Kingdee released its preliminary financial results for 2023 on 5 January. Management expects total revenue of RMB5.65bn-5.70bn for 2023, representing YoY growth of 16.2%-17.2% (2022: 16.6%), slightly shy of Bloomberg consensus of RMB5.8bn which we attribute to macro headwinds, while the expectation for loss attributable to ordinary shareholders of RMB170mn-250mn was better than consensus at RMB259mn, in our view demonstrated on track loss reduction aided by efficient cost control. Although we expect demand recovery will take time amid current macro backdrop, digitalization and domestic substitution remains a vital long-term trend, and Kingdee is well-positioned to benefit from the trend, in our view. With greater revenue generation from subscription services than peers, Kingdee will likely enjoy greater visibility on revenue growth in 2024. We trim target price to HK$15.1 per share (previous HK$17.0), based on one-year average EV/Sales of 7.5x (previous: 8.4x). BUY.
　　Resilient performance amid macro headwinds. For 2023, Kingdee expects to record: 1) total revenue of RMB5.65bn-5.70bn, representing YoY growth of 16.2%-17.2% (2022: 16.6%), slightly shy of Bloomberg consensus of RMB5.8bn; 2) net cash flow from operating activities of c.RMB630mn- 670mn, up 68.3%-78.9% YoY; 3) loss attributable to ordinary shareholders of RMB170mn-250mn, better than consensus at loss of RMB259mn, which indicated a loss reduction of RMB140mn-220mn YoY; 4) Cloud subscription annual recurring revenue (ARR) of RMB2.85bn (vs previous guidance of RMB3.0bn), up 32.8% YoY. Although recovery of revenue growth and ARR growth are likely slower than previous expectation owing to ongoing macro headwinds, the preliminary results have demonstrated Kingdee’s ability to achieve resilient financial performance, in our view.
　　Loss reduction and cash flow status improvement on track. The results imply Kingdee has recorded: 1) 2H23 revenue of RMB3.08bn-3.13bn, up 15.5-17.4% YoY (2H22: 16.0%; 1H23: 16.8%); 2) 2H23 net profit of RMB34mn-114mn (2H22: net loss of RMB33mn), demonstrated an on track loss reduction, aided by Kingdee’s disciplined spending, and scale effect driven by the increase in revenue contribution from subscription revenue.
　　Operating efficiency improvement likely remains a key theme for software players in 2024. We expect structural recovery of the software and IT services sector may still take time, due to macro uncertainty and enterprises’ stringent budget. However, the improvement in market liquidity may support the re-rating of the sector. Looking ahead in the mid-to long term, we remain positive on the investment theme of software localization. We believe the recovery of the macro environment should support enterprise IT spending and sector valuation recovery. Kingdee’s revenue growth may enjoy greater visibility compared to overall industry, given greater revenue contribution from subscription services. Reiterate Kingdee as our sector top pick within software and IT services coverage space.