Kingdee. China / Hong Kong Company Focus FULLY VALUED HK$1.57 HSI: 22,100. On the right track but will take time to recover

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1 China / Hong Kong Company Focus Bloomberg: 268 HK Equity Reuters: 0268.HK DBS Group Research. Equity 8 November 2012 FULLY VALUED HK$1.57 HSI: 22,100 Price Target : 12-Month HK$ 0.90 Reason for Report: Company update and earnings revision Potential Catalyst: Stabilisation of global economy to lead recovery of SMEs in China DBSV vs Consensus: We are more conservative on FY13 earnings Analyst Tsz Wang TAM CFA, tw_tam@hk.dbsvickers.com On the right track but will take time to recover Cloud application key direction for the long term; insignificant contribution in the near term Demand for small enterprise product (KIS) shows signs of pick-up in 3Q12 Short-term earnings pressure remains due to uncertain macro outlook Price Relative HK$ Relative Index Maintain FULLY VALUED with TP of HK$ Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Forecasts and Valuation (LHS) Relative HSI INDEX (RHS) FY Dec (RMB m) 2011A 2012F 2013F 2014F Turnover 2,022 1,860 2,047 2,243 EBITDA Pre-tax Profit 181 (242) Net Profit 145 (229) Net Pft (Pre Ex.) 145 (229) EPS (RMB) 0.06 (0.09) EPS (HK$) 0.07 (0.11) EPS Gth (%) (47.2) (257.4) n.m Diluted EPS (HK$) 0.07 (0.11) DPS (HK$) BV Per Share (HK$) PE (X) 22.0 nm P/Cash Flow (X) 21.1 nm P/Free CF (X) nm nm EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH ROAE (%) 9.2 (15.4) Earnings Rev (%): (2) 59 1 Consensus EPS (RMB) (0.01) Other Broker Recs: B: 3 S: 5 H: 4 ICB Industry: Technology ICB Sector: Software & Computer Services Principal Business: is a leading provider of enterprise management software in China Source of all data: Company, DBSV, HKEX Leading the cloud application in ERP. We attended s annual customer conference in Shanghai on 4 Nov. We learned that has devoted resources on developing cloud applications for its ERP products, and is years ahead of most local players. The industry agrees with this direction as mobile Internet gains in popularity. However, the revenue contribution remains insignificant in the near-term. The positives in 3Q12. Sales of KIS (a product for small enterprises) shows signs of pick-up. On the other hand, the company will continue to be selective in larger size but low margin projects. Opex in 9M12 is also stable after a series of cost-cutting measures. will have wider channel distribution especially on K/3 (previously only <50% distributed through partners), to minimise the fixed-cost of maintaining branch operations. Short-term earnings pressure remains. We project a smaller loss of Rmb229m for FY12. Cost-cutting will be key to earnings recovery going forward. Based on the latest strategy and updates, we revise upwards FY13 earnings from Rmb29m to Rmb46m, and FY14 earnings by 1% to Rmb147m. In view of the uncertain short-term outlook, we only expect full recovery in FY14. Lacking earnings support, the stock trades at 71x FY13 PE. Maintain FULLY VALUED with a TP of HK$0.9 unchanged (based on estimated property value per share). At A Glance Issued Capital (m shrs) 2,519 Mkt. Cap (HK$m/US$m) 3,960 / 511 Major Shareholders Xu Shao Chun (%) 31.0 Capital Research and Management (%) 6.1 FIL Limited (%) 6.0 JPMorgan Chase & Co. (%) 5.0 Free Float (%) 69.0 Avg. Daily Vol.( 000) 11,626 In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd ( DBSVR ), are to contact DBSVR at in respect of any matters arising from or in connection with this report. Refer to important disclosures at the end of this report ed-oy / sa- AL

2 We attended the Chinese Management World Forum in Shanghai on 4 Nov. This annual customer conference is coorganised by (268 HK), which saw a total of 1,000+ participants this year, mostly being potential or existing ERP users. The theme is "Transformation and Breaking Through in the Cloud Computing Era". We also met s management for the latest business update. Key takeaways from customer annual conference Cloud computing will be a core part of ERP development in the future. Mobile Internet has become very popular in China. Industry survey shows that most enterprise managers are willing to have cloud applications for enterprise on their mobile devices. has launched kdweibo, a closed social network application for enterprise customers. Currently it has 250,000+ registered users under 20,000+ corporate accounts. While the service could be monetised based on the number of users (or number of apps downloaded), standalone revenue contribution should be insignificant. The company believes that the apps serve as an appealing feature to enhance overall user experience and therefore customer stickiness and product penetration. Management believes that its cloud development is years ahead of most other Chinese ERP providers. Compared to foreign brands, has a stronger competitive advantage in social network kind of applications, as it involves understanding the Chinese management style. As for the ERP industry in China, experts believe that the high growth environment in China is over. In order to stay competitive, ERP is a solution to enhance efficiency. 3Q12 business update earlier announced on HKEx that its major subsidiary Software (China) Co Ltd (" Software") recorded a net loss of Rmb286m in 9M12. The disclosure is required in relation to its issuance of a medium-term note. The numbers are based on PRC accounting. Revenue momentum in 3Q12 should be similar to that in 1H12 (sales down 8% y-o-y in 1H12) Opex is stable in 9M12 after a series of cost control measures. There was improvement in 3Q12, and we expect that the benefit from cost cutting will further be reflected in FY13. Going forward, headcount reduction and salary freezes will continue. will have more channel distribution especially on K/3 products (previously <50% was sold by partners), so as to minimize the fixed-cost of maintaining branch operations. Its business strategy has shifted from market share gain to earnings focus. It will be more selective on those large size and yet low margin (or actually non-profitable) projects. In this regard, investors should anticipate slower revenue, but improving margins in the future. Demand for KIS (the simplest product category) showed a slight recovery in 3Q12. Earnings revision and recommendation made a loss of Rmb211m in 1H12, and management is targeting break-even for the full year. Street estimates are quite diverged but the consensus suggests a slight loss for the full year, which implies c.rmb100m+ earnings in 2H12. In the short-term, the operating environment remains challenging. We believe that s loss has not been narrowed down in 3Q12. Its major competitor Ufida ( CH) also reported a worse-than-expected 3Q results (loss of Rmb131m in 3Q12, widened from Rmb32m in 3Q11). We revise our estimates by incorporating slower revenue and lower Opex. We anticipate the loss to narrow down to Rmb19m in 2H12 due to historically stronger revenue in 4Q and effective cost control measures. We forecast a net loss of Rmb229m for the full year. We revise upwards FY13 earnings from Rmb29m to Rmb46m, and FY14 earnings by 1% to Rmb147m, as we expect greater benefits from cost cutting when the business gradually recovers. Despite that, we are positive on the sector's long-term outlook, it takes time for short-term earnings to go back to historical levels by simply downsizing. Lacking short-term earnings support, we maintain our FULLY VALUED recommendation on the counter, with a TP of HK$0.9 unchanged (based on estimated property value per share). This should serve a very strong support level. Page 2

3 PE band chart PB band chart Share Price (HK$) x 40x 28x 17x 5x Share Price (HK$) x 6.7x 4.7x 2.8x 0.8x Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers Peer Table Mkt PE PE Yield Yield P/Bk P/Bk ROE ROE Currency Price Cap Fiscal 12F 13F 12F 13F 12F 13F 12F 13F Company Name Code Local$ US$m Yr x x % % x x % % Intl.* 268 HK HKD Dec-11 n.a (15.4) 3.3 Sap Ag (Mil) SAP US EUR ,449 Dec Oracle# ORCL US USD ,379 May Yonyou Software 'A' CH CNY ,721 Dec Neusoft 'A' CH CNY ,467 Dec China Nat. Software 'A' CH CNY Dec-11 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. YGSOFT 'A' CH CNY ,021 Dec Hand Enterprise 'A' CH CNY Dec QAD 'A'# QADB US USD Jan n.a. 0.0 n.a. n.a. n.a. n.a. Aisino 'A' CH CNY ,130 Dec # FY12: FY13; FY13: FY14 Source: Thomson Reuters, *DBS Vickers Page 3

4 Key Assumptions Sensitivity Analysis KIS sales growth (18.0) K/3 sales growth (16.4) Revenue +/- 1% Net Profit +/- 28% EAS sales growth (7.5) OPM +/- 1ppt Net Profit +/- 40% Service revenue growth Operating profit margin (10.4) Segmental Breakdown (RMB m) Revenues (RMB m) Sales of software license 813 1, ,031 Implementation service Consultation, training and maintenance service Others Total 1,437 2,022 1,860 2,047 2,243 Income Statement (RMB m) Revenue 1,437 2,022 1,860 2,047 2,243 Cost of Goods Sold (338) (605) (612) (717) (792) Gross Profit 1,099 1,418 1,248 1,331 1,452 Other Opng (Exp)/Inc (798) (1,228) (1,441) (1,222) (1,230) Operating Profit (193) Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (6) (9) (49) (58) (60) Exceptional Gain/(Loss) Pre-tax Profit (242) Tax (19) (28) (2) (3) (8) Minority Interest (5) (8) 15 (2) (8) Preference Dividend Net Profit (229) Net Profit before Except (229) EBITDA Growth Revenue Gth (%) (8.1) EBITDA Gth (%) 38.7 (10.9) (92.6) 1, Opg Profit Gth (%) 37.1 n.m. n.m. n.m Net Profit Gth (%) 27.9 n.m. n.m. n.m Margins & Ratio Gross Margins (%) Opg Profit Margin (%) (10.4) Net Profit Margin (%) (12.3) ROAE (%) (15.4) ROA (%) (6.7) ROCE (%) (7.3) Div Payout Ratio (%) N/A Net Interest Cover (x) (3.9) Margins Trend 22.0% 17.0% 12.0% 7.0% 2.0% -3.0% 2010A 2011A 2012F 2013F 2014F -8.0% -13.0% Operating Margin % Net Income Margin % Page 4

5 Interim Income Statement (RMB m) FY Dec 1H2010 2H2010 1H2011 2H2011 1H2012 Revenue , Cost of Goods Sold (112) (226) (198) (407) (245) Gross Profit Other Oper. (Exp)/Inc (336) (462) (511) (716) (741) Operating Profit (206) Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc 1 (6) (2) (7) (19) Exceptional Gain/(Loss) Pre-tax Profit (225) Tax (1) (18) (9) (20) (1) Minority Interest 3 (7) 2 (10) 15 Net Profit (211) Net profit bef Except (211) Revenue Trend 1,400 1,200 1, H2007 1H2008 2H2008 1H2009 2H2009 1H2010 2H2010 1H2011 2H2011 1H2012 Revenue Revenue Growth % (YoY) 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% Growth Revenue Gth (%) (7.6) Opg Profit Gth (%) (74.5) (251.9) Net Profit Gth (%) (90.1) (266.0) Margins Gross Margins (%) Opg Profit Margins (%) (26.4) Net Profit Margins (%) (27.0) Page 5

6 Balance Sheet (RMB m) Asset Breakdown Net Fixed Assets ,038 Invts in Associates & JVs Other LT Assets 680 1,082 1,182 1,287 1,397 Cash & ST Invts Inventory Debtors Other Current Assets Total Assets 2,258 3,031 3,799 3,970 4,224 Debtors % Assocs'/JVs - 0.0% Net Fixed Assets % Bank, Cash and Liquid Assets % ST Debt Other Current Liab ,039 LT Debt ,000 1,000 1,000 Other LT Liabilities Shareholder s Equity 1,534 1,609 1,380 1,426 1,572 Minority Interests Total Cap. & Liab. 2,258 3,031 3,799 3,970 4,224 Inventory - 0.2% Non-Cash Wkg. Capital (96) (12) Net Cash/(Debt) (602) (819) (940) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH CASH Net Debt/Equity ex MI (X) CASH CASH Capex to Debt (%) Z-Score (X) Cash Flow Statement (RMB m) Pre-Tax Profit (242) Dep. & Amort Tax Paid (1) (2) (28) (2) (3) Assoc. & JV Inc/(loss) (Pft)/ Loss on disposal of FAs Chg in Wkg.Cap. (91) (105) (66) (52) (63) Other Operating CF (47) (124) (3) (5) (3) Net Operating CF (118) Capital Exp.(net) (62) (203) (260) (150) (150) Other Invts.(net) (160) (312) (232) (255) (280) Invts in Assoc. & JV 0 (72) (50) (50) (50) Div from Assoc & JV Other Investing CF (77) Net Investing CF (299) (481) (539) (451) (477) Div Paid (40) (60) Chg in Gross Debt Capital Issues 23 (35) Other Financing CF Net Financing CF Currency Adjustments Chg in Cash (217) (121) Opg CFPS (RMB) (0.02) Free CFPS (RMB) 0.09 (0.02) (0.15) Capital Expenditure A 2011A 2012F 2013F 2014F Capital Expenditure (-) Page 6

7 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 DBS Vickers Research is available on the following electronic platforms: DBS Vickers ( Thomson ( Factset ( Reuters ( Capital IQ ( and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. 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