various management software for the enterprises. According to iResearch, the revenue of SaaS Enterprise Software market is expected to grow from Rmb4.4bn in 2014 to Rmb20.6bn in 2018, representing a CAGR of c.50%. For SaaS platform, the revenue is expected to grow from Rmb1.3bn in 2014 to Rmb10.4bn in 2018, representing a CAGR of c.70%.

Revenue of China's SaaS enterprise software market

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Rmb bn

Source: iResearch

Revenue of China's SaaS platform market

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Number of paying enterprise customers of SaaS platforms in China

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'000 k%

Source: iResearch

Industry Focus


P2P lending

P2P lending refers to the lending of money by one party to another unrelated party through the platform on the internet without the involvement of traditional financial institutions such as banks. The platform acts as an intermediary to bridge the lenders/investors and the borrowers and charges the borrowers finance costs. According to iiMedia Research, P2P lending in China experienced a high-growth stage with 230% CAGR from 2012 to 2014, amounting to a total of transaction volume of Rmb260bn. The expected growth rate in 2015 is 97.5%, to Rmb513bn. In 2016, we expect the industry growth rate to be slower due to stricter regulations.

We believe Yonyou’s P2P lending platform, yyfax.com, should benefit from the recently proposed rules on P2P lending platforms (网络借贷信息中介机构业务活动管理暂行办法[征求

意见稿]) released by China Banking Regulatory Commission (CBRC). As at Nov 2015, there were 3,769 P2P platforms and one-third of them were found to be problematic or fraudulent, according to CBRC. Management believes that yyfax.com is operating according to the regulations and Yonyou has sufficient resources to invest into the platform to build a larger user base. Yonyou will grab market share from the non-complying platforms. The regulations will allow a healthy industry development and give consumers more confidence.

CBRC released the proposed rules to regulate the P2P lending platforms and asked for comments from the public in Dec 2015. The rules design the P2P lending platforms as information intermediaries between borrowers and lenders. The platform should sufficiently disclose the basic information of the borrowers and the projects that are applying for financing. P2P lending platforms are required to publish their operating figures on their websites from time to time. The money from the lenders to the borrowers should not flow through the information intermediaries. Instead, banks should be appointed to be the custodians for the lenders.

P2P lending market growth

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P2P Lending Transaction Vol. (LHS)

Growth rate (RHS)

RMB bn

Source: iiMedia

Third-party payments

Third-party payments refer to the payment platform offered by third parties to the buyers and sellers in trading activities. Commonly known examples of third-party payment platforms are Alipay, Paypal, CNEPay and Lakala. The gross merchandise value (GMV) of third-party online payments in China experienced a high growth of c.50% CAGR between 2011 and 2014 to Rmb8.1tn, according to iResearch. For third-party mobile payments in China, the GMV experienced a 300%+ CAGR from 2011-2014. Going forward, the markets for third-party online and mobile payments are forecasted to maintain high growth rates of c.30% p.a. from 2014-2018, according to iResearch.

Industry Focus


China's third-party online payment gross merchandise value

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Growth rate (RHS)

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Source: iResearch

China's third-party mobile payment gross merchandise value

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Gross merchandise value (LHS)

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RMB tn

Source: iResearch

Earnings revision and recommendation

We expect Kingdee and Yonyou to release their annual results for FY15F in mid-March. We reckon that their recent corrections of share prices have partly reflected the higher operating losses from their cloud businesses.

Kingdee. We have revised down our earnings estimates by 14% to Rmb202m in FY15F and by 35% to Rmb200m in FY16F due to higher investments into the cloud business. We estimate the operating losses from cloud business to be Rmb100-150m in FY15F and Rmb180-230m in FY16F. This may bring short term pressure to the stock price, but we believe that the cloud business has huge potential and the investments now will benefit the company in the longer term. We expect the cloud business to break even in FY17-18F. For the ERP business, we forecast the revenue to grow at a low single-digit rate in FY15F and a high single-digit rate in FY16F. While we expect the ERP business to be driven by rapid development of e-commerce, the slower growth in FY15F was largely due to the restructuring of distribution channel from direct to indirect sales. Thanks to operating leverage, we expect the operating profit from the ERP business to grow at mid-teens from FY15-16F. We maintain BUY on Kingdee with a TP of HK$4.2 based on 30x FY17F PE (vs previous 30x FY16F PE), pegged to its A-share major peer Yonyou’s historical average.

Yonyou. We have revised down our earnings estimates by 33% to Rmb331m in FY15F and by 23% to Rmb496m in FY16F mainly due to higher operating losses from the new businesses. We estimate the new businesses to incur operating losses of Rmb450-500m in FY15F and Rmb350-400m in FY16F. We believe the operating losses for cloud business will peak in FY15F and break even in FY17-18F. For the ERP business, we expect slower growth at a low single-digit rate in FY15F partly due to the restructuring of distribution channel and economic slowdown. Going forward, we forecast high single-digit rates for ERP revenue growth, driven by the rapid development of e-commerce. We estimate the operating profits of ERP business to grow at mid-teens due to the revenue growth and operating leverage. We believe the new businesses have good long-term potential. But the market is over-optimistic on the near-term earnings contribution; and we think its high valuation is unsustainable. We maintain a FULLY VALUE rating on the stock with a TP of Rmb14.0 based on 30x FY17F PE, which is in-line with its historical average.

Industry Focus


Peers valuation

M k t PE PE PEG P/S P/S EV /S EV /S

Price Cap F iscal 16F 17F 17F 16F 17F 16F 17F

Company Name Code Local$ US$m Y r x x x x x x x

Kingdee Intl.* 268 HK 2.75 1,034 Dec 33.5 19.5 0.3 3.52 2.91 3.86 3.19

Chanjet Info.Tech.'H' 1588 HK 12.82 358 Dec 18.6 19.0 (8.7) 5.17 4.01 n.a. n.a.

Yonyou Network Tech.'A'* 600588 CH 20.39 4,579 Dec 58.2 43.9 1.4 5.76 5.05 8.26 7.24

Neusoft 'A' 600718 CH 21.18 4,035 Dec 57.6 41.4 1.1 2.94 2.62 n.a. n.a.

China Nat. Software 'A' 600536 CH 24.94 1,891 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a.

YGSOFT 'A' 002063 CH 15.1 1,381 Dec 22.6 23.7 (5.1) 6.68 6.29 9.45 8.91

Hand Enterprise 'A' 300170 CH 15.05 1,912 Dec 40.1 29.1 0.8 7.31 5.69 9.11 7.10

Aisino 'A' Susp - Susp.12/10/1 600271 CH 55.91 7,915 Dec 22.6 16.4 0.4 1.84 1.60 1.40 1.22Hundsun Technologies 'A' 600570 CH 43.6 4,130 Dec 49.1 34.8 0.8 11.28 8.78 16.48 12.84Shenzhen Kingdom Tech. 'A' 600446 CH 32.89 4,211 Dec 81.2 61.5 1.9 8.89 7.39 n.a. n.a.Shanghai Amarsoft Itech. 'A' 300380 CH 47.26 996 Dec 121.2 96.4 3.8 19.99 16.00 n.a. n.a.Shenzhen Infogem Techs. 'A' 300085 CH 44.77 3,609 Dec 255.8 127.9 1.3 31.72 22.76 n.a. n.a.Digiwin Software 'A' 300378 CH 45.75 1,408 Dec 77.9 50.3 0.9 6.47 5.02 n.a. n.a.

QAD 'A'# QADB US 18.67 350 J an 23.8 21.5 2.0 1.22 1.18 n.a. n.a.

A v erage 66.3 45.0 0.1 8.7 6.9 8.1 6.7

# FY16: FY17; FY17: FY18

Source: Thomson Reuters, *DBS Vickers

Industry Focus


Kingdee - PE band chart

Kingdee - PB band chart

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Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers

Yonyou - PE band chart

Yonyou - PB band chart

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Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers

ASIAN INSIGHTS VICKERS SECURITIES

ed-TH/ sa- DL

BUY

Last Traded Price: HK$2.75 (HSI : 19,286) Price Target: HK$4.20 (53% upside) (Prev HK$3.80) Potential Catalyst: Stronger growth in cloud revenue & profitability Where we differ: We expect higher operating losses from cloud business and lower earnings than consensus Analyst Tsz Wang TAM CFA, +852 2971 1772 [email protected] Chris KO [email protected]

What’s New Expect traditional ERP business to resume growth

in 2H15F as the restructuring of distribution

channels has concluded Expect the cloud business to grow at a CAGR of

80% from FY15-17F to account for 30% of the total

revenue More investment needed in FY15-16F to capture

the cloud business opportunity, leading to initial

operating losses and downward earnings revision

Price Relative

Forecasts and Valuation FY Dec (RMB m) 2014A 2015F 2016F 2017FTurnover 1,547 1,653 1,918 2,319 EBITDA 575 553 548 746 Pre-tax Profit 226 237 235 406 Net Profit 197 202 200 346 Net Pft (Pre Ex) 197 202 200 346 Net Profit Gth (Pre-ex) (%) 55.9 2.3 (0.8) 73.0 EPS (RMB) 0.08 0.07 0.07 0.12 EPS (HK$) 0.09 0.08 0.08 0.14 EPS Gth (%) 53.7 (8.9) (1.7) 71.4 Diluted EPS (HK$) 0.09 0.08 0.08 0.13 DPS (HK$) 0.01 0.01 0.01 0.02 BV Per Share (HK$) 0.92 1.44 1.49 1.61 PE (X) 30.0 32.9 33.5 19.5 P/Cash Flow (X) 11.7 15.2 15.1 10.5 P/Free CF (X) 13.5 15.9 15.8 10.9 EV/EBITDA (X) 10.8 9.8 9.7 6.8 Net Div Yield (%) 0.5 0.5 0.4 0.8 P/Book Value (X) 3.0 1.9 1.8 1.7 Net Debt/Equity (X) 0.1 CASH CASH CASH ROAE (%) 10.5 7.4 5.6 9.1 Earnings Rev (%): (13.7) (35.0) (5.8) Consensus EPS (RMB) 0.09 0.11 0.14 Other Broker Recs: B: 7 S: 0 H: 2

Source of all data: Company, DBSV, Thomson Reuters, HKEX

ERP funding the future growth Started cloud business by leveraging on ERP's market leading position. Kingdee is the second largest Chinese provider of ERP software in China with a focus on small and medium enterprises. It has started investing into the cloud business by leveraging on its large existing customer base. We are positive on the traditional ERP business in the medium term and expect high single-digit growth rates in the coming years. We also believe the huge potential of the cloud business and the investment now will benefit Kingdee in the longer term. We have a BUY rating on Kingdee with a TP of HK$4.2 based on 30x FY17F PE, pegged to its A-share major peer Yonyou’s historical average. ERP business resumes growth after restructuring of sales channel. We expect the revenue from ERP business to resume growth in 2H15F as the restructuring of sales channel has concluded. We forecast the revenue from ERP business to grow at a low single-digit rate to Rmb1,462m in FY15F. The restructuring from direct to indirect sales led to revenue decline but improvement in operating margin. It should improve overall profitability. We expect the operating profit to grow at a double-digit rate in FY15F. We are positive on the medium-term outlook of the ERP business and expect high single-digit growth rates in the coming years. Continuing to invest for future growth. We expect the revenue from the cloud business to grow at 80% p.a. from FY15-17F to account for 30% of the total revenue. The company currently focuses on growing the number of enterprise customers rather than the monetisation model. Therefore we believe more investments into the cloud business will be needed for R&D and marketing & sales. We estimate the operating losses from the cloud business to be Rmb100-150m in FY15F and Rmb180-230m in FY16F. We forecast it to break even in FY17-18F. Valuation: We believe that the cloud business has huge potential and the investments will benefit Kingdee in the longer term. We maintain BUY on Kingdee with a TP of HK$4.2 based on 30x FY17F (vs previous 30x FY16F PE), pegged to its A-share major peer Yonyou’s historical average. Key Risks to Our View:

Earnings risk. The revenue recovery of traditional ERP business may be slower than expected, and this could also result in less operating leverage. Any earnings disappointment could lead to PE contraction. Persistent valuation discount. The valuation discount to A-share peers may not narrow or even widen due to different stock market sentiments.

At A Glance Issued Capital (m shrs) 2,925 Mkt. Cap (HK$m/US$m) 8,043 / 1,034 Major Shareholders

Xu Shao Chun (%) 26.9 JD.com (%) 10.0 FMR LLC (%) 8.1 Credit Suisse Group AG (%) 7.9

Free Float (%) 73.1 3m Avg. Daily Val. (US$m) 8.0 ICB Industry : Technology / Software & Computer Services

43

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Relative IndexHK$

Kingdee (LHS) Relative HSI INDEX (RHS)


China / Hong Kong Company Guide

Kingdee Version 2 | Bloomberg: 268 HK Equity | Reuters: 0268.HK

Refer to important disclosures at the end of this report


Company Guide

Kingdee

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

ERP business growth. We expect Kingdee’s traditional ERP business to register a high single-digit revenue growth, supported by more e-commerce business activities. Enterprises need to rely more on enterprise software and cloud technology to integrate and manage their sales channel, inventory, supply chain and customer details. One example is that JD.com promoted Kingdee’s ERP products to its suppliers for information integration to enhance supply chain management. Note that the company has undergone restructuring in its sales channel, from direct sales to indirect sales, leading to a revenue decline but gross profit margin uplift in the past two years. The transition has been completed. We forecast revenue to resume growth and continue to improve due to operating leverage. Cloud business growth. The cloud business accounted for 11% of the total revenue in 1H15. Having a growth of 82% for the cloud business in 1H15, we forecast it to grow at a CAGR of 80% from FY14-17F. We expect this segment to account for 30% of the revenue by FY17F. We believe that the company has the first-mover advantage in China for being one of the earliest companies to develop cloud-based products, including mobile office cloud, finance cloud, ERP cloud and Express data cloud. 1. Cloud hub, ranked no.1 mobile office cloud in China,

has 4.5m registered users and 400k registered enterprises.

2. Finance Cloud, ranked no.1 accounting cloud in China, has 55k paying users.

3. K/3, ranked no.1 online ERP cloud in China, has 63k paying users and 1,000 paying enterprises.

4. Kuaidi100, ranked no.1 express data cloud in China, has 5.8bn parcel searches in 1H15.

Earnings contribution from the cloud business remains small at the moment. But it has stronger potential than the traditional ERP business, and the market is willing to give a higher valuation. The company may also consider spinning off its various cloud products in the future.

ERP rev growth

Cloud rev growth

Operating profit margin

Source: Company, DBS Vickers

-12.48

-6.77

1.49

7.72 8.01

-13.73-12.72-11.71-10.70-9.69-8.68-7.66-6.65-5.64-4.63-3.62-2.61-1.60-0.590.431.442.453.464.475.486.497.50

2013A 2014A 2015F 2016F 2017F

8680 80 80

0.0

17.5

35.1

52.6

70.1

2014A 2015F 2016F 2017F

14.8

19.1

17.6

14.2

19.1

0.0

3.9

7.8

11.7

15.6

19.5

2013A 2014A 2015F 2016F 2017F


Company Guide

Kingdee

Balance Sheet:

Healthy financial position. As at the end of 1H15, the company improved its financials to a net cash position of Rmb708m due to the issuance of shares to JD.com on 16 May 2015 to raise Rmb1.3bn. Share Price Drivers:

Narrowing of valuation discount to A-Share peers. Kingdee now trades at a discount to Yonyou’s c.40x FY15 PE. We expect Kingdee’s valuation to catch up with Yonyou which is its A-Share major peer, thanks to the launch of HK-Shanghai stock connect. The re-rating is also supported by the positive business outlook. Stock sentiment supported by favourable policies. There may be policies released by the government to help more enterprises adopt cloud services. The market may therefore give a higher valuation premium to the company.

Key Risks:

Cyclical uncertainties Product demand slows down due to poor economic activity.

Company Background:

Kingdee is the second largest Chinese provider of ERP software in China with a focus on small and medium enterprises.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE

Forward PE Band

01020304050607080

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

x

Avg: 19.6x

+1SD: 32.3x

-1SD: 6.8x

PB Band


0.3

0.3

0.3

0.4

0.4

0.4

0.4

0.4

0.5

0.5

0.5

0.00

0.20

0.40

0.60

0.80

1.00

2013A 2014A 2015F 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

2013A 2014A 2015F 2016F 2017F

Capital Expenditure (-)

RM

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2013A 2014A 2015F 2016F 2017F

Avg: 2.48x

+1sd: 3.16x

+2sd: 3.85x

‐1sd: 1.79x

‐2sd: 1.1x0.9

1.4

1.9

2.4

2.9

3.4

3.9

4.4

4.9

5.4

Feb-12 Feb-13 Feb-14 Feb-15

(x)


Company Guide

Kingdee

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F ERP rev growth (12.5) (6.8) 1.5 7.7 8.0 Cloud rev growth N/A 86.0 80.0 80.0 80.0 Operating profit margin 14.8 19.1 17.6 14.2 19.1 Source: Company, DBS Vickers

Segmental Breakdown (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (RMB m) Sales of software license 750 752 795 860 934 Service 747 648 626 674 727 Cloud 57 106 191 344 618 Others 48 41 40 40 40 Total 1,602 1,547 1,653 1,918 2,319 Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 1,602 1,547 1,653 1,918 2,319 Cost of Goods Sold (396) (271) (331) (422) (464) Gross Profit 1,206 1,276 1,322 1,496 1,855 Other Opng (Exp)/Inc (967) (976) (1,031) (1,223) (1,411) Operating Profit 239 300 291 273 444 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 (1) 0 0 0 Net Interest (Exp)/Inc (102) (73) (54) (38) (38) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 137 226 237 235 406 Tax (17) (25) (31) (31) (53) Minority Interest 7 (3) (4) (4) (7) Preference Dividend 0 0 0 0 0 Net Profit 126 197 202 200 346 Net Profit before Except. 126 197 202 200 346 EBITDA 532 575 553 548 746 Growth Revenue Gth (%) (9.3) (3.5) 6.9 16.1 20.9 EBITDA Gth (%) 288.8 8.0 (3.8) (0.8) 36.2 Opg Profit Gth (%) N/A 25.7 (3.0) (6.2) 62.7 Net Profit Gth (%) N/A 55.9 2.3 (0.8) 73.0 Margins & Ratio Gross Margins (%) 75.3 82.5 80.0 78.0 80.0 Opg Profit Margin (%) 14.9 19.4 17.6 14.2 19.1 Net Profit Margin (%) 7.9 12.7 12.2 10.4 14.9 ROAE (%) 7.6 10.5 7.4 5.6 9.1 ROA (%) 3.2 4.7 4.1 3.6 5.9

ROCE (%) 6.3 7.3 5.7 4.7 7.3 Div Payout Ratio (%) 0.0 15.2 15.0 15.0 15.0 Net Interest Cover (x) 2.3 4.1 5.3 7.1 11.7 Source: Company, DBS Vickers


Company Guide

Kingdee

Interim Income Statement (RMB m)

FY Dec 1H2013 2H2013 1H2014 2H2014 1H2015 Revenue 745 857 750 797 758 Cost of Goods Sold (189) (207) (144) (127) (158) Gross Profit 556 650 606 670 599 Other Oper. (Exp)/Inc (495) (472) (469) (507) (469) Operating Profit 61 177 137 163 130 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 (1) 0 Net Interest (Exp)/Inc (52) (50) (51) (23) (32) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 9 127 87 139 98 Tax (6) (11) (6) (20) (8) Minority Interest 6 1 1 (4) 1 Net Profit 9 118 81 116 92 Net profit bef Except. 9 118 81 116 92 Growth Revenue Gth (%) (4.5) (13.0) 0.7 (7.1) 1.1 Opg Profit Gth (%) N/A 72.5 124.5 (8.3) (5.1) Net Profit Gth (%) N/A 67.5 845.6 (1.9) 12.6 Margins Gross Margins (%) 74.7 75.8 80.9 84.0 79.1 Opg Profit Margins (%) 8.2 20.7 18.3 20.4 17.2 Net Profit Margins (%) 1.2 13.7 10.9 14.5 12.1 Source: Company, DBS Vickers

Balance Sheet (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 896 860 834 804 770 Invts in Associates & JVs 2 2 2 2 2 Other LT Assets 1,450 1,428 1,427 1,455 1,513 Cash & ST Invts 1,003 1,554 2,605 2,775 3,092 Inventory 4 4 4 4 5 Debtors 277 244 257 270 283 Other Current Assets 296 301 316 332 349

Total Assets 3,928 4,393 5,444 5,642 6,013 ST Debt

420 546 546 546 546 Creditors 363 303 318 334 351 Other Current Liab 169 181 189 197 206 LT Debt 1,155 1,291 811 811 811 Other LT Liabilities 66 74 79 79 101 Shareholder’s Equity 1,750 1,989 3,487 3,657 3,973 Minority Interests 4 9 13 17 25 Total Cap. & Liab. 3,928 4,393 5,444 5,642 6,013 Non-Cash Wkg. Capital 45 66 70 75 80 Net Cash/(Debt) (572) (283) 1,248 1,418 1,735 Debtors Turn (avg days) 67.2 61.5 55.3 50.1 43.5 Creditors Turn (avg days) 1,602.6 (26,020.0) 1,649.5 810.5 774.9 Inventory Turn (avg days) 14.0 (307.2) 21.4 10.5 10.0 Asset Turnover (x) 0.4 0.4 0.3 0.3 0.4 Current Ratio (x) 1.7 2.0 3.0 3.1 3.4 Quick Ratio (x) 1.3 1.7 2.7 2.8 3.1 Net Debt/Equity (X) 0.3 0.1 CASH CASH CASH Net Debt/Equity ex MI (X) 0.3 0.1 CASH CASH CASH Capex to Debt (%) 8.8 3.8 1.5 1.5 1.5 Z-Score (X) 3.3 3.2 4.0 4.1 4.2 Source: Company, DBS Vickers


Company Guide

Kingdee

Cash Flow Statement (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 137 226 237 235 406 Dep. & Amort. 294 275 265 275 303 Tax Paid (1) (5) (25) (31) (31) Assoc. & JV Inc/(loss) 0 1 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (8) 5 (4) (5) (5) Other Operating CF (7) 5 (34) (30) (30)

Net Operating CF 415 507 438 444 643 Capital Exp.(net) (139) (70) (20) (20) (20) Other Invts.(net) (217) (211) (214) (253) (306) Invts in Assoc. & JV (1) 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (96) (110) 31 30 30 Net Investing CF (454) (391) (203) (243) (296) Div Paid 0 0 (30) (30) (30) Chg in Gross Debt (17) 273 (480) 0 0 Capital Issues 16 14 1,327 0 0 Other Financing CF 0 0 0 0 0 Net Financing CF (1) 287 817 (30) (30) Currency Adjustments 0 0 0 0 0 Chg in Cash (40) 403 1,051 171 317 Opg CFPS (RMB) 0.17 0.20 0.15 0.15 0.22 Free CFPS (RMB) 0.11 0.17 0.15 0.15 0.21 Source: Company, DBS Vickers

Target Price & Ratings History

Source: DBS Vickers

1

2

3

2.02.53.03.54.04.55.05.56.06.57.0

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

HK$S.No. Date Closing Target Rat ing

Price Price1: 18-Mar-15 HK$2.85 HK$3.20 Buy2: 29-Jun-15 HK$5.01 HK$6.80 Buy3: 20-Aug-15 HK$2.93 HK$3.80 Buy4:


ed-TH/ sa- DL

FULLY VALUED

Last Traded Price: RMB20.39 (CSI300 Index : 3,052) Price Target: RMB14.00 (31% downside) (Prev RMB17.00) Potential Catalyst: Slower-than-expected earnings growth in the coming results Where we differ: We expect new businesses to take a longer time to contribute to earnings Analyst Tsz Wang TAM CFA, +852 2971 1772 [email protected] Chris KO [email protected]

What’s New Expect traditional ERP business to resume growth

in 2H15F as the restructuring of distribution

channels has concluded Fast growth in cloud at a CAGR of 100%+ from

FY15-17F to account for c.15% of the total revenue Lower earnings estimates due to significant

operating loss from the initial investment into

cloud business in FY15-16F

Price Relative

Forecasts and Valuation FY Dec (RMB m) 2014A 2015F 2016F 2017FTurnover 4,374 4,584 5,185 5,917 EBITDA 797 574 772 969 Pre-tax Profit 612 369 553 733 Net Profit 550 331 496 657 Net Pft (Pre Ex) 550 331 496 657 Net Profit Gth (Pre-ex) (%) 0.4 (39.8) 49.7 32.5 EPS (RMB) 0.39 0.23 0.35 0.46 Core EPS (RMB) 0.39 0.23 0.35 0.46 EPS Gth (%) (0.7) (40.5) 49.7 32.5 Core EPS Gth (%) (0.7) (40.5) 49.7 32.5 Diluted EPS (RMB) 0.39 0.23 0.34 0.45 DPS (RMB) 0.30 0.14 0.20 0.27 BV Per Share (RMB) 3.40 3.93 4.07 4.25 PE (X) 51.8 87.2 58.2 43.9 Core PE (X) 51.8 87.2 58.2 43.9 P/Cash Flow (X) 35.5 75.6 48.6 37.2 P/Free CF (X) 68.3 nm 148.9 76.8 EV/EBITDA (X) 35.3 47.2 35.3 28.1 Net Div Yield (%) 1.5 0.7 1.0 1.3 P/Book Value (X) 6.0 5.2 5.0 4.8 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 15.3 6.8 8.5 10.8 Earnings Rev (%): (32.9) (22.9) (21.5) Consensus EPS (RMB) 0.32 0.49 0.64 Other Broker Recs: B: 7 S: 2 H: 1

Source of all data: Company, DBSV, Thomson Reuters, HKEX

Priced beyond perfection Lofty valuation is vulnerable. The stock is trading at a high PE of 40x+ FY17F earnings, which has fully priced in the growth potential of its new business initiatives. The new segments require start-up investments and we believe that the market is overly optimistic on its near-term earnings contribution and any earnings disappointment would lead to pressure on share price.

Traditional ERP business is stable. Yonyou is a leading Chinese enterprise software or enterprise resource planning (ERP) provider in China with c.20% market share. We forecast its traditional ERP business to register high single-digit revenue growth in the coming two years, which is supported by more ERP applications for the increasing e-commerce activities in China.

New initiatives focus on internet businesses. Yonyou recently expanded into cloud services, third-party payments and P2P lending which are new and fast-growing segments. We expect these new initiatives to contribute c.15% to total sales by FY17F. However, the segments are still incurring losses and will erode FY15F and FY16F earnings growth as we do not expect breakeven to be earlier than FY17F. Valuation: The stock is trading at a 40x+ FY17F PE, above its 10-year average of 30x. We agree that new business initiatives have good long-term potential. But the market is simply over-optimistic, and we think the high valuation is unsustainable. We have a FULLY VALUED rating and a TP of Rmb14.0 on Yonyou, based on 30x FY17F PE which is its historical average. Key Risks to Our View:

Stronger-than-expected business growth. There are uncertainties on the new businesses including their breakeven points and profitability. Stronger-than-expected execution will provide upside risk to our view. Stock sentiment supported by favourable policies. There may be policies released by the government to help more enterprises adopt ERP services. The market may therefore give a higher valuation premium to the company.

At A Glance Issued Capital (m shrs) 1,465 Mkt. Cap (RMBm/US$m) 29,865 / 4,579

Major Shareholders Wang Wenjing (%) 44.7

Free Float (%) 55.3 3m Avg. Daily Val. (US$m) 96.5 ICB Industry : Technology / Software & Computer Services

52

102

152

202

252

302

352

5.0

15.0

25.0

35.0

45.0

55.0

65.0

75.0

Feb-12 Feb-13 Feb-14 Feb-15 Feb-16

Relative IndexRMB

Yonyou Network Technology (LHS)

Relative SHSZ300 Index (RHS)


China / Hong Kong Company Guide

Yonyou Network Technology Version 2 | Bloomberg: 600588 CH Equity | Reuters: 600588.SS Refer to important disclosures at the end of this report


Company Guide

Yonyou Network Technology

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Traditional ERP business. Yonyou has a leading market share of c.20% in the enterprise software market in China. We expect this segment to grow at high single digits in the coming years, thanks to increasing enterprise software penetration. This is partly supported by more ERP applications for rising e-commerce activities in China. New business initiatives. The company has recently expanded into cloud services, third-party payments and P2P lending which are in the new and fast-growing segments. We expect the new businesses to contribute c.15% to total sales by FY17F. However, these segments require significant start-up investments. They are still incurring losses presently and will erode FY15F and FY16F earnings growth, as we do not expect the segments to break even before FY17F. (1) Cloud business. Yonyou is developing cloud-based enterprise software applications and related value-added services, in order to capture the business opportunities brought by “internet+”, e-commerce and mobile internet. We estimate that cloud business will account for c.8% of total revenue in FY17F. (2) P2P lending. Yonyou launched its P2P lending platform yyfax.com in Oct 2014. P2P lending, together with third-party payments, will enable the company to provide a one-stop solution on financial management. We estimate that P2P lending will account for c.1% of total revenue in FY17F. (3) Third-party payments. Yonyou plans to integrate its third-party payment system - Chanpay - into its ERP software products to facilitate payment services, especially between enterprises, and between enterprises and government bodies. This will enhance the overall product functionality, which will help raise overall customer satisfaction and stickiness. Moreover, data collected will be of great value to other services such as internet financing.

Traditonal ERP business growth %

New businesses business growth %

Gross margin


181

89

0

37

74

111

148

185

2016F 2017F

62.3

67.5 67.5 68.7 67.9

0.0

14.0

28.0

42.0

56.0

70.0

2013A 2014A 2015F 2016F 2017F

2.2

-0.37

1

7 7

- 0.40

0.48

1.36

2.25

3.13

4.02

4.90

5.78

6.67

2013A 2014A 2015F 2016F 2017F


Company Guide


Balance Sheet:

Strong financials. We estimate a net cash position of Rmb2,270m in FY15F. Going forward, despite making more investments into the new businesses, we believe the company’s balance sheet will remain healthy. Share Price Drivers:

Earnings at risk. We believe the strong potential from the new businesses is fully priced in with its rich valuation and the market is too optimistic on profitability and breakeven timeline for the new businesses. The new businesses are at an early development stage and ongoing losses will erode operating profits and margins for FY15F and FY16F, based on our current estimates. There is downside earnings risk, which may disappoint the market and hence pressure the stock price. Moreover, the cloud platform business on which third-party developers can develop and sell cloud-based ERP is more challenging (than just developing apps), as it is not easy to build a customer base with a certain level of stickiness. Key Risks:

Uncertainty on new businesses Investment risks on new businesses More competition in cloud and mobile products Slower IT spending amid economic slowdown

Company Background:

Yonyou is a leading Chinese enterprise management software provider in China with c.20% market share. The company has been focusing more on government and state-owned enterprise customers.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE

Forward PE Band

PB Band


0.4

0.5

0.5

0.6

0.6

0.7

0.7

0.00

0.10

0.20

0.30

0.40

0.50

0.60

2013A 2014A 2015F 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

365.0

370.0

375.0

380.0

385.0

390.0

395.0

400.0

405.0

2013A 2014A 2015F 2016F 2017F

Capital Expenditure (-)

RM

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2013A 2014A 2015F 2016F 2017F

Avg: 56.6x

+1sd: 103.5x

+2sd: 150.3x

‐1sd: 9.7x

-33.4

16.6

66.6

116.6

166.6

216.6

266.6


(x)

Avg: 4.95x

+1sd: 8.29x

+2sd: 11.62x

‐1sd: 1.61x

-1.5

3.5

8.5

13.5

18.5


(x)


Company Guide


Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Traditonal ERP business growth %

2.2 (0.4) 1.0 7.0 7.0

New businesses growth %

N/A N/A N/A 181.0 88.9

Gross margin 62.3 67.5 67.5 68.7 67.9 Source: Company, DBS Vickers

Segmental Breakdown (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (RMB m) Traditonal ERP 4,303 4,277 4,330 4,633 4,958 New businesses 0 10 160 450 850 Others 60 87 94 101 109 Total 4,363 4,374 4,584 5,185 5,917 Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 4,363 4,374 4,584 5,185 5,917 Cost of Goods Sold (1,645) (1,421) (1,489) (1,625) (1,899) Gross Profit 2,717 2,954 3,096 3,559 4,018 Other Opng (Exp)/Inc (2,326) (2,571) (2,946) (3,268) (3,599) Operating Profit 391 382 150 291 420 Other Non Opg (Exp)/Inc 334 314 314 356 407 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (78) (84) (94) (94) (94) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 647 612 369 553 733 Tax (78) (42) (26) (39) (51) Minority Interest (21) (19) (12) (18) (24) Preference Dividend 0 0 0 0 0 Net Profit 548 550 331 496 657 Net Profit before Except. 548 550 331 496 657 EBITDA 822 797 574 772 969 Growth Revenue Gth (%) 3.0 0.3 4.8 13.1 14.1 EBITDA Gth (%) 37.4 (3.0) (28.0) 34.5 25.5 Opg Profit Gth (%) 83.7 (2.3) (60.9) 94.7 44.0 Net Profit Gth (%) 44.3 0.4 (39.8) 49.7 32.5 Margins & Ratio Gross Margins (%) 62.3 67.5 67.5 68.7 67.9 Opg Profit Margin (%) 9.0 8.7 3.3 5.6 7.1 Net Profit Margin (%) 12.6 12.6 7.2 9.6 11.1 ROAE (%) 17.6 15.3 6.8 8.5 10.8 ROA (%) 8.2 6.9 3.4 4.6 6.0

ROCE (%) 7.2 6.0 1.9 3.2 4.5 Div Payout Ratio (%) 53.2 63.9 60.0 60.0 60.0 Net Interest Cover (x) 5.0 4.5 1.6 3.1 4.5 Source: Company, DBS Vickers


Company Guide


Interim Income Statement (RMB m)

FY Dec 1H2013 2H2013 1H2014 2H2014 1H2015 Revenue 1,539 2,823 1,554 2,820 1,515 Cost of Goods Sold (564) (1,081) (558) (862) (577) Gross Profit 975 1,742 996 1,957 938 Other Oper. (Exp)/Inc (952) (1,374) (1,059) (1,512) (1,163) Operating Profit 23 369 (63) 446 (225) Other Non Opg (Exp)/Inc 146 188 155 159 170 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (37) (41) (40) (44) (47) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 132 515 52 560 (102) Tax (55) (23) (41) (1) (43) Minority Interest (7) (14) 1 (20) (23) Net Profit 69 479 11 539 (169) Net profit bef Except. 69 479 11 539 (169) Growth Revenue Gth (%) (10.3) 12.0 1.0 (0.1) (2.5) Opg Profit Gth (%) (76.0) 213.1 N/A 20.9 (254.9) Net Profit Gth (%) (48.5) 95.3 (83.7) 12.6 N/A Margins Gross Margins (%) 63.3 61.7 64.1 69.4 61.9 Opg Profit Margins (%) 1.5 13.1 (4.1) 15.8 (14.8) Net Profit Margins (%) 4.5 17.0 0.7 19.1 (11.1) Source: Company, DBS Vickers

Balance Sheet (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 1,597 1,810 2,042 2,264 2,473 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 1,895 2,058 2,116 2,169 2,218 Cash & ST Invts 2,100 2,963 4,363 4,259 4,241 Inventory 22 22 24 25 26 Debtors 1,394 1,476 1,550 1,627 1,709 Other Current Assets 222 481 481 481 481

Total Assets 7,230 8,811 10,575 10,825 11,147 ST Debt

1,020 1,268 1,268 1,268 1,268 Creditors 363 400 420 441 463 Other Current Liab 1,628 1,862 1,845 1,858 1,871 LT Debt 833 824 824 824 824 Other LT Liabilities 23 14 14 14 14 Shareholder’s Equity 3,227 3,986 5,735 5,933 6,196 Minority Interests 136 456 468 486 510 Total Cap. & Liab. 7,230 8,811 10,575 10,825 11,147 Non-Cash Wkg. Capital (353) (283) (211) (166) (118) Net Cash/(Debt) 247 871 2,270 2,167 2,148 Debtors Turn (avg days) 112.9 119.7 120.5 111.8 102.9 Creditors Turn (avg days) 76.8 105.5 108.7 104.8 94.0 Inventory Turn (avg days) 4.9 6.2 6.1 5.9 5.3 Asset Turnover (x) 0.7 0.5 0.5 0.5 0.5 Current Ratio (x) 1.2 1.4 1.8 1.8 1.8 Quick Ratio (x) 1.2 1.3 1.7 1.7 1.7 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 20.5 18.5 19.1 19.1 19.1 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers


Company Guide


Cash Flow Statement (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 647 612 369 553 733 Dep. & Amort. 97 101 110 124 143 Tax Paid (78) (42) (26) (39) (51) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (16) (45) (55) (58) (61) Other Operating CF 161 179 (16) 13 13

Net Operating CF 810 804 382 594 776 Capital Exp.(net) (379) (387) (400) (400) (400) Other Invts.(net) (437) (269) 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 121 56 0 0 0 Net Investing CF (695) (600) (400) (400) (400) Div Paid (192) (291) (351) (199) (298) Chg in Gross Debt 97 336 0 0 0 Capital Issues 148 764 0 0 0 Other Financing CF 229 (159) 1,769 (99) (97) Net Financing CF 282 649 1,417 (298) (394) Currency Adjustments 1 (1) 0 0 0 Chg in Cash 397 853 1,399 (104) (18) Opg CFPS (RMB) 0.60 0.61 0.31 0.46 0.59 Free CFPS (RMB) 0.31 0.30 (0.01) 0.14 0.27 Source: Company, DBS Vickers

Target Price & Ratings History

Source: DBS Vickers

1 2 3

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Feb-

15

May

-15

Jul-1

5

Sep-

15

Dec

-15

Feb-

16

RMBS.No. Date Closing T arget Rat ing

Price Price1: 29-Jun-15 RMB46.34 RMB32.00 Fully Valued2: 22-Jul-15 RMB42.56 RMB32.00 Fully Valued3: 31-Aug-15 RMB27.43 RMB17.00 Fully Valued4:

Industry Focus


DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited (“DBSVHK”) This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd and DBSVHK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVHK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBSVHK, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 22 February 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended in this report as of 17 Feb 2016.

2. Compensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Industry Focus


RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”) or DBS Vickers (Hong Kong) Limited (“DBSVHK”), which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSVHK is regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBSVHK which is licensed and regulated by the Hong Kong Securities and Futures Commission.

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United Kingdom

This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients.

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBSVHK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Vickers (Hong Kong) Limited

18th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong

Tel: (852) 2820-4888, Fax: (852) 2868-1523

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