Kingdee’s FY24 results were a slight miss to consensus but overall profitability and cash flow turnaround is taking place. We are not bothered much by the slightly slow IT spending in FY24 for now as we think the momentum has started to pick up meaningfully entering 2025 driven by fiscal stimulus especially regarding government digitalisation and AI projects. The increase in ARR (RMB3.4bn, +20% YoY), contract liability (RMB3.7bn, +17% YoY) and net operating cash flow of RMB934m again support Kingdee’s competitiveness in cloud and AI era. In the long term, we believe Kingdee’s order wins over SOE and large enterprise will contribute to a much healthier profitability than current level as Kingdee’s AI products progress. We maintain our FY25 breakeven target unchanged. Maintain BUY with new TP of HK$18.9 (was HK$8.5).
　　Key Factors for Rating
　　2H24 results slightly missed: Revenue grew 9% YoY. GPM improved 0.6ppt YoY to 66.6%, OPM increased 0.5ppt YoY to -0.5% thanks to improving SME client margins and cost control (revenue per head remained steady up trend).
　　NI increased 3% YoY to RMB76m, below BOCIe of RMB152m and consensus of RMB150m mainly due to the slowdown and project delay in 2H24 when enterprise IT spending confidence remained low.
　　By cloud segments: Large enterprise business (Cloud Cosmic/Constellation): revenue increased 29% YoY and 38% HoH to RMB758m and NDR was at 108% due to continuous wins in both upsell and new sign-up. Medium enterprise business (Cloud Galaxy): revenue grew 7% YoY and 4% HoH, with total clients reaching 44k and 95% NDR. SME business: revenue grew 11% YoY. NDR of Cloud Stellar improved to 93% (was 92% in 1H24).
　　Subscription bringing strong cash inflow: In 2024, net operating cash was RMB934m and mgmt. guides 2025 net operating cash to further increase though overall macro remains uncertain and challenging. In 2H24, ARR was RMB3.4bn, up 20% YoY; Cloud contract liabilities were RMB3.5bn, up 21% YoY; subscription contract liabilities were RMB3.1bn, up 28% YoY.
　　AI is driving new IT system replacement cycle including ERP, finance and HR systems: We expect the IT system domestic substitution in China’s large enterprise and SOE will accelerate in the DeepSeek era. Kingdee will benefit in the long term from the secular trend of enterprises incorporating DeepSeek into their business. To better unleash the potential of their proprietary data, enterprises will have no choice but to build a better IT infra including database, ERP, finance and HR systems.
　　Key Risks for Rating
　　1) Enterprise IT spending slowdown due to macro uncertainty; 2) risk of bottom- line miss due to heavy R&D expenses; 3) risk of rising competition; and 4) unsatisfactory subscription retention.
　　Valuation
　　We cut 2025/26 sales by 3%/4% but raise our PS multiple to reflect the current transition period of enterprise developing their AI strategy for the long term. Our valuation is based on SOTP, which we apply 8x 2026E P/S (was 4x 2025E P/S) to Cloud Services business, and 9x 2026E P/E to Management Software business (was 9x 2025E P/E). Our new target price is HK$18.9 (previously HK$8.5).
　　Maintain BUY.