Kingdee reported 2024 results: revenue was RMB6.3bn, up 10% YoY (2023: 17% YoY), 4% short of Bloomberg consensus; dragged by RMB55mn fair value losses on investment properties; net loss attributable to ordinary shareholders was RMB142mn (2023: loss of RMB210mn), shy of Bloomberg consensus at RMB75mn. Excluding the impact from fair value loss, Kingdee’s loss reduction effort was largely inline with our expectation, with loss margin narrowing from 3.2% in 2023 to 1.4% in 2024, driven by 0.9ppt improvement in gross margin, on an increase in subscription revenue contribution, as well as operating efficiency improvement. We remain positive that Kingdee is well-positioned to benefit from the domestic substitution trend, backed by strong and continuously enhanced product capability and partner ecosystem. Its “AI First” strategy, aiming to accelerate AI-ERP integration and prioritize AI-applicable scenarios, should help drive ARPU expansion over the long-run and drive a reacceleration in revenue growth when macro recovers, in our view. We are looking for revenue growth to recover to 12.5%/15.2% YoY in 2025E/2026E. We roll forward our valuation to 2025E, and our TP is lifted to HK$19.3 (prior HK$10.8) based on 8.5x FY25E EV/S, in-line with two-year mean plus two s.d. to reflect Kingdee’s industry-leading position and its strong development potential in the AI era (was 4.4x 2024E EV/S; 5-year mean of 11.4x). Maintain BUY.
　　Cloud revenue contribution increased steadily. In 2024, Kingdee’s cloud rev grew 13% YoY to RMB5.1bn (82% of total; +3ppt YoY). ERP business and others revenue declined by 2% YoY (2023: +2% YoY). Despite macro headwinds, Kingdee inked 20% YoY growth in ARR (2023: 34%) and 21% YoY growth in subscription contract liabilities (2023: 28%).
　　Small- and medium-sized enterprises: Galaxy maintained healthy OPM. Kingdee’s core SaaS product Galaxy achieved revenue of RMB2.2bn in 2024, up 10.3% YoY (2023: 16.3%). Galaxy recorded c.44,000 customers by end-2024, indicating c.5,000 YoY net adds (2023: c 8,000), and saw 19% YoY growth in subscription ARR (2023: 29%). Net dollar retention (NDR) rate came in at 95% in 2024, down slightly from 97% in 2023 owing to macro headwinds. Management highlighted that Kingdee has a market share of 46% in national-level niche-and-specialized little giants, and noted that the OPM of Galaxy business stayed at >20% level in 2024, which demonstrated its ability to maintain stable profitability amid macro headwinds, in our view.
　　Large enterprises: NDR recovered from trough in 1H24. Benefiting from ongoing software localization demand, as well as enhanced product capability, Kingdee Cosmic & Constellation (C&C) revenue grew 33% YoY to RMB1.3bn (20.8% of total revenue; +3.5ppts YoY) in 2024, and NDR recovered from 97%/105% in 1H24/2023 to 108.0%, which demonstrated Kingdee’s sustained large customer recognition.
　　Update on financial guidance. Although facing macro uncertainties, management maintained its target to achieve net profit breakeven in 2025E, and guided for over RMB1.0bn OCF in 2025E (2024: RMB933.5mn). Also, it guided for >20% YoY growth in ARR in 2025E based on preliminary estimates. Management highlighted “AI First, Subscription First, and Globalization” strategy, which in our view should help drive innovation through AI integration, deepen subscription models, and accelerate global expansion. Kingdee expects the incorporation of AI features to improve both user stickiness and ARPU, and to help improve operating efficiency of both its customers and itself.