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, +852 2971 1772 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$0.9 5.5 4.5 3.5 2.5 1.5 0.5 52 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Forecasts and Valuation (LHS) Relative HSI INDEX (RHS) FY Dec (RMB m) 2011A 2012F 2013F 2014F Turnover 2,022 1,860 2,047 2,243 EBITDA 391 29 351 484 Pre-tax Profit 181 (242) 51 162 Net Profit 145 (229) 46 147 Net Pft (Pre Ex.) 145 (229) 46 147 EPS (RMB) 0.06 (0.09) 0.02 0.06 EPS (HK$) 0.07 (0.11) 0.02 0.07 EPS Gth (%) (47.2) (257.4) n.m. 217.4 Diluted EPS (HK$) 0.07 (0.11) 0.02 0.07 DPS (HK$) 0.00 0.00 0.00 0.00 BV Per Share (HK$) 0.79 0.67 0.69 0.75 PE (X) 22.0 nm 70.7 22.3 P/Cash Flow (X) 21.1 nm 13.8 9.2 P/Free CF (X) nm nm 38.6 15.9 EV/EBITDA (X) 8.1 132.7 11.6 8.7 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 2.0 2.3 2.3 2.1 Net Debt/Equity (X) CASH 0.4 0.6 0.6 ROAE (%) 9.2 (15.4) 3.3 9.8 Earnings Rev (%): (2) 59 1 Consensus EPS (RMB) (0.01) 0.05 0.07 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 352 302 252 202 152 102 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 1.5-2 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 +65 6535 9688 in respect of any matters arising from or in connection with this report. www.dbsvickers.com Refer to important disclosures at the end of this report ed-oy / sa- AL
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 1.5-2 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 (600588.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$0.9 unchanged (based on estimated property value per share). This should serve a very strong support level. Page 2
PE band chart PB band chart Share Price (HK$) 8 7 6 5 4 3 2 1 0 52x 40x 28x 17x 5x Share Price (HK$) 8 7 6 5 4 3 2 1 0 8.6x 6.7x 4.7x 2.8x 0.8x 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers Peer Table Mkt PE PE Yield Yield P/Bk P/Bk ROE ROE Currency Price Cap Fiscal 12F 13F 12F 13F 12F 13F 12F 13F Company Name Code Local$ US$m Yr x x % % x x % % Intl.* 268 HK HKD 1.57 510 Dec-11 n.a. 70.7 0.0 0.0 2.3 2.3 (15.4) 3.3 Sap Ag (Mil) SAP US EUR 57.45 90,449 Dec-11 18.8 16.4 1.5 1.6 4.8 4.1 25.3 24.6 Oracle# ORCL US USD 30.79 148,379 May-12 11.6 10.6 0.8 0.7 3.0 2.5 23.1 21.5 Yonyou Software 'A' 600588 CH CNY 11.15 1,721 Dec-11 17.4 13.1 1.9 2.7 3.1 2.6 19.7 21.8 Neusoft 'A' 600718 CH CNY 7.58 1,467 Dec-11 17.2 14.0 2.4 3.0 1.8 1.6 11.2 11.9 China Nat. Software 'A' 600536 CH CNY 11.51 409 Dec-11 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. YGSOFT 'A' 002063 CH CNY 14.65 1,021 Dec-11 21.2 15.9 1.3 1.6 5.4 4.3 26.4 27.2 Hand Enterprise 'A' 300170 CH CNY 16.83 445 Dec-11 22.1 16.3 0.5 0.0 2.1 1.8 13.2 15.0 QAD 'A'# QADB US USD 11.97 151 Jan-12 21.4 14.8 n.a. 0.0 n.a. n.a. n.a. n.a. Aisino 'A' 600271 CH CNY 14.63 2,130 Dec-11 12.5 10.8 2.7 3.5 2.4 2.0 19.9 19.6 # FY12: FY13; FY13: FY14 Source: Thomson Reuters, *DBS Vickers Page 3
Key Assumptions Sensitivity Analysis KIS sales growth 37.7 18.5 (18.0) 10.0 10.0 2013 K/3 sales growth 27.3 34.3 (16.4) 10.0 10.0 Revenue +/- 1% Net Profit +/- 28% EAS sales growth 45.2 31.8 (7.5) 10.0 10.0 OPM +/- 1ppt Net Profit +/- 40% Service revenue growth 51.5 41.2 4.1 10.0 10.0 Operating profit margin 16.2 2.7 (10.4) 5.3 9.9 Segmental Breakdown (RMB m) Revenues (RMB m) Sales of software license 813 1,088 867 945 1,031 Implementation service 254 347 357 393 432 Consultation, training and maintenance service 352 509 534 587 646 Others 18 79 102 123 135 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 301 190 (193) 109 222 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (6) (9) (49) (58) (60) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 295 181 (242) 51 162 Tax (19) (28) (2) (3) (8) Minority Interest (5) (8) 15 (2) (8) Preference Dividend 0 0 0 0 0 Net Profit 272 145 (229) 46 147 Net Profit before Except. 272 145 (229) 46 147 EBITDA 439 391 29 351 484 Growth Revenue Gth (%) 44.1 40.8 (8.1) 10.1 9.6 EBITDA Gth (%) 38.7 (10.9) (92.6) 1,119.4 37.9 Opg Profit Gth (%) 37.1 n.m. n.m. n.m. 103.4 Net Profit Gth (%) 27.9 n.m. n.m. n.m. 220.6 Margins & Ratio Gross Margins (%) 76.5 70.1 67.1 65.0 64.7 Opg Profit Margin (%) 20.9 9.4 (10.4) 5.3 9.9 Net Profit Margin (%) 18.9 7.2 (12.3) 2.2 6.5 ROAE (%) 19.6 9.2 (15.4) 3.3 9.8 ROA (%) 13.5 5.5 (6.7) 1.2 3.6 ROCE (%) 18.3 7.8 (7.3) 3.5 6.8 Div Payout Ratio (%) 22.2 0.0 N/A 0.0 0.0 Net Interest Cover (x) 53.7 21.5 (3.9) 1.9 3.7 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
Interim Income Statement (RMB m) FY Dec 1H2010 2H2010 1H2011 2H2011 1H2012 Revenue 534 902 844 1,178 780 Cost of Goods Sold (112) (226) (198) (407) (245) Gross Profit 422 677 647 771 535 Other Oper. (Exp)/Inc (336) (462) (511) (716) (741) Operating Profit 86 214 136 55 (206) Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc 1 (6) (2) (7) (19) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 87 208 134 48 (225) Tax (1) (18) (9) (20) (1) Minority Interest 3 (7) 2 (10) 15 Net Profit 89 183 127 18 (211) Net profit bef Except. 89 183 127 18 (211) Revenue Trend 1,400 1,200 1,000 800 600 400 200 0 2H2007 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 (%) 21.3 62.2 58.0 30.6 (7.6) Opg Profit Gth (%) 14.1 49.2 57.1 (74.5) (251.9) Net Profit Gth (%) 18.6 32.9 43.0 (90.1) (266.0) Margins Gross Margins (%) 79.0 75.0 76.6 65.5 68.6 Opg Profit Margins (%) 16.1 23.8 16.1 4.6 (26.4) Net Profit Margins (%) 16.6 20.3 15.0 1.5 (27.0) Page 5
Balance Sheet (RMB m) Asset Breakdown Net Fixed Assets 430 602 822 930 1,038 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 680 1,082 1,182 1,287 1,397 Cash & ST Invts 754 672 918 701 580 Inventory 2 4 4 4 4 Debtors 273 379 493 591 680 Other Current Assets 120 292 380 456 525 Total Assets 2,258 3,031 3,799 3,970 4,224 Debtors - 22.1% Assocs'/JVs - 0.0% Net Fixed Assets - 36.9% Bank, Cash and Liquid Assets - 40.8% ST Debt 0 20 520 520 520 Other Current Liab 491 687 823 945 1,039 LT Debt 190 598 1,000 1,000 1,000 Other LT Liabilities 29 85 58 59 64 Shareholder s Equity 1,534 1,609 1,380 1,426 1,572 Minority Interests 14 33 18 20 28 Total Cap. & Liab. 2,258 3,031 3,799 3,970 4,224 Inventory - 0.2% Non-Cash Wkg. Capital (96) (12) 54 106 169 Net Cash/(Debt) 564 54 (602) (819) (940) Debtors Turn (avg days) 60.2 58.8 85.5 96.6 103.4 Creditors Turn (avg days) 549.6 353.2 479.4 462.0 464.8 Inventory Turn (avg days) 3.7 2.7 3.8 3.1 2.8 Asset Turnover (x) 0.7 0.8 0.5 0.5 0.5 Current Ratio (x) 2.3 1.9 1.3 1.2 1.1 Quick Ratio (x) 2.1 1.5 1.1 0.9 0.8 Net Debt/Equity (X) CASH CASH 0.4 0.6 0.6 Net Debt/Equity ex MI (X) CASH CASH 0.0 0.6 0.6 Capex to Debt (%) 32.6 32.8 17.1 9.9 9.9 Z-Score (X) 8.9 2.7 2.6 2.6 0.0 Cash Flow Statement (RMB m) Pre-Tax Profit 295 181 (242) 51 162 Dep. & Amort. 139 201 222 242 262 Tax Paid (1) (2) (28) (2) (3) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (91) (105) (66) (52) (63) Other Operating CF (47) (124) (3) (5) (3) Net Operating CF 294 151 (118) 234 355 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 0 0 0 0 0 Other Investing CF (77) 105 3 5 3 Net Investing CF (299) (481) (539) (451) (477) Div Paid (40) (60) 0 0 0 Chg in Gross Debt 133 428 903 0 0 Capital Issues 23 (35) 0 0 0 Other Financing CF 0 0 0 0 0 Net Financing CF 116 332 903 0 0 Currency Adjustments 0 0 0 0 0 Chg in Cash 112 2 246 (217) (121) Opg CFPS (RMB) 0.16 0.10 (0.02) 0.11 0.16 Free CFPS (RMB) 0.09 (0.02) (0.15) 0.03 0.08 Capital Expenditure 300 250 200 150 100 50 0 2010A 2011A 2012F 2013F 2014F Capital Expenditure (-) Page 6
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 (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. 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DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published, the analyst and his / her spouse and/or relatives and/or associate who are financially dependent on the analyst, do not hold interests in the securities recommended in this report ( interest includes direct or indirect ownership of securities, directorships and trustee positions). Page 7
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended in this report as of the date the report is published. 2. DBSVHK, DBSVUSA, DBS Bank Ltd and/or other affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject companies mentioned in this document as of the latest available date of the updated information. 3. Compensation for investment banking services: DBSVHK, DBSVUSA, DBS Bank Ltd and/or other affiliates may have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the subject companies mentioned in this document. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. RESTRICTIONS ON DISTRIBUTION This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or General located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to hold an Australian financial services licence under the Corporation Act 2001 [ CA] in respect of financial services provided to the Australia recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [ MAS ] under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for wholesale investors within the meaning of the CA.. This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Hong Kong Securities and Futures Commission. Singapore United Kingdom Dubai/ United Arab Emirates United States Other jurisdictions This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser s licence and is regulated by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report produced by a foreign DBS Vickers entity, analyst or affiliate is distributed in Singapore only to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chap. 289 of Singapore. Any distribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to Accredited Investors is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the First Schedule to the FAA. This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients. This report is being distributed in Dubai/United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 rd Floor, Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for clients who meet the DFSA regulatory criteria to be a Professional Client. It should not be relied upon by or distributed to Retail Clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority. Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations. In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Vickers (Hong Kong) Limited 18 th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2868-1523 Page 8