China / Hong Kong Company Focus Bloomberg: 600588 CH Equity Reuters: 600588.SS DBS Group Research. Equity 31 August 2015 Refer to important disclosures at the end of this report FULLY VALUED Last Traded Price: RMB27.43 (CSI300 Index : 3,342) Price Target : RMB17.00 (38% downside) (Prev RMB32.0) Potential Catalyst: Slower-than-expected earnings growth Where we differ: We expect new business to take longer time to contribute Analyst Tsz Wang TAM CFA, +852 2971 1772 tw_tam@hk.dbsvickers.com Chris KO chris_ko@hk.dbsvickers.com Price Relative 75.0 65.0 55.0 45.0 35.0 25.0 15.0 RMB 5.0 46 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 (LHS) Relative SHSZ300 Index (RHS) Relative Index Forecasts and Valuation FY Dec (RMB m) 2014A 2015F 2016F 2017F Turnover 4,374 4,880 6,118 7,601 EBITDA 797 762 958 1,209 Pre-tax Profit 612 551 717 933 Net Profit 550 494 644 837 Net Pft (Pre Ex) 550 494 644 837 EPS (RMB) 0.39 0.35 0.45 0.59 EPS Gth (%) (0.7) (11.3) 30.3 30.0 Diluted EPS (RMB) 0.39 0.34 0.44 0.58 DPS (RMB) 0.30 0.20 0.26 0.34 BV Per Share (RMB) 3.40 3.97 4.15 4.38 PE (X) 69.7 78.6 60.4 46.4 P/Cash Flow (X) 47.7 68.1 50.6 38.7 P/Free CF (X) 91.9 227.7 105.6 64.2 EV/EBITDA (X) 47.6 48.5 38.6 30.5 Net Div Yield (%) 1.1 0.7 1.0 1.3 P/Book Value (X) 8.1 6.9 6.6 6.3 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 15.3 10.1 10.9 13.4 EPS Rev (%): (20) (19) (17) Consensus EPS (RMB) 0.51 0.65 0.87 Other Broker Recs: B: 8 S: 1 H: 2 ICB Industry: Technology ICB Sector: Software & Computer Services Principal Business: Yonyou is the largest Chinese provider of ERP software in China focusing on government and state-owned enterprise customers Source of all data: Company, DBSV, Thomson Reuters, HKEX 296 246 196 146 96 Too early to be optimistic 1H15 results below our expectations due to operating loss from new businesses and weak software sales New businesses are on track but too early to contribute to earnings Expect downward earnings revisions as the market was too optimistic on new businesses Maintain FULLY VALUED, with a lower TP of Rmb17 1H15 results below expectations. Revenue fell 3% y-o-y to Rmb1,515m in 1H15, and losses from operations widened to Rmb197m, from 1H14 s Rmb31m. The company reported a net loss of Rmb169m, vs. Rmb11m profit in 1H14. The results were below market expectations. The fall in revenue was primarily due to a 9% decline in sales of software products to Rmb751m; this segment contributes 50% of revenue. This was partly offset by 5% growth in technical and training services to Rmb674m. Gross margin contracted 2.2ppts to 61.9% and core operating loss deteriorated from Rmb31m to Rmb197m, due to operating losses from new businesses. New businesses on track but too early to contribute. The new businesses are marking satisfactory progress but revenue generated remains insignificant at this point. They are still incurring operating losses. The number of enterprise customers grew 113% to 320k from the end of 2014. The transaction volumes of P2P lending and third party payments were Rmb753m and Rmb3,100m in 1H15, as compared to Rmb117m and Rmb2,100m in FY14. Maintain Fully Valued, TP lowered to Rmb17. We have cut our EPS estimates by 20%/19%/17% for FY15-17 due to slower traditional ERP businesses, greater operating losses from the new businesses and 4% dilution from issuance of 53m new shares. We lower our TP to Rmb17 pegged at 30x FY17F PE which is the historical average. We lower our target multiple from 1SD above historical average previously due to weaker market sentiment. Maintain Fully Valued rating as we think the market has been too optimistic on the new businesses; we expect further downward earnings revision by the market. At A Glance Issued Capital (m shrs) 1,459 Mkt. Cap (RMBm/US$m) 40,020 / 6,291 Major Shareholders Wang Wenjing (%) 44.7 Free Float (%) 55.3 3m Avg. Daily Val. (US$m) 415.6 www.dbsvickers.com ed- JS / sa- PY
INVESTMENT THESIS Profile Yonyou is a leading Chinese enterprise management software provider in China with c.20% market share. The company has been focusing more on government and state-owned enterprise customers. Rationale Growth driven by new businesses; but downside risk to near term earnings Yonyou has started new businesses on cloud applications, third party payments and P2P lending. We think the market is overestimating the earnings due to the higher investment loss on new businesses. Sky-high valuation vulnerable Valuation We have a FULLY VALUED recommendation on the stock based on 30x FY17 price earnings ratio Risks Uncertainty on new businesses Investment risks on new businesses More competition in cloud and mobile products Slower IT spending amid economic slowdown Source: DBS Vickers Page 2
PE band chart PB band chart Share Price (RMB) 90 80 70 60 50 40 30 20 10 0 178x 137x 96x 54x 13x Share Price (RMB) 80 70 60 50 40 30 20 10 0 23.2x 17.9x 12.5x 7.2x 1.8x Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers PE chart x 200 180 160 140 120 100 80 60 40 20 0 +1SD: 53.7x Avg: 32.7x -1SD: 11.7x Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: Thomson Reuters, DBS Vickers Page 3
Peer Table Mkt PE PE PEG P/S P/S EV/S EV/S Price Cap Fiscal 15F 16F 16F 15F 16F 15F 16F Company Name Code Local$ US$m Yr x x x x x x x Yongyou Network Tech.'A'* 600588 CH 27.43 6,291 Dec 78.6 60.4 2.0 8.20 6.54 13.19 10.52 Kingdee Intl.* 268 HK 2.78 1,044 Dec 28.2 21.6 0.7 4.12 3.71 6.65 5.99 Chanjet Info.Tech.'H' 1588 HK 13.66 383 Dec 12.1 9.6 0.4 n.a. n.a. n.a. n.a. Neusoft 'A' 600718 CH 15.58 2,994 Dec 37.9 32.7 2.0 2.07 1.85 n.a. n.a. China Nat. Software 'A' 600536 CH 27.42 2,123 Dec 38.5 17.3 0.1 1.84 1.29 n.a. n.a. YGSOFT 'A' 002063 CH 16.96 1,584 Dec 20.8 16.8 0.7 7.68 6.19 6.79 5.47 Hand Enterprise 'A' 300170 CH 13.08 1,687 Dec 44.6 32.4 0.9 7.82 5.99 n.a. n.a. Aisino 'A' 600271 CH 46.94 6,786 Dec 24.6 19.8 0.8 1.81 1.55 2.74 2.34 Hundsun Technologies 'A' 600570 CH 51.28 4,960 Dec 66.3 49.5 1.5 16.27 12.94 34.85 27.71 Shenzhen Kingdom Tech. 'A' 600446 CH 101.55 4,401 Dec 125.5 89.6 2.2 10.59 9.17 n.a. n.a. Shanghai Amarsoft Itech. 'A' 300380 CH 47.03 1,012 Dec 120.6 120.6 n.a. 24.58 19.89 n.a. n.a. Shenzhen Infogem Techs. 'A' 300085 CH 35.5 2,920 Dec 338.1 273.1 11.5 34.10 26.61 n.a. n.a. Digiwin Software 'A' 300378 CH 38.84 1,221 Dec 84.6 59.5 1.4 6.46 5.42 n.a. n.a. QAD 'A'# QADB US 20.4 379 Jan 25.7 23.1 2.0 1.28 1.23 n.a. n.a. Median 41.5 32.5 1.4 7.7 6.0 6.8 6.0 Average 74.7 59.0 2.0 9.8 7.9 12.8 10.4 # FY15: FY16; FY16: FY17 Source: Thomson Reuters, *DBS Vickers Page 4
Key Assumptions FY Dec 2013A 2014A 2015F 2016F 2017F Sensitivity Analysis (FY16) Traditonal ERP business 2.2 (0.4) 3.0 5.0 7.0 growth % New businesses business ERP growth N/A N/A N/A 273.0 83.3 Net Profit +/- 4% growth % +/- 1% Gross margin 62.3 67.5 65.5 66.7 67.6 GPM +/- 1ppt Net Profit +/- 7% Income Statement (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 4,363 4,374 4,880 6,118 7,601 Cost of Goods Sold (1,645) (1,421) (1,683) (2,040) (2,464) Gross Profit 2,717 2,954 3,196 4,078 5,137 Other Opng (Exp)/Inc (2,326) (2,571) (2,886) (3,687) (4,635) Operating Profit 391 382 310 390 502 Other Non Opg (Exp)/Inc 334 314 335 421 525 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (78) (84) (94) (94) (94) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 647 612 551 717 933 Tax (78) (42) (39) (50) (65) Minority Interest (21) (19) (18) (23) (30) Preference Dividend 0 0 0 0 0 Net Profit 548 550 494 644 837 Net Profit before Except. 548 550 494 644 837 EBITDA 822 797 762 958 1,209 Growth Revenue Gth (%) 3.0 0.3 11.6 25.4 24.2 EBITDA Gth (%) 37.4 (3.0) (4.4) 25.8 26.2 Opg Profit Gth (%) 83.7 (2.3) (18.8) 25.8 28.6 Net Profit Gth (%) 44.3 0.4 (10.2) 30.3 30.0 Margins & Ratio Gross Margins (%) 62.3 67.5 65.5 66.7 67.6 Opg Profit Margin (%) 9.0 8.7 6.4 6.4 6.6 Net Profit Margin (%) 12.6 12.6 10.1 10.5 11.0 ROAE (%) 17.6 15.3 10.1 10.9 13.4 ROA (%) 8.2 6.9 5.1 6.0 7.5 ROCE (%) 7.2 6.0 3.9 4.3 5.3 Div Payout Ratio (%) 53.2 63.9 60.0 60.0 60.0 Net Interest Cover (x) 5.0 4.5 3.3 4.1 5.3 Source: Company, DBS Vickers Margins Trend 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 2013A 2014A 2015F 2016F 2017F Operating Margin % Net Income Margin % Page 5
Interim Income Statement (RMB m) FY Dec 1H2013 2H2013 1H2014 2H2014 1H2015 Revenue Trend 3,000 15% Revenue 1,539 2,823 1,554 2,820 1,515 Cost of Goods Sold (564) (1,081) (558) (862) (577) Gross Profit 975 1,742 996 1,957 938 Other Oper. (Exp)/Inc (952) (1,374) (1,059) (1,512) (1,163) Operating Profit 23 369 (63) 446 (225) Other Non Opg (Exp)/Inc 146 188 155 159 170 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (37) (41) (40) (44) (47) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 132 515 52 560 (102) Tax (55) (23) (41) (1) (43) Minority Interest (7) (14) 1 (20) (23) Net Profit 69 479 11 539 (169) Net profit bef Except. 69 479 11 539 (169) 2,500 2,000 1,500 1,000 500 0 1H2012 2H2012 1H2013 2H2013 1H2014 2H2014 Revenue Revenue Growth % (YoY) 1H2015 10% 5% 0% -5% -10% -15% Growth Revenue Gth (%) (10.3) 12.0 1.0 (0.1) (2.5) Opg Profit Gth (%) (76.0) 213.1 N/A 20.9 (254.9) Net Profit Gth (%) (48.5) 95.3 (83.7) 12.6 N/A Margins Gross Margins (%) 63.3 61.7 64.1 69.4 61.9 Opg Profit Margins (%) 1.5 13.1 (4.1) 15.8 (14.8) Net Profit Margins (%) 4.5 17.0 0.7 19.1 (11.1) Source: Company, DBS Vickers Page 6
Balance Sheet (RMB m) Asset Breakdown FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Net Fixed Assets 1,597 1,810 2,037 2,243 2,424 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 1,895 2,058 2,114 2,161 2,198 Cash & ST Invts 2,100 2,963 4,454 4,435 4,539 Inventory 22 22 24 25 26 Debtors 1,394 1,476 1,550 1,627 1,709 Other Current Assets 222 481 481 481 481 Total Assets 7,230 8,811 10,659 10,972 11,375 ST Debt 1,020 1,268 1,268 1,268 1,268 Creditors 363 400 420 441 463 Other Current Liab 1,628 1,862 1,858 1,870 1,885 LT Debt 833 824 824 824 824 Other LT Liabilities 23 14 14 14 14 Shareholder s Equity 3,227 3,986 5,800 6,058 6,392 Minority Interests 136 456 474 498 528 Total Cap. & Liab. 7,230 8,811 10,659 10,972 11,375 Non-Cash Wkg. Capital (353) (283) (224) (178) (133) Net Cash/(Debt) 247 871 2,361 2,343 2,446 Debtors Turn (avg days) 112.9 119.7 113.2 94.8 80.1 Creditors Turn (avg days) 76.8 105.5 95.6 83.1 72.4 Inventory Turn (avg days) 4.9 6.2 5.4 4.7 4.1 Asset Turnover (x) 0.7 0.5 0.5 0.6 0.7 Current Ratio (x) 1.2 1.4 1.8 1.8 1.9 Quick Ratio (x) 1.2 1.3 1.7 1.7 1.7 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 20.5 18.5 19.1 19.1 19.1 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers Inventory - 0.3% Debtors - 19.2% Assets - 25.3% Assocs'/JVs - 0.0% Bank, Cash and Liquid Assets - 55.2% Cash Flow Statement (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 647 612 551 717 933 Dep. & Amort. 97 101 117 147 183 Tax Paid (78) (42) (39) (50) (65) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (16) (45) (55) (58) (61) Other Operating CF 161 179 (4) 12 15 Net Operating CF 810 804 571 768 1,005 Capital Exp.(net) (379) (387) (400) (400) (400) Other Invts.(net) (437) (269) 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 121 56 0 0 0 Net Investing CF (695) (600) (400) (400) (400) Div Paid (192) (291) (351) (297) (386) Chg in Gross Debt 97 336 0 0 0 Capital Issues 148 764 0 0 0 Other Financing CF 229 (159) 1,671 (90) (116) Net Financing CF 282 649 1,320 (386) (502) Currency Adjustments 1 (1) 0 0 0 Chg in Cash 397 853 1,490 (18) 103 Opg CFPS (RMB) 0.60 0.61 0.44 0.58 0.75 Free CFPS (RMB) 0.31 0.30 0.12 0.26 0.43 Capital Expenditure RM 405.0 400.0 395.0 390.0 385.0 380.0 375.0 370.0 365.0 2013A 2014A 2015F 2016F 2017F Capital Expenditure (-) Source: Company, DBS Vickers Page 7
Target Price & Ratings History RMB 80.0 70.0 60.0 1 2 S.No. Date Closing Target Rating Price Price 1: 29-J un-15 RMB46.34 RMB32.00 Fully Valued 2: 22-J ul-15 RMB42.56 RMB32.00 Fully Valued 50.0 40.0 30.0 20.0 10.0 0.0 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Source: DBS Vickers Page 8
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 GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited ( DBSVHK ), a direct wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVHK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBSVHK and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. 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