Share price of Kingdee plunged 8.4% due to profit taking upothe company’s 1H25 results slightly missing iterms of revenue (+11% YoY) and ARR (RMB3.7bn, +18.5% YoY). However, we believe Kingdee still demonstrates decent turnaround iprofitability and operating cash flow. Particularly, management guides breakeveand no less thaRMB1bnet operating cash for 2025. Ithe long term, we believe Kingdee’s order wins from Cloud and AI agent will generate more upside, giveKingdee’s advantage ileveraging proprietary data. We slightly cut TP price from HK$18.9 to HK$18.08 to factor inew SOTP assumption. MaintaiBUY.
　　Key Factors for Rating
　　1H25 results missed: Revenue grew 11% YoY. GPM improved 2.4ppts YoY to 65.6%, OPM increased 5.6ppts YoY to -5.5% thanks to effective cost control iR&D but partially offset by one-time layoff compensatioaround RMB80m. Net loss narrowed 55% YoY to RMB98m but still missed consensus of RMB73m mainly due to less interest income. Net operating cash outflow reduced to RMB18m (was -RMB166m i1H24). Cloud subscription: Large enterprise business (Cloud Cosmic/Constellation): revenue increased 41.1% YoY to RMB276m and NDR was 108% due to continuous wins iboth upsell and new sign-up. Medium enterprise business (Cloud Galaxy): revenue grew 19% YoY to RMB740m, with total clients reaching 46k and 94% NDR. SME business: revenue grew 23.8% YoY to RMB537m with NDR at 93% and 88% for Cloud Stellar and Jingdou Cloud. Product, implementatioand others: This is a new segment disclosure by Kingdee where it groups all non-subscriptionature revenues (such as one project implementatiofee) as well as management software revenues. Mgmt. will increasingly outsource such non-core business and as a result, we expect that while group revenue growth may slow down, margins and profit should increase. Positive guidance: I1H25, ARR was RMB3.7bn, up 18.5% YoY; Cloud subscriptiocontract liabilities were RMB3.4bn, up 25% YoY. Mgmt. guides 2025 breakevetarget unchanged with net operating cash to reach not less thaRMB1bdespite uncertaiand challenging macro. Mgmt. also believes subscriptioGPM should be higher thacurrent 96.2% thanks to high platform reuse rate, paid AI solutioand accelerating global expansioiSouth Asia and the Middle East.
　　AI driving future growth: In 1H25, Kingdee’s AI contract value exceeded RMB150m, with AI Assistant reaching an active user base of 170k enterprises.
　　Mgmt. is confident at its latest AI agent who received positive client feedback and secured over 800 advanced AI service orders. We believe Kingdee will be at a favoured position as it could work with clients on vast proprietary data and explore the value underneath.
　　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 2025/26/27 sales by 6%/9%/13% to reflect outsourcing strategy but raise EPS by 4% and 21% in 2026/27 to reflect the smooth subscription transition and clear long term AI upside. Our valuation is based on SOTP, which we now apply 13x 2026E P/S to Cloud Subscription business, and 15x 2026E P/E to other business. Our new target price is HK$18.08 (previously HK$18.90).
　　Maintain BUY.