China Securities Co., Ltd. released a research report stating that considering the company's net income turning profitable and maintaining a high-speed growth, as well as the continuous optimization of operating cash flow, it maintains a 'buy' rating for Kingdee International (00268). As a leader in the domestic industry cloud transformation, Kingdee International has accumulated strength and is realizing a cloud revenue share of over 80%, with profits set to be released. On the one hand, in the ERP industry, it benefits from the demand release driven by the combination of 'digitalization + localization + AI'. On the other hand, after years of investment and polishing, the cloud products have gradually entered a stable state of profit release for the SME product line, and the large enterprise market continues to break through, gradually highlighting its own advantages.

Main viewpoints of Zhongxin Jiandao are as follows:

Currently, the cloud ratio exceeds 80%, and the total contract liabilities rank first in China's software industry.

The company has been deeply involved in the ERP field for decades and has gradually completed the transformation to cloud SaaS, with cloud revenue accounting for 83.2% in 24H1. In terms of products, in 2023, the revenue of Cangqiong & Xinghan was 0.981 billion yuan, and the amount of contracts signed was 1.4 billion yuan; Xingkong has been the first in terms of market share of enterprise application software for growth in IDC China for 19 consecutive years, with revenue of 1.952 billion yuan in 2023. The core cloud product revenue and orders of the company continue to grow. As of 24H1, the contract liabilities have reached 3.367 billion yuan, ranking first in the China software industry.

Industry driving forces (Beta): 'digitalization + localization + AI', three driving forces for demand release.

1) Digitalization: In 2022, the scale of China's data economy has reached 50.2 trillion yuan, and ERP systems, as the core tools for digital management of enterprises, directly benefit from it.

2) Localization: Considering the current high-end market of domestic ERP, foreign products such as SAP still have a relatively high market share. From the perspective of supply chain security, there is still a large space for replacing foreign ERP with domestic software in the large enterprise market.

3) AI: On the one hand, AI has good points of integration with ERP products in terms of data analysis and process execution, which can improve user experience and efficiency. On the other hand, the requirements for AI's large model cloud deployment also promote the improvement of enterprises' acceptance of public cloud, which is bullish for cloud ERP vendors.

Self-advantages (Alpha): The cloud capability has accumulated strength and made breakthroughs in the large enterprise market continuously.

1) The small and medium-sized enterprise market is the basic source. After the stabilization of cloudization, the profit-making ability has been improved. In the first half of 2024, NDR (Net Dollar Retention) of StarrySky reached 95%, with an operating profit margin of 20%; the NDR of Jingtouyun reached 87%, with an operating profit margin of 40%, both higher than the software era.

2) In the large enterprise market, the company achieved breakthroughs through product lines such as Cangqiong and Xinghan. In the first half of 2024, 275 new signed customers, and new contract amount of 0.9 billion yuan, with a subscription ARR growth rate of +29%. Through the breakthrough in the large enterprise market, the overall revenue ceiling is raised.