CHINA/HONG KONG China Internet and Software -...

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CHINA/HONG KONG

Inside

Cross-country comparison indicates upside in China adoption 2

Sales and implementation towards specialization 3

Comparison across ERP brands 4

Industry overview 6

Yonyou - More than just ERP 9

Kingdee - More competition in mobile office 28

Analyst(s) Hillman Chan, CFA +852 3922 3716 [email protected] Wendy Huang, CFA +852 3922 3378 [email protected] Jake Lynch +852 3922 3583 [email protected] Julia Pan +852 3922 4211 [email protected] Joe Yu +852 3922 1160 [email protected]

29 April 2016 Macquarie Capital Limited

China Internet and Software All eyes on cloud and Internet finance Upside in China’s ERP and cloud adoption

Spending on software accounted for merely 5% of total IT spending in 2015 in

China, according to IDC, in contrast to the more developed US IT market where

software, hardware and services each accounted for roughly one-third of the IT

spending. In addition, China is behind the US in cloud adoption among small-

and-medium sized enterprises. As China’s corporates are growing into a more

mature stage and cloud becoming the de facto standard for software delivery,

closely on the heels of the US, we expect further upside to ERP and cloud

adoption in China.

Sales and implementation towards specialization

Shifting sales and implementation to third-party specialists is the trend in the

China ERP market, in line with the more sophisticated models of SAP and

Oracle in the developed markets. Yonyou adopted indirect sales for its ERP

products for medium-sized enterprises, i.e., U8, in 2015 and looks to gradually

rely more on external specialists for its high-end products such as NC. Kingdee

is moving in the same direction. These transitions are positive to margin

expansion at the Chinese ERP players.

Internet finance still in early stage

After obtaining the payment business licence, Yonyou is engaged mostly in POS

acquiring (processing of debit and credit card payments) and P2P financing.

Yonyou is also developing its Internet payment solutions for enterprises i.e.

Chanjet Payment acting as a gateway between enterprises and the financial

institutions, offering a one-stop service platform to ERP customers. We see the

merits of Internet payment solutions from ERP providers but the adoption by

enterprises is still in the early stage. On the other hand, Kingdee has not got a

payment licence yet.

Initiate with OP on Yonyou and reiterate OP on Kingdee

Yonyou. We are initiating coverage with an Outperform and a SOTP-based TP of

Rmb29, with 50% upside to the current share price, on the back of 9% revenue

and 26% earnings CAGRs in 2015-18E supported by fast-growing cloud and

Internet finance. We expect revenue contribution from these two initiatives to grow

from 3% in FY15 to 18% in FY18E. We value Yonyou’s ERP at 40x FY17E P/E, in

line with A-share software peers and its historical median, and value enterprise

Internet/cloud and Internet finance at 9x FY17E P/S, in line with peers.

Kingdee. Its mobile office Cloud Hub will face more intense competition from

Ding Ding and the emerging Enterprise Weixin with strong social networking and

upcoming third-party enterprise apps, in our view. We reduce our cloud revenue

growth forecast from 80% to 70% for FY16 but maintain 50% for FY17-18, and

thus trim FY16-18E revenue by 1%, earnings by 3%, and TP from HK$3.55 to

HK$3.40. We transfer coverage from Jake Lynch to Hillman Chan. Reiterate

Outperform.

Macquarie Research China Internet and Software

29 April 2016 2

Cross-country comparison indicates upside in China adoption Spending on software accounted for merely 5% of total IT spending in 2015 in China,

whereas hardware investments made up 83% and services the rest, according to IDC. This is

in contrast to the more developed US IT market, where software, hardware and services each

accounted for roughly one-third of the 2015 IT spending. As China’s economic and business

developments are progressively maturing, we expect software as a percentage of IT spending

will gradually reach the level of developed countries.

Fig 1 China’s software (5%) as % of IT spending well below the US (29%) in 2015

Fig 2 Cloud as % of software-only revenue (2015 vs 2013)

Source: IDC, Macquarie Research, April 2016 Source: company data, Macquarie Research, April 2016

According to an IDC survey, the cloud adoption among the emerging market SMEs is higher,

which we believe is due partly to the web-based methodology as emerging country customers

responding to an online survey tend to be less representative of the population. Yet, China is

still behind the US in cloud adoption, but we expect further upside to this and an increase in

cloud content per enterprise, as the cloud is becoming the de facto standard for software

delivery in China, closely on the heels of the US.

Fig 3 Cloud adoption of small and medium-sized enterprises (China vs India)

Fig 4 Cloud adoption of small and medium-sized enterprises (China vs US)

Source: IDC, Macquarie Research, April 2016 Source: IDC, Macquarie Research, April 2016

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29 April 2016 3

Sales and implementation towards specialization Outsourcing sales and implementation to third-party specialists is the trend in the China ERP

market, in line with the more sophisticated models of SAP and Oracle in the developed

markets. This process is progressing well, in our view.

Yonyou has shifted its ERP products for medium-sized enterprises, i.e. U8, to indirect sales in

2015, and intends to rely more on this model and third-party implementation for its high-end

products such as NC in the future. Yonyou currently handles sales and implementation of NC

on its own given the product complexity and customization. On the other hand, Kingdee is

shifting towards indirect sales and moving low-end onsite services to indirect distribution.

These transitions improve ERP margins, in our view.

Fig 5 Direct and indirect sales as % of ERP revenue – Yonyou vs Kingdee

Source: Company data, Macquarie Research, April 2016

Fig 6 Sales channels and implementation – Yonyou vs Kingdee

Yonyou Kingdee

Sales and distribution channels Customer segment Main product Sales channels Main product Sales channels

Large NC Direct sales EAS Direct sales Medium U8 Indirect sales K3 Indirect sales Small/micro T Indirect sales KIS Indirect sales Implementation Customer segment Main product Implementation Main product Implementation

Large NC Yonyou's in-house team EAS Kingdee's in-house team Medium U8 Not much implementation

required K3 Outsourced to third

parties Small/micro T Not much implementation

required KIS Not much

implementation required


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Direct Indirect


29 April 2016 4

Comparison across ERP brands

Fig 7 Customer satisfaction survey – large enterprise users (2014)

Source: Cniteyes, Macquarie Research, April 2016

Large enterprises – clear cut between domestic and foreign firms

According to a Cniteyes survey in 2014, Yonyon’s NC series for large enterprises scores

lower than peers in overall satisfaction, in contrast to our expectation which is based on its

market leadership. Domestic peers Kingdee and Inspur performed relatively well in most

aspects. On the other hand, foreign brands – Oracle (ORCL US, US$40.85, Outperform, TP:

US$46.00, Sarah Hindlian) and SAP (SAP US, Not Rated) – performed well on product and

support services, but scored poorly on implementation, which it outsources to third parties,

affecting the quality of this complicated service in some cases.

While Chinese enterprises view domestic ERP positively, MNCs in China generally prefer

global brands over the domestic brands, due to the perception that functionalities of Chinese

ERP, particularly the financial modules, do not meet the international standards.

Fig 8 Customer satisfaction survey – medium-sized enterprise users (2014)


Medium-sized enterprises – Yonyou’s lack of cloud a weak spot

Yonyou and Kingdee are the leaders in the space. New Grand performed well in the survey,

but it is strong in only certain regions. Kingdee and SAP both have cloud offerings for

medium-sized enterprises, but Yonyou has none. Kingdee’s K3 Cloud is a threat to Yonyou’s

U8, in our view.

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Yonyou (NC) Oracle SAP Kingdee Inspur

Overall satisfaction Pre-sale services Implementation Product Support services

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Yonyou (U8) Kingdee Inspur SAP B1 New Grand (新中大)

Pre-sale services Implementation Product Support services


29 April 2016 5

Fig 9 Customer satisfaction survey – micro/small enterprise users (2014)


Micro/small enterprises – cloud applications growing rapidly

Given better pricing and flexibility, we see demand for cloud applications accelerating among

MSEs. Though these applications do not replace the comprehensive functionalities of ERP,

they cater well to certain specific functions such as collaboration, CRM, finance and

accounting. Yonyou’s BizChat, Customer Management, Easy Accounting Agent as well as

Kingdee’s Cloud Hub and Yonshang.com fall into this category.

Fig 10 No. of customers and average price range – Yonyou vs Kingdee

Yonyou No. of customers Average price range per customer (Rmb)

NC6 1000 1m to 5m U8 300,000 200k to 1m T 1,000,000 2,000 to 90k Kingdee No. of customers Average price range per

customer (Rmb)

EAS 3,000-5,000 500k+ K3 100,000+ 100k+ KIS 1,000,000 2,000+


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Chanjet Kingdee Grasp (管家婆) Superdata (速達)

Overall satisfaction Pre-sale services Implementation Product Support services


29 April 2016 6

Industry overview A 15% revenue CAGR between 2014 and 2017E

We expect the China management software industry will witness a 15% CAGR between 2014

and 2017E and reach Rmb38bn in size, according to CCID. Enterprises represent 86% of the

customers, whereas governments and public services account for the remainder.

Fig 11 China's management software industry

Source: CCID, Macquarie Research, April 2016

In 2014, ERP (enterprise resource planning) was the biggest segment in management

software, accounting for 48% of the industry revenue, followed by FM (financial management)

of 14% and SCM (supply chain management) of 12%.

CRM, SCM and HRM will continue to grow faster (16% CAGR) as enterprises focus on

management of customer relationships, supply chain, and human resources.

Fig 12 China's management software industry breakdown by customer (2014)

Fig 13 China's management software market breakdown by product segment (2014)

Source: CCID, Macquarie Research, April 2016 Source: CCID, Macquarie Research, April 2016

By sector, manufacturing accounted for 44%, the most among all sectors, of China’s software

management in 2014. Logistics/postal represented 11% and wholesale/retail 7%.

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FM14%

SCM12%

HRM8%

CRM7%

EAM6%

Others5%


29 April 2016 7

Fig 14 China's management software industry breakdown by customer sector (2014)


Yonyou, with a focus on large enterprises, is the No. 1 player in China’s management

software industry, with a 23% market share and ERP industry with a 31% market share in

2014, according to CCID. The global leader, SAP, ranks second in China’s management

software and ERP with market shares of 11% and 15%, respectively, followed closely by the

other two Chinese players, Inspur and Kingdee.

Fig 15 China’s management software market share (2014)

Fig 16 China’s ERP market share (2014)

Source: CCID, Macquarie Research, April 2016 Source: CCID, Macquarie Research, April 2016

Manufacturing44%

Logistics and postal11%

Wholesale and retail7%

Others6%

Internet5%

Coal and other energy

5%Telecom

4%

Transport3% Government

3%

Electricity3% Oil and petrolchem

3%Healthcare

2%Bank2%

Education1%

Brokerage0% Insurane

0%Science0%

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Yonyou23%

SAP11%

Inspur9%

Kingdee8%

Oracle5%

Neusoft (东软)

4%

Infor4%

Digiwin (鼎捷)

3%

Aisino3%

eAbax (金算

盤)

2%

Others28%

Yonyou31%

SAP15%

Inspur12%

Kingdee11%

Oracle6%

Digiwin (鼎捷)

6%

Infor5%

Aisino4%

eAbax (

金算盤)

3%

Platinum (

中华网)

2%

Others5%


29 April 2016 8

Fig 17 Relative revenue size of Yonyou and Kingdee by client segment

Fig 18 Revenue mix by client segment (2016E)

Source: Company data, Macquarie Research, April 2016 Source: Company data, Macquarie Research, April 2016

In 2014, Yonyou managed to maintain its leadership position in five out of the six product

segments within management software. It consolidated close to one-third of the FM and ERP

market, leveraging its strengths. However, the other product segments are more fragmented.

Yonyou, as the top player, takes a 12-16% market share each in CRM, EAM and HRM. SCM

is the most fragmented. Even the top player, SAP, has about 9% market share vs Yonyou’s 7%

in the fourth place.

Fig 19 Yonyou’s ranking and market share in various management software segments

Yonyou's ranking Yonyou's market share

FM (Financial management) 1 27% ERP (Enterprise resource planning) 1 31% CRM (Customer relationship management) 1 12% SCM (Supply china management) 4 7% HRM (Human resource management) 1 16% EAM (enterprise asset management) 1 12%


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29 April 2016 9

CHINA

600588 CH Outperform

Price (at 07:03, 28 Apr 2016 GMT) Rmb19.30

Valuation Rmb 29.00 - Sum of Parts 12-month target Rmb 29.00

Upside/Downside % +50.3

12-month TSR % +51.1

Volatility Index Very High

GICS sector Software & Services

Market cap Rmbm 28,236

Market cap US$m 4,348

Free float % 54.3

30-day avg turnover US$m 59.8

Number shares on issue m 1,463

Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E

Revenue m 4,451.3 4,780.3 5,275.8 5,750.0 EBIT m -166.2 -39.8 154.3 261.3 EBIT growth % nmf 76.1 nmf 69.4 Reported profit m 323.7 333.4 535.2 653.4 Adjusted profit m 323.7 333.4 535.2 653.4 EPS rep Rmb 0.22 0.22 0.35 0.42 EPS rep growth % nmf 4.0 57.4 19.7 EPS adj Rmb 0.23 0.22 0.35 0.42 EPS adj growth % nmf -2.9 58.0 19.8

PER rep x 89.3 85.8 54.5 45.6 PER adj x 84.5 87.1 55.1 46.0 Total DPS Rmb 0.14 0.14 0.22 0.26

Total div yield % 0.7 0.7 1.1 1.4 ROA % -1.5 -0.4 1.4 2.2 ROE % 5.2 5.3 8.2 9.5 EV/EBITDA x -147.5 -630.0 166.4 100.5 Net debt/equity % -61.8 -57.9 -55.3 -53.4 P/BV x 4.5 4.5 4.4 4.3

Source: FactSet, Macquarie Research, April 2016

(all figures in Rmb unless noted, TP in CNY)

Analyst(s) Hillman Chan, CFA +852 3922 3716 [email protected] Wendy Huang, CFA +852 3922 3378 [email protected] Julia Pan +852 3922 4211 [email protected] Joe Yu +852 3922 1160 [email protected]


We are initiating coverage with an Outperform rating and a SOTP-based TP of

RMB29 that offers 50% upside to the current share price. Yonyou embarked on

cloud and Internet finance from FY14-15. Both are loss-making currently owing

to minimal monetization during the initial phase, heavy R&D expenses and

related share-based compensation. We expect monetization will gradually ramp

up in FY17-18, driving 9% revenue and 26% earnings CAGRs from 2015-18E.

We value Yonyou’s ERP at 40x FY17 P/E, in line with A-share software peers

and Yonyou’s median of historical trading range of 20-60x PE, to reach

RMB37.4bn; we value Yonyou’s enterprise Internet/cloud and Internet finance at

9x FY17 P/S, in line with peers, at RMB2.3bn and RMB3.1bn, respectively, or 12%

of total valuation.

Clear market leadership with stable core business

Yonyou with 31% share maintains market leadership ahead of competitors such

as the global leader SAP (15%) and the other two local players Inspur (12%) and

Kingdee (11%) in China’s EPR market in 2014. However, large and medium-

sized enterprises are more stringent in IT investments and undertake long

decision cycles. Micro and small customers (MSEs), on the other hand, fare

better on the back of subsidiary Chanjet’s consistent upgrades of T+ but are

impacted by the switch from software license revenue to rateable cloud revenue.

All in all, we thus expect the legacy ERP business to remain stable as the cash

cow to fund new initiatives.

Cloud drives incremental software growth

Yonyou is lagging behind Kingdee (already 10%+ of revenue) in cloud offerings.

To cater to rising demand, particularly in the MSE segment, Chanjet released a

series of cloud apps specializing in finance, customer management and

enterprise communication, and saw its cloud enterprise users quadruple to 600k

in 2015, of which one-third were active users. Integration with the T+ product,

upcoming launches of cloud apps and other enterprise Internet services

including digital marketing services should fuel further growth, in our view. We

currently project the cloud will account for 5-17% of software revenue

contribution in 2016-18E.

Boosting payment adoption by enterprises

The cumulative lending amount on Yonyou’s P2P platform skyrocketed to

RMB4.5bn in Mar 2016 after about six quarters in operation. The transaction

amount through Yonyou’s POS (i.e. acquiring business) also grew rapidly to

RMB24bn in FY15. We see solid potential in Yonyou’s acquiring business and

P2P, and expect revenue from Internet finance and others to grow from 3% of

total in FY15 to 11% in FY18E.

Risks are enterprise adoption of Chanjet Payment, cloud execution, the

sustainability of government grants, macro impact, and A-share market de-

rating.

Yonyou

More than just ERP


29 April 2016 10

Inside

Investment summary 11

Valuation 12

Company overview 14

Financial analysis 19

Risks 22

Appendices 23

Company profile Established in 1988, Yonyou is China’s top ERP player, with a market share

of 31% in 2014 according to CCID. Yonyou is also the top player in China’s

ERP (enterprise resource planning), FM (financial management), CRM

(customer relationship management), and HRM (human resource

management) spaces. The company went public on the domestic A-share

market in May 2001. Its subsidiary Chanjet listed on HKEx in Jun 2014, and

Seentao listed on NEEQ in Oct 2015. Yonyou's A-share listing is under

Shanghai-Hong Kong Stock Connect, a cross-boundary program that allows

investors on HKEx to invest in A-shares.

Cloud and payment are the key growth areas. Yonyou started to roll out cloud

applications, e.g. Easy Accounting Agent, particularly for micro and small

enterprises in 2015 and should see monetization in 2016. Chanjet Payment

obtained a payment business license issued by PBoC, and also licenses for

national acquiring (i.e. processing debit and credit card payments) and

national internet payment.

Fig 1 Rising revenue contribution from cloud and Internet finance

Source: Macquarie Research, April 2016

Fig 2 600588 CH rel CSI 300 performance, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.


(all figures in Rmb unless noted, TP in CNY)

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Cloud Others (incl. Internet finance)


29 April 2016 11

Investment summary Value Yonyou at RMB29 based on SOTP

Yonyou’s core ERP business is profitable, but the budding enterprise Internet services and

Internet finance business are loss-making due to additional R&D expenses and share-based

compensation during the investment phase. We apply a 40x FY17 P/E, in line with Chinese

A-share software peers and on par with Yonyou’s median forward PE for the past two years,

for Yonyou’s ERP business; in addition, we apply a 9x FY17 P/S, in line with Chinese A-share

SaaS/cloud peers, for Yonyou’s enterprise Internet/cloud business and reach a fair value

RMB29 per share, representing 50% upside to current share price.

Cloud and Internet finance drive 9% revenue CAGR in 2015-18E…

Chanjet saw its cloud enterprise users quadruple to 600k in 2015, of which one-third were

active users. Yonyou also offers digital marketing services through Chaoke and Bingjun, and

e-Commerce services through Dianshangtong. We currently model enterprise Internet service

revenue at RMB101mn, or about 5% of software revenue in FY16, vs RMB106mn of

Kingdee’s cloud revenue back in FY14.

Further, Chanjet Payment obtained licenses to participate in payment business including

acquiring (i.e. processing debit or credit card payments on behalf of merchants) and Internet

payment. We see solid growth potential in Yonyou’s acquiring business, with already

RMB24bn transaction value in FY15 and P2P of cumulative lending amount of RMB4.5bn by

Mar 2016. We expect the revenue contribution from these two initiatives to grow from 3% in

FY15 to 18% in FY18E.

…and 26% earnings CAGR in 2015-18E from better monetization

Yonyou embarked on cloud and Internet finance from 2014-15. At the moment, both are loss-

making owing to minimal monetization, heavy R&D expenses and related share-based

compensation. We expect monetization of new initiatives gradually ramps up in the second

and third year of operations. Additional revenue will start to cover the related expenses. We

currently model breakeven in these new initiatives in FY18E, implying 26% earnings CAGR in

2015-18E.

Fig 3 Cloud and Internet finance drive 26% earnings CAGR in 2015-18E


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29 April 2016 12

Valuation Yonyou’s core ERP business is profitable, but the budding enterprise Internet services and

Internet finance business are loss-making due to additional R&D expenses and share-based

compensation during the investment phase. We thus use a SOTP methodology to value the

various business segments of Yonyou.

Core ERP. Global ERP players deliver an OPM above 20% on average (e.g. Oracle and SAP

had 21-36% OPMs last fiscal year). Also, Yonyou is shifting away from the low-margin

implementation business. We thus expect a 20% OPM to be a realistic level for Yonyou’s

core ERP business. On the back of stable revenue and better margins from de-emphasis of

implementation, we apply 40x FY17 P/E to Yonyou’s ERP business, in line with Chinese A-

share software peers and on par with Yonyou’s median of historical trading range of 20-60x

PE, and reach a fair value of RMB37.4bn.

Enterprise Internet and cloud services. These two are loss-making at the moment owing to

heavy R&D expenses and related share-based compensation. We apply 9x FY17 P/S, in line

with Chinese A-share SaaS/cloud peers, for Yonyou’s enterprise Internet/cloud business and

reach a fair value of RMB2.3bn. We also apply 9x FY17 P/S, in line with Chinese A-share

Internet finance peers, for Yonyou’s Internet finance business and reach a fair value of

RMb3.1bn.

As such, we reach a total fair value of RMB45bn (RMB42.8bn EV + RMB2.2bn net cash), or

RMB29 per share, representing 50% upside to current share price.

Fig 4 SOTP valuation

(RMB mn) Methodology FY17 multiple Revenue Revenue CAGR (2015-18E)

OPM EBIT Fair value Fair value per share (RMB)

Core ERP software P/E 40.0x 4,678 1% 20% 936 37,424 24 Enterprise Internet / cloud services P/S 9.0x 255 250% 2,291 1 Internet finance P/S 9.0x 343 172% 3,089 2 Total EV 42,804 28

Cash 2,207 1 Target price (RMB) 45,010 29


Fig 5 Valuation comparison (SaaS/Cloud, Internet finance)

China’s SaaS/cloud peers FY17 P/S

Thunisoft 5.6 Hand 6.2 Fengdong 8.3 VRV Software 15.0 Net263 9.1 Average 8.8 China’s Internet finance peers FY17 P/S

Hundsun 11.0 Hithink 14.1 Everyday Network 6.4 Shenzhen Kingdom 9.0 Hoperun 6.8 Average 9.5

Source: Bloomberg, Macquarie Research, April 2016


29 April 2016 13

Fig 6 Valuation comparison

Source: Bloomberg, Macquarie Research, April 2016; pricing as of Apr 28, 2016

Fig 7 12-month forward PE chart

Source: Bloomberg, Macquarie Research, April 2016

Fig 8 Share price of Yonyou and Kingdee (correlation = 0.87)

Fig 9 Share price of Yonyou and Chanjet (correlation = 0.81)

Source: Bloomberg, Macquarie Research, April 2016 Source: Bloomberg, Macquarie Research, April 2016

Company Bloomberg Price Macq Target Price Market Cap

Name Code (Local $) Rating (Local $) (US$mn) 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017

A-share software comps

Yonyou 600588 CH Equity 19.30 Outperform 29.00 4,348 6.5 6.1 5.5 89.5 87.0 55.1 nmf nmf nmf 5.2 5.3 8.2

Inspur 600756 CH Equity 29.80 NR NR 1,491 nmf nmf nmf 74.1 66.7 nmf nmf nmf nmf nmf nmf nmf

Ygsoft 002063 CH Equity 13.27 NR NR 1,222 8.5 7.7 6.6 63.4 26.3 19.5 87.6 58.8 38.3 7.4 10.8 12.5

Neusoft 600718 CH Equity 18.00 NR NR 3,454 2.8 2.9 2.8 56.3 47.1 36.6 57.9 50.0 38.7 6.7 8.5 8.9

Glodon 002401 CH Equity 12.83 NR NR 2,235 9.3 8.1 6.8 57.9 34.8 19.8 94.6 27.9 20.9 8.7 13.5 15.4

E-Huala 300212 CH Equity 27.85 NR NR 1,590 6.3 3.9 2.9 72.2 36.8 46.7 39.6 37.1 32.9 7.3 13.0 15.0

Shiji 002153 CH Equity 83.15 NR NR 4,565 14.5 13.3 12.2 68.9 61.4 49.8 69.8 53.8 43.4 11.1 8.8 9.3

Wonders 300168 CH Equity 24.42 NR NR 3,858 13.0 10.7 8.8 102.1 78.6 57.1 64.5 57.9 50.0 13.1 11.6 13.7

Beijing Ultrapow er 300002 CH Equity 8.60 NR NR 2,647 6.0 4.7 4.0 47.1 39.1 29.5 nmf 40.6 28.6 nmf nmf nmf

Sinodata 002657 CH Equity 51.87 NR NR 2,704 12.9 10.9 9.0 98.7 80.1 58.5 69.4 66.2 53.1 10.2 9.5 11.6

Thunisoft 300271 CH Equity 18.50 NR NR 1,835 8.6 6.5 4.7 52.0 39.1 29.4 45.8 37.5 28.8 15.8 16.1 18.0

Hand 300170 CH Equity 13.37 NR NR 1,725 8.9 7.1 5.8 49.9 41.3 29.9 59.7 36.2 26.5 13.5 13.5 15.4

Fengdong 002530 CH Equity 25.10 NR NR 1,039 15.1 10.9 9.6 187.3 92.3 71.8 nmf nmf nmf 5.0 4.5 4.9

VRV Softw are 300352 CH Equity 34.90 NR NR 1,456 19.7 17.8 13.5 130.2 79.2 54.4 nmf nmf nmf 9.2 10.1 13.5

Net263 002467 CH Equity 14.06 NR NR 1,733 15.3 12.5 9.7 170.5 70.0 57.1 85.9 86.6 65.6 3.3 5.9 6.7

Hundsun 600570 CH Equity 54.73 NR NR 5,221 15.0 12.8 9.9 72.7 64.0 45.9 107.9 88.7 54.8 20.9 20.0 22.2

Hithink 300033 CH Equity 76.38 NR NR 6,340 28.3 20.1 14.9 41.6 39.4 29.2 45.6 40.4 33.3 57.7 43.3 40.3

Everyday Netw ork 300295 CH Equity 33.05 NR NR 980 9.7 7.4 5.6 48.6 41.5 32.1 nmf nmf nmf 14.8 14.4 15.6

Shenzhen Kingdom 600446 CH Equity 31.24 NR NR 4,027 9.8 8.5 7.3 97.7 69.9 49.2 nmf 88.5 49.7 24.0 22.2 24.3

Hoperun 300339 CH Equity 31.75 NR NR 1,756 9.8 7.0 5.9 48.1 35.0 26.6 71.6 29.6 24.3 8.4 8.3 9.8

2345 Netw ork 002195 CH Equity 24.05 NR NR 3,547 nmf nmf nmf 48.6 23.1 16.3 nmf nmf nmf nmf nmf nmf

Average 11.3 9.2 7.5 79.9 54.8 40.7 89.6 53.2 39.3 13.1 13.0 14.5

HK-listed software comps

Kingdee 268 HK Equity 2.56 Outperform 3.40 968 3.9 3.8 3.4 66.3 46.3 27.9 11.5 10.6 8.0 3.5 4.3 6.9

Kingsoft 3888 HK Equity 17.90 Outperform 28.00 3,006 3.4 2.4 1.7 24.1 13.7 8.1 21.0 10.9 5.4 16.8 28.1 37.9

Chanjet 1588 HK Equity 11.80 NR NR 330 6.0 5.8 5.2 nmf 24.5 nmf nmf nmf nmf nmf nmf nmf

Chinasoft 354 HK Equity 2.85 Outperform 3.85 792 1.0 0.8 0.7 16.4 15.3 12.7 10.1 8.4 7.3 9.8 9.5 10.7

Sinosoft 1297 HK Equity 4.30 NR NR 572 8.2 6.8 5.6 22.6 18.5 15.0 12.8 13.3 11.2 19.7 20.5 21.5

Average 4.50 3.91 3.32 32.3 23.7 15.9 13.8 10.8 8.0 12.4 15.6 19.2

Global software comps

Sage SGE LN Equity 6.00 NR NR 9,435 4.3 4.3 4.0 22.7 22.2 20.3 17.9 15.5 14.4 25.6 31.2 32.6

SAP SAP US Equity 81.02 NR NR 99,533 4.3 4.1 3.8 nmf 17.8 16.2 16.8 15.3 11.3 14.3 20.2 nmf

Oracle ORCL US Equity 40.85 Outperform 46.00 169,522 4.8 4.6 4.2 15.6 14.5 13.0 11.7 11.1 10.0 24.4 25.5 27.3

Salesforce CRM US Equity 75.69 Outperform 92.00 51,351 7.8 6.6 5.7 102.9 76.2 56.5 38.1 31.1 24.1 11.2 13.1 16.2

Netsuite N US Equity 78.00 Neutral 69.00 6,239 8.4 6.6 5.3 nmf nmf nmf nmf nmf nmf 6.6 10.7 16.7

Intuit INTU US Equity 103.51 NR NR 26,584 6.1 5.5 5.0 45.5 26.9 22.3 21.8 15.2 13.0 26.8 nmf nf

Workday WDAY US Equity 75.93 Underperform 49.00 14,877 12.7 9.9 7.9 nmf nmf nmf nmf nmf nmf nmf nmf 2.0

Linx LINX3 BZ Equity 47.94 NR NR 640 4.7 4.5 3.9 20.5 27.5 22.2 16.5 16.7 14.1 9.8 11.5 13.7

Average 6.63 5.76 4.98 41.4 30.9 25.1 20.5 17.5 14.5 17.0 18.7 18.1

PS (x) PE (x) EV/EBITDA (x) ROE (%)

0102030405060708090

100

Jan

-2014

Feb-2

014

Mar-

2014

Ap

r-2014

May-2

014

Jun

-2014

Jul-

2014

Aug

-2014

Sep

-2014

Oct-

2014

No

v-2

014

Dec-2

014

Jan

-2015

Feb-2

015

Mar-

2015

Ap

r-2015

May-2

015

Jun

-2015

Jul-

2015

Aug

-2015

Sep

-2015

Oct-

2015

No

v-2

015

Dec-2

015

Jan

-2016

Feb-2

016

Mar-

2016

Ap

r-2016

12-month forward PE - 1 s.d. Median + 1 s.d.

0

1

2

3

4

5

6

7

0

10

20

30

40

50

60

70

Yonyou Kingdee (RHS)

(RMB) (HK$)

0

5

10

15

20

25

30

35

40

45

0

10

20

30

40

50

60

70

01-Jun-14 01-Dec-14 01-Jun-15 01-Dec-15

Yonyou Chanjet (RHS)

(RMB) (HK$)


29 April 2016 14

Company overview

Fig 10 Yonyou’s product and service offerings

Business segments Typical products

Enterprise resource planning (ERP) Large enterprises NC6, U9, HCM, BQ Medium-sized enterprises U8+, PLM, CRM Small and micro enterprises Chanjet T+, T1, T3, T6

Enterprise Internet services Financial services MSE financial service platform (小微企业财务服务)

Easy Accounting Agent (易代账)

Good Accountant (好会计)

Digital Marketing Chaoke (超客營銷)

Bingjun (秉钧網絡)

Enterprise collaboration and communication Enterprise Space (企业空间)

Biz Chat (工作圈)

Dudu (嘟嘟)

Others Dianshangtong (电商通)

Internet finance Consumers P2P - yyfax.com (友金所), personal loans

Enterprises ChanPay (暢捷支付), POS


Core ERP business: a stable cash cow

Large enterprises

Yonyou’s flagship NC6 and U9 products fit well the demand of most comprehensive ERP

functions for large enterprises. The company is trying to enhance the subscription model e.g.

bundling with additional support and maintenance services. This product segment is 100%

direct sales with in-house implementation, given the customization required in the products.

On the other hand, we see policy tailwinds that favour adoption of domestic software. For

example, China Customs is a recent new customer of NC.

Going online and mobile with Internet services. Yonyou is rolling out mobile

applications for large enterprises on various fronts, including finance, sales, HR and more.

Yonyou is exploring in-depth new mobile applications for large enterprises such as project

management, cost control and business intelligence.

Promoting a hybrid of private and public cloud offerings. Yonyou is connecting NC

series of private cloud products with its public cloud offerings such as Yonyou Dodo,

Huishang Cloud Platform, CJT Payment, Youjinsuo and many more.

Medium-sized enterprises

To cater to the rising medium-sized enterprise market, Yonyou set up a wholly-owned

subsidiary Yonyou Up (优普) in 2014 with a focus on U8+, PLM and CRM. There are about

300k medium-sized enterprise customers.

Internet services the focus. Recent upgrades to U8+ focus on Internet services and O2O

application for its medium-sized customers.

Transformed to distributor model. Yonyou shifted its sales and distribution channels

from direct sales to wholly external distributors in 2015. Yonyou Up expanded meaningfully

its distribution channels and partnered with 684 distributors in 2H15, up 22% YoY.

Small and micro enterprises (MSEs)

Yonyou spun off Chanjet (1588 HK, NR) in 2014 to focus specifically on micro and small

enterprises (MSEs). Net proceeds from Chanjet’s listing fund R&D of the Chanjet T series,

cloud and payment solutions. Its product portfolio now includes Chanjet T+, T1, T3 and T6.

The T series has about 1mn customers and is sold through external distributors.


29 April 2016 15

Ramping up cloud offerings. Chanjet recently launched a new paid cloud application

service, Excellent Accountant, targeting MSEs with in-house accountants, in addition to the

existing cloud applications include Easy Accounting Agent, Biz Chat, and Accountant

Home. The company is also working to connect cloud offerings with T+ series, e.g. Biz

Chat and Accountant Home. In FY15, the new enterprise users of Chanjet’s cloud service

exceeded 470k, and the number of accumulated enterprise users exceeded 600k.

Focus on the value chain of financial service. Chanjet targets to become a one-stop

service platform for MSEs, particularly on financial services, e.g. account keeping, tax

auditing, business registration and more.

Fig 11 Revenue model of Yonyou’s products

Typical products Revenue model

NC6, U9 License fee; customization and implementation; support services U8+ License fee; customization and implementation; support services Chanjet T+, T1, T3, T6 License fee; subscription fee for additional cloud services


Fig 12 Revenue mix (2015) Fig 13 Revenue mix by software product (2015)


Technical services: de-emphasising low-margin implementation

Yonyou provides implementation and support services for its ERP customers. Implementation

carries very low GPM, given the labour intensity and lengthy rounds of testing and

implementation. In the developed markets, leading ERP players such as SAP and Oracle sell

only licenses for the ERP products and rely on external specialists for implementation.

Yonyou is shifting away from implementation and focusing more on support services. The

company has trimmed its implementation team from about 4k at peak to now 2k+. Support

services are more scalable and not labour-intensive. Support services deliver a high GPM of

90%+. Yonyou’s support team currently has about 1k staff.

Software products

50%

Technical services and

training

45%

Other software products

3%

Others (incl. Internet

finance)

2% High-end (NC6, U9..)

35%

Mid-range (U8…)

38%

Low-end (T+, T1, T3, T6)

27%


29 April 2016 16

Enterprise Internet services: budding Internet services and MSE cloud fuel growth

Fig 14 Chanjet’s portfolio of cloud applications

English name Chinese name Functions

Easy Accounting Agent 易代账 Tax reporting

Good Accounting 好会计 Finance and accounting

Good Business 好生意 Business operations

Biz Chat 工作圈 Social networking and work collaboration; connected to T+ and U8/U9

Customer Management 客戶管家 CRM; connected to T+ series products

Accountant Home 會計家園 Accounting; connected to T+


Yonyou’s subsidiary Chanjet plays a key role in the financial and accounting cloud. Chanjet

offers cloud applications as well as integration with its T+ ERP product. MSE users can opt

for any of the cloud applications, and can also purchase T+ for more comprehensive services.

In general, micro enterprises find the functionalities of cloud applications sufficient. Once

micro enterprises grow into small enterprises, they can adopt T+ to meet higher requirements.

Biz Chat, Customer Management and Accountant Home are connected to T+.

Cloud applications. Chanjet operates a freemium model of its cloud applications. The

company offers basic cloud functions for free and charges subscription fees for value-

added services and specialized functions. Biz Chat, Customer Management, and

Accountant Home are free for basic functions or below certain users. Going forward, the

company monetizes through Easy Accounting Agent, Good Accounting and Good

Business.

Open platform. Chanjet launched Chanjet Cloud Service Open Platform V2.0 that

engages developers and provides toolkits to developers. More than 30 third-party

developers intended or have started to create apps.

That said, Yonyou is slower in cloud offerings compared to Kingdee. Kingdee does well with

MSEs who have high demand for cloud applications for pricing and flexibility, whereas

Yonyou focuses more on ERP for large enterprises and Internet finance.

All in all, Yonyou is diversifying into enterprise Internet services. Among those, the financial

and accounting cloud for MSEs is the key focus. Additionally, Yonyou also offers digital

marketing services through Chaoke and Bingjun, and e-Commerce services through

Dianshangtong. We expect the revenue contribution from enterprise Internet services to be 8%

in 2018E from literally none in 2014.

Fig 15 Enterprise users of Chanjet’s cloud service


0

200

400

600

800

1000

1200

2H14 1H15 2H15

Registered enterprise users Enterprise users of Chanjet cloud service

Active enterprise users of Chanjet cloud service

('000)


29 April 2016 17

Internet finance: payment still in early stage

Yonyou’s Internet finance is engaged in three main areas, namely P2P lending, acquiring,

and Internet payment. P2P lending and acquiring currently account for the majority of revenue

in Yonyou’s Internet finance business, while Internet payment is still under development and

should start to contribute more meaningfully from FY16 onwards.

P2P lending

Yonyou partnered with Leaguer Financial to roll out the P2P lending platform yyfax.com (友金

所) in Sep 2014. As of mid Feb 2016, more than 390k investors have participated in the

platform and have lent out more than RMB3.7bn in total. yyfax.com sources loans on its P2P

platform from quality MSE customers of Yonyou’s ERP products. Other requirements include

ownership of real estate properties, insurance products and more.

We see rising regulatory risks to P2P lending in China, after many platforms were alleged to

have pooled investors’ money to fund their own projects or provide guarantees for the lenders.

Fig 16 P2P products from yyfax.com

Product Maturity Annualized interest rate

YY-A 3 months 7.0% YY-B 6 months 8.5% YY-C 12 months 9.5%

You Jin E Fu (友金e富) 12, 24, 36 months 10.0%

Source: company data, Macquarie Research, April 2016

Payment services

The payment business is conducted through Chanjet’s subsidiary Chanjet Payment. Chanjet

Payment obtained a payment business license (支付業務許可證) issued by PBoC, and also a

license for national acquiring (i.e. processing debit and credit card payments on behalf of

merchants) and national internet payment (全國收單及全國互聯網支付的牌照), and received

the qualification of national professional acquiring outsourcer awarded by China Union Pay.

Acquiring (收單). Chanjet sets up POS terminal at the shops of registered merchants and

facilitates payment collection with the settlement bank. As of Dec 2015, more than 27k

merchants have enrolled in Chanjet Payment with a transaction amount of more than

RMB24bn cumulatively since its start in mid 2014. Chanjet Payment currently charges

0.38%, 0.78%, and 1.25% of the transaction amount depending on product categories. A

new fee scheme will be effective in Sep 2016 as regulators seek to adjust the scheme to

be more market-oriented. It aims to lower the overall fees to 0.35% (debit cards) and 0.45%

(credit cards), and allows acquiring firms and merchants to negotiate the acquiring fees. In

our view, this new policy promotes healthy development of the payment industry, e.g. by

standardizing fees across product categories, but may squeeze revenue across value

chain.


29 April 2016 18

Fig 17 Value chain around POS acquiring (i.e. processing of debit/credit card payments on behalf of merchants)


Internet payment. Chanjet Payment’s application in Internet payment is currently under

development. It aims to act as a gateway between their ERP customers and the financial

institutions. Integrating Chanjet Payment with Yonyou’s and Chanjet’s ERP systems

provide one-stop service platform to ERP customers. Chanjet is leading its software

competitors, as Kingdee hasn’t yet an Internet payment license.

Across the customer segments, large and medium-sized enterprises are more motivated to

adopt Chanjet Payment. An enterprise payment solution integrates business units with

payment functions, enables better monetization of current balance sheet positions, speeds up

payment processing and has access to more banks.

Fig 18 ChanPay as the intermediary between enterprises and financial institutions



29 April 2016 19

Financial analysis

Fig 19 Key assumptions

Key assumptions 2012 2013 2014 2015 2016E 2017E 2018E

Revenue (RMB mn) 4,235 4,363 4,374 4,451 4,780 5,276 5,750 Software products 2,304 2,216 2,208 2,076 2,197 2,374 2,596 - High-end 1,104 1,121 1,085 938 948 957 967 - Mid-range 892 799 821 822 833 842 850 - Low-end 308 296 303 305 314 320 327 - Enterprise Internet services / cloud 0 0 0 11 101 255 452 Technical services and training 1,748 1,844 1,967 2,152 2,260 2,350 2,421 Other software products 158 243 112 110 116 122 128 Others (incl. Internet finance) 25 60 87 113 208 430 606

% of revenue Software products 54% 51% 50% 47% 46% 45% 45% - High-end 26% 26% 25% 21% 20% 18% 17% - Mid-range 21% 18% 19% 18% 17% 16% 15% - Low-end 7% 7% 7% 7% 7% 6% 6% - Enterprise Internet services / cloud 0% 0% 0% 0% 2% 5% 8% Technical services and training 41% 42% 45% 48% 47% 45% 42% Other software products 4% 6% 3% 2% 2% 2% 2% Others (incl. Internet finance) 1% 1% 2% 3% 4% 8% 11%

YoY Revenue 3% 0% 2% 7% 10% 9% Software products -4% 0% -6% 6% 8% 9% - High-end 2% -3% -13% 1% 1% 1% - Mid-range -10% 3% 0% 1% 1% 1% - Low-end -4% 2% 1% 3% 2% 2% - Enterprise Internet services / cloud na na 151% 78% Technical services and training 5% 7% 9% 5% 4% 3% Other software products 54% -54% -2% 5% 5% 5% Others (incl. Internet finance) 140% 46% 30% 84% 107% 41%


Legacy ERP business sees flat growth

Out of the three major product/customer segments, NC-facing large enterprises accounted for

45% of total software revenue in FY15. Large enterprises are more stringent in IT

investments and undertake long decision cycles, leading to 3-13% revenue decline in FY14-

15 by our estimates. We currently model a 1% revenue CAGR for this segment between

2015-18. On the other hand, MSEs are the bright spot on the back of Chanjet’s consistent

upgrades of T+ but have been adversely impacted by the switch from new software license

revenue to rateable cloud revenue. We thus model 2% revenue CAGR in FY15-18. Overall,

we expect 1% revenue CAGR in the legacy ERP business.

Enterprise Internet service revenue catching up with peers

The financial and accounting cloud for MSEs through Chanjet is the key focus. Chanjet

operates a freemium model of its cloud applications. Enterprises pay for usage above certain

limits on functionalities and user accounts. Besides, Yonyou also offers digital marketing

services through Chaoke and Bingjun, and e-Commerce services through Dianshangtong.

We currently model enterprise Internet service revenue to be RMB101mn, or about 5% of

software revenue in FY16, compared to RMB106mn of Kingdee’s cloud revenue back in

FY14. We expect revenue contribution of enterprise Internet service will expand further to 11%

and 17% of software revenue in FY17 and FY18.


29 April 2016 20

Fig 20 Yonyou vs Kingdee (enterprise Internet services and cloud revenue)

Fig 21 Yonyou ramping up cloud revenue


Internet finance: P2P and payment

P2P lending is the main driver of Yonyou’s Internet finance business. Yonyou partnered with

Leaguer Financial to roll out the P2P lending platform yyfax.com (友金所). The cumulative

lending amount skyrocketed to RMB4.5bn in Mar 2016 after about six quarters into operation.

The transaction amount through Yonyou’s POS (i.e. acquiring business) also grew rapidly to

RMB24bn in 4Q15. We currently forecast 75% revenue CAGR between 2015-18 for the

others (including Internet finance) segment.

Fig 22 yyfax.com’s P2P lending amount (cumulative) Fig 23 Yonyou’s others revenue incl. Internet finance


Sizeable non-op income to total earnings

As the Chinese government has identified the software industry as strategic for development,

Yonyou with its market leadership enjoys favourable treatment under tax and financial

policies. Yonyou’s software products are eligible for VAT refunds. The VAT tax is collected on

software sales at a standard rate of 17%, but the portion of collected tax in excess of 3% will

be refunded under China’s tax policies. In addition, the company receives government grants

in the form of R&D funding.

0

100

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500

600

700

800

900

2014 2015 2016E 2017E 2018E

Kingdee Yonyou

(RMB mn)

0%

5%

10%

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20%

25%

30%

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2015 2016E 2017E 2018E

Yonyou % of software revenue

(RMB mn)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Dec 2014 Mar 2015 Jun 2015 Sep 2015 Dec 2015

P2P lending amount (cumulative) (RMB bn)

(RMB bn)

0%

20%

40%

60%

80%

100%

120%

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2015 2016E 2017E 2018E

Others incl. Internet finance YoY

(RMB mn)


29 April 2016 21

Government grants and VAT refunds accounted for 24% and 71% of non-op income in FY15.

The non-op income is very significant in size, ranging between 62% to 110% as % of profit

between FY13-15. Yonyou’s dependence on government grants should reduce across time,

in our view, as its business turns profitable. We project non-op profit to total earnings

contribution to decline from its peak at 110% in 2015 to 70% in 2018E.

Fig 24 Breakdown of non-op income (2015) Fig 25 Yonyou’s non-op income


Margins to recover on better monetization of new initiatives

We expect GPM will stay stable at the sub-60% level as the revenue mix of software and

technical services maintains. As Yonyou is strategically shifting away from low-margin

implementation, there can be upside to GPM.

On the other hand, S&M expenses and R&D expenses are surging on investments in Internet

finance and cloud in the past two years. We expect margins will start to improve as

monetization of cloud and Internet finance ramps up, and expect breakeven in the new

initiatives in FY18. We currently model -1% OPM for FY16, expanding to 5% in FY18.

Fig 26 GPM to stay stable with upside from less low-margin implementation business

Fig 27 OPM to recover on better monetization of new initiatives


Asset disposal gain

0%

Government subsidies

25%

VAT refund71%

Others4%

0%

20%

40%

60%

80%

100%

120%

0

50

100

150

200

250

300

350

400

450

2012 2013 2014 2015 2016E 2017E

Non-op income Non-op income as % of earnings

(RMB mn)

59%

60%

61%

62%

63%

64%

65%

66%

67%

68%

69%

2012 2013 2014 2015 2016E 2017E 2018E

GPM

-6%

-4%

-2%

0%

2%

4%

6%

8%

2012 2013 2014 2015 2016E 2017E 2018E

OPM


29 April 2016 22

Risks Cloud execution. Yonyou and Chanjet are lagging behind Kingdee in cloud offerings. This

can be a headwind to Yonyou, given Kingdee’s first-mover advantage, more established

brand reputation and market share in cloud, particularly for MSEs. Yonyou released major

cloud applications in 2015 and targets to start monetization in 2016 – about two years behind

Kingdee.

On the other hand, there can be cannibalization between cloud applications and the T+

product. For now, we expect incremental revenue from new cloud subscription of micro

enterprises rather than cannibalization of potential purchase or existing usage of T+ products.

Adoption of Chanjet Payment. A new fee scheme is rolling out in Sep 2016 as regulators

seek to lower the overall fees to 0.35-0.45%, and allow acquiring firms and merchants to

negotiate the acquiring fees. In our view, this new policy promotes healthy development of the

payment industry, e.g. by standardizing fees across product categories, but may squeeze

revenues across the value chain and make the acquiring business more competitive.

Macro impact. Medium-sized and micro/small enterprises are more sensitive to the macro

cycle. That said, the new income stream of cloud applications for micro/small enterprises are

growing, which may offset macro softness.

Government grants. Yonyou thus far enjoys government grants, given its market leadership

against a backdrop of favourable policies towards the software industry. Government grants

accounted for 24% of non-op income and 27% of net profit in FY14. There is no guarantee

that Yonyou can continue to receive government grants.

Volatility in A-share market. Yonyou’s share price is highly correlated with the broad A-

share market (61% correlation in the last two years). At the peak of the rally in May 2015,

Yonyou was trading at above 60x forward PE vs the A-shares at 16x.


29 April 2016 23

Appendices Shanghai-Hong Kong Stock Connect

Yonyou’s A-share listing is also under Shanghai-Hong Kong Stock Connect, a cross-

boundary program that allows investors on HKEx to invest in A-share. While the exchanges

do not report trading volume or value of northbound orders by stock, they do release the top

ten stocks by trade value. Currently, the top ten stocks by northbound trade value are mostly

in financial, consumer and material industries, and Yonyou is not among them.

As investor interest over HK-listed software and cloud peers including Kingdee and Kingsoft

grows over time and more international brokers cover the A-share peers, we expect A-share

Yonyou under the Shanghai-Hong Kong Stock Connect will become more actively traded.

Fig 28 Shareholding of Yonyou

Company Company (Chinese name) Shareholding

Beijing Yonyou Science 北京用友科技有限公司 28.6%

Shanghai Yonyou Science 上海用友科技咨询有限公司 12.2%

Shanghai Yipei 上海益倍管理咨询有限公司 4.8%

Beijing Yonyou Enterprise Management 北京用友企业管理研究所有限公司 4.0%

Shanghai Youfu 上海优富信息咨询有限公司 2.9%

China Securities Finance Corp 中国证券金融股份有限公司 2.0%

Others 45.5%

Source: cninfo, Macquarie Research, April 2016

Fig 29 Shareholding of WANG, Wen Jing (Chairman, CEO) in Yonyou

Company Company (Chinese) WANG, Wen Jing's share in

shareholding companies

Shareholding companies'

stake in Yonyou A-share

WANG, Wen Jing's stake in

Yonyou A-share

Beijing Yonyou Science 北京用友科技有限公司 100% 29% 29%

Shanghai Yonyou Science 上海用友科技咨询有限公司 68% 12% 8%

Beijing Yonyou Enterprise Management

北京用友企业管理研究所有

限公司

76% 4% 3%

Total 40%


Fig 30 Yonyou’s major subsidiaries

Major subsidiary Major subsidiary (Chinese name) Shareholding

Beijing Yonyou Government 北京用友政务软件有限公司 84.2%

Yonyou Auto Info Services 用友汽车信息科技（上海）股份有限公司 77.9%

Yonyou Financial 用友金融信息技术有限公司 81.6%

Seentao (833694 on NEEQ) 用友新道科技股份有限公司 67.6%

Yonyou Tobacco 厦门用友烟草软件有限责任公司 73.0%

Yonyou Up 用友优普信息技术有限公司 100.0%

Chanjet (1588 HK) 畅捷通信息技术股份有限公司 68.9%



29 April 2016 24

Fig 31 Management profile

WANG, Wen Jing Chairman, CEO - co-founders f Yonyou

- over 25 years of working experience in the software industry

- served as the chairman of the board of directors of Yonyou since December 1988

- was elected a member of the 9th, 10th, 11th and 12th session of the NPC for a term from March 1998 to March 2018

- vice chairman of China Software Industry Association from March 2002

- vice chairman of the 10th All-China Federation of Industry & Commerce from November 2007 to December 2012

- graduated from Jiangxi University of Finance and Economics with a bachelor’s degree of economics in 1983

GUO, Xin Ping Vice Chairman - worked for MOF from Aug 1985 to Jul 1989

- a director of Yonyou from Nov 1999

- an independent non-executive director of CCID Consulting Company Limited since May 2002

- an independent director of Glodon Software from Mar 2011 to Apr 2014

- an independent director of Sound Environmental Resources since Apr 2012

- graduated from The Hong Kong University of Science and Technology with a master of business administration in Nov 2007

- a senior accountant recognized by the Personnel Department of Hubei Province in Jan 1998 WANG, Jia Liang CFO - Joined Yonyou in Jan 2014

- worked for MOF from Aug 1991 to Dec 1998

- served as a financial manager at Brady (Beijing) from Dec 2001 to Dec 2003

- CFO of Savcor Face (Beijing) Technologies from Dec 2003 to Sep 2007

- CFO in the Asian Pacific Region and the deputy general manager of Cobra Beijing Automotive Technologies from Jul 2008 to Aug 2010

- CFO of Jidong Development Group from Jul 2011 to Jan 2014

- graduated from George Washington University in Jan 2001 with a master’s degree in accounting


Fig 32 Dividend payout history

Stock dividend Cash dividend (RMB)

2015 0.15

2014 20% 0.3 2013 20% 0.3 2012 0.2 2011 20% 0.4 2010 0.22 2009 30% 0.6 2008 30% 0.3


Fig 33 Pledge of stocks – Yonyou vs Software sector average

Source: Wind, Macquarie Research, April 2016; *Neusoft, Wonders, Beijing Ultrapower, Sinodata in the software sector

As of Mar 3, 2016, Beijing Yonyou Science pledged 43.22% of its shareholding, or 12.37% of

Yonyou’s total outstanding shares, as guarantees for loans from shareholders.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Yonyou Software sector average*

Pledge of stocks


29 April 2016 25

Fig 34 Ratio summary

YE 31 December 2013 2014 2015 2016E 2017E 2018E 15-16E 16-17E 17E-20E

Per Share EPS (diluted) (CNY) 0.39 0.39 0.22 0.22 0.35 0.42 3% 58% 7% DPS (CNY) 0.30 0.30 0.15 0.14 0.22 0.26 -6% 56% 7% BVPS (CNY) 2.32 2.84 3.67 3.74 3.90 4.03 2% 4% 0% Cash per share (CNY) 0.53 0.97 1.28 1.17 1.16 1.17 -9% -1% -1% Diluted shares (mn) 1,391 1,406 1,502 1,503 1,528 1,556 0% 2% 5% Value EV/Revenue x 7.2 x 7.1 x 7.0 x 6.5 x 5.9 x 5.4 x -- -- -- EV/EBITDA x 95.7 x 83.7 x -981.0 x 451.3 x 114.1 x 79.7 x -- -- -- EV/FCF x na na na na na na -- -- -- Non-GAAP P/E x 56.1 x 56.5 x 102.5 x 99.6 x 63.1 x 52.6 x -- -- -- Non-GAAP P/E (ex Cash)

x 54.7 x 54.0 x 96.6 x 94.4 x 59.8 x 49.9 x -- -- --

Price/ Sales x 7.6 x 7.6 x 7.5 x 6.9 x 6.3 x 5.8 x -- -- -- Price/ Book x 9.5 x 7.8 x 6.0 x 5.9 x 5.7 x 5.5 x -- -- -- Profit & Loss Revenue (RMB mn) 4,363 4,374 4,451 4,780 5,276 5,750 7% 10% 7% EBITDA (RMB mn) 327 374 (32) 69 274 392 -- 296% 24% Operating Profit (RMB mn) 230 273 (166) (40) 154 261 -- -- 35% Net Income (RMB mn) 548 550 324 333 535 653 3% 61% 13% Profitability Gross Margin % 62% 68% 68% 67% 67% 68% (73 bps) 12 bps 27 bps EBITDA Margin % 7% 9% -1% 1% 5% 7% -- 375 bps 299 bps Operating Margin % 5% 6% -4% -1% 3% 5% -- -- 298 bps Net Margin % 13% 13% 7% 7% 10% 11% (30 bps) 317 bps 171 bps Cash Flow Operating Cash Flow (RMB mn) 740 804 550 460 641 800 -16% 39% 14% Free Cash Flow : (RMB mn) 14 0 (414) (211) (55) 76 -- -- -- +EBIT*(1-t) (RMB mn) 202 254 (157) (38) 139 230 -- -- 34% +D&A (RMB mn) 97 101 134 109 120 131 -19% 10% 7% +Capex & Investments

(RMB mn) -281 -284 -263 -300 -300 -300 14% 0% 0%

+Change in NWC (RMB mn) (4) (70) (128) 17 (14) 15 -- -179% -- Yield Dividend Yield % 1% 1% 1% 1% 1% 1% (4 bps) 36 bps 22 bps FCF Yield % 0% 0% -1% -1% 0% 0% -- -- -- Earnings Yield % 2% 2% 1% 1% 2% 2% 3 bps 58 bps 38 bps Balance Sheet Net debt (Cash) (RMB mn) (743) (1,369) (1,923) (1,752) (1,769) (1,815) -- -- -- Net debt/ equity % Cash Cash Cash Cash Cash Cash -- -- -- Shareholders Equity (RMB mn) 3,227 3,986 5,519 5,627 5,950 6,268 2% 6% 5% Efficiency ROE (average) % 18% 15% 7% 6% 8% 10% (111 bps) 275 bps 205 bps ROA (average) % 8% 7% 3% 3% 5% 5% (26 bps) 167 bps 124 bps ROIC (average) % 15% 12% 6% 5% 8% 10% (31 bps) 294 bps 203 bps

Source: Company data, Macquarie Research, April 2016 Prices of 20 April 2016


29 April 2016 26

Fig 35 Financial statements

YE 31 December 2013 2014 2015 2016E 2017E 2018E 15-16E 16-17E 17-20E

Consolidated Income Statement (RMB mn) Total Revenue 4,363 4,374 4,451 4,780 5,276 5,750 7% 10% 7%

Software products (主營業務 - 軟

件行業)

2,216 2,208 2,076 2,197 2,374 2,596 6% 8% 6%

Core software 2,216 2,208 2,065 2,095 2,119 2,144 1% 1% -- Enterprise Internet services / cloud

0 0 11 101 255 452 866% 151% --

Technical services and training 1,844 1,967 2,152 2,260 2,350 2,421 5% 4% 4% Other software products and

services (其他（商品）)

243 112 110 116 122 128 5% 5% 5%

Others (incl. Internet finance) 60 87 113 208 430 606 84% 107% 21% Cost of revenues 1,645 1,421 1,431 1,572 1,728 1,866 10% 10% 7% Gross Profit 2,717 2,954 3,020 3,209 3,547 3,884 6% 11% 7% GP Margin 62% 68% 68% 67% 67% 68% (73 bps) 12 bps 27 bps SG&A 2,487 2,681 3,187 3,248 3,393 3,622 2% 4% 5% S&M expense 1,027 1,093 1,185 1,185 1,315 1,411 0% 11% 5% G&A expense 1,242 1,357 1,723 1,777 1,767 1,886 3% -1% 5% Business tax and surcharge 53 57 73 79 88 96 8% 11% 7% Finance cost 78 84 93 98 98 98 5% 0% 0% Provision for doubtful accounts 87 90 112 109 125 132 Operating Profit 230 273 -166 -40 154 261 -76% -- 35% OP Margin 5% 6% -4% -1% 3% 5% 290 bps 376 bps 298 bps Non-Operating, Net 417 339 529 412 468 510 -22% 14% 3% PBT 647 612 362 372 622 771 3% 67% 13% Income Taxes (Credit) 78 42 19 19 62 93 -4% 235% 20% Net Income 548 550 324 333 535 653 3% 61% 13% NP Margin 13% 13% 7% 7% 10% 11% (30 bps) 317 bps 171 bps EBITDA 327 374 -32 69 274 392 -- 296% 24% EBITDA Margin 7.5% 8.5% -0.7% 1.4% 5.2% 6.8% 217 bps 375 bps 299 bps Consolidated Balance Sheet (RMB mn) Current assets 3,738 4,943 6,606 6,553 6,751 6,969 -1% 3% 3% Cash & cash equivalents 2,100 2,963 3,879 3,707 3,725 3,771 -4% 0% 2% Restricted cash 23 34 43 43 43 43 Receivables 1,453 1,537 1,617 1,736 1,916 2,088 7% 10% 7% Other current assets 185 442 1,110 1,110 1,110 1,110 0% 0% 0% Fixed assets 3,492 3,868 4,313 4,610 4,902 5,189 7% 6% 6% PPE 1,597 1,810 1,990 2,211 2,424 2,630 11% 10% 8% Intangible assets & goodwill 1,286 1,373 1,639 1,659 1,676 1,689 1% 1% 1% Investments 420 505 562 618 680 748 10% 10% 10% Other fixed assets 189 180 122 122 122 122 0% 0% 0% Total assets 7,230 8,811 10,919 11,164 11,653 12,158 2% 4% 4% Current liabilities 3,011 3,530 4,705 4,842 5,008 5,196 3% 3% 3% Short-term Loans 1,020 1,268 1,824 1,824 1,824 1,824 0% 0% 0% Trade payables 970 1,090 1,182 1,234 1,311 1,405 4% 6% 6% Other Current Liabilities 1,021 1,172 1,699 1,784 1,873 1,967 5% 5% 5% Long-term Loans 337 326 132 132 132 132 Deferred Revenue and Others 519 512 19 19 19 19 LT Liabilities 856 838 151 151 151 151 0% 0% 0% Total Liabilities 3,867 4,368 4,856 4,993 5,159 5,347 3% 3% 3% Shareholders Equity 3,363 4,443 6,063 6,171 6,494 6,811 2% 5% 5% Shares 971 1,171 1,465 1,465 1,465 1,465 0% 0% 0% Reserves 523 592 635 635 635 635 0% 0% 0% Retained Earnings 1,289 1,479 1,408 1,516 1,839 2,156 8% 21% 15% Others -2 -1 -208 -208 -208 -208 0% 0% 0% Minority interests 136 456 544 544 544 544 0% 0% 0% Total Sh. Equity + Liabilities 7,230 8,811 10,919 11,164 11,653 12,158 2% 4% 4% Consolidated Cash Flow (RMB mn) Operating Cash Flow 740.1 804.3 549.7 459.9 641.5 799.7 -16% 39% 14% Net Income 547.9 550.3 323.7 333.4 535.2 653.4 3% 61% 13% + Depreciation/Amortization 96.6 100.8 134.4 109.1 119.8 130.9 -19% 10% 7% + Change in Working Capital (4.2) (70.4) (128.0) 17.3 (13.6) 15.4 -- -- -- Others 99.8 223.6 219.7 Investing Cash Flow (625.4) (599.7) (956.2) (406.2) (411.8) (418.0) -58% 1% 2% Capex -281 -284 -263 -300 -300 -300 14% 0% 0% Increase in intangibles -64 -116 -317 -50 -50 -50 -84% 0% 0% Other (non-recurring) -281 -199 -376 (56.2) (61.8) (68.0) -85% 10% 10% Financing Cash Flow 281.7 648.9 1,313.1 (225) (212) (336) -- -6% 27% Shares issued (redeemed) -73.8 567.9 1,811.4 0.0 0.0 0.0 -- -- -- Increase (decrease) in debt 652.5 230.1 -131.3 0.0 0.0 0.0 -- -- -- Increase in minority interests 55.8 320.7 87.5 0.0 0.0 0.0 -- -- -- Cash Dividends -278.8 -446.3 -506.5 -225.3 -212.1 -336.0 Others -73.9 -23.4 52.0 0.0 0.0 0.0 -- -- -- Net Change in Cash 396.4 853.5 906.5 (171.7) 17.6 45.7 -- -- 73% Exchange impact 0.9 -1.0 0.1 0.0 0.0 0.0 -- -- -- Change in restricted cash 5.5 11.0 9.0 0.0 0.0 0.0 Cash at beginning of period 1,697.0 2,099.8 2,963.4 3,879.0 3,707.4 3,725.0 31% -4% 1% Cash at end of period 2,099.8 2,963.4 3,879.0 3,707.4 3,725.0 3,770.7 -4% 0% 2%



29 April 2016 27

Yonyou (600588 CH, Outperform, Target Price: Rmb29.00) Quarterly Results 4Q/15A 1Q/16E 2Q/16E 3Q/16E Profit & Loss 2015A 2016E 2017E 2018E

Revenue m 2,182 537 1,088 827 Revenue m 4,451 4,780 5,276 5,750 Gross Profit m 1,629 284 728 477 Gross Profit m 3,020 3,209 3,547 3,884 Cost of Goods Sold m 552 253 360 350 Cost of Goods Sold m 1,431 1,572 1,728 1,866 EBITDA m 433 -248 -5 -264 EBITDA m -166 -40 154 261

Depreciation m 0 0 0 0 Depreciation m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0 EBIT m 433 -248 -5 -264 EBIT m -166 -40 154 261

Net Interest Income m 0 0 0 0 Net Interest Income m 0 0 0 0 Associates m 0 0 0 0 Associates m 0 0 0 0 Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Other Pre-Tax Income m 287 117 75 57 Other Pre-Tax Income m 529 412 468 510 Pre-Tax Profit m 720 -131 70 -207 Pre-Tax Profit m 362 372 622 771 Tax Expense m 21 7 -3 10 Tax Expense m -19 -19 -62 -93 Net Profit m 741 -124 66 -196 Net Profit m 343 353 560 679 Minority Interests m -23 2 -10 -4 Minority Interests m -19 -20 -25 -25

Reported Earnings m 718 -123 56 -201 Reported Earnings m 324 333 535 653 Adjusted Earnings m 718 -123 56 -201 Adjusted Earnings m 324 333 535 653

EPS (rep) 0.49 -0.08 0.04 -0.13 EPS (rep) 0.22 0.22 0.35 0.42 EPS (adj) 0.49 -0.08 0.04 -0.13 EPS (adj) 0.23 0.22 0.35 0.42 EPS Growth yoy (adj) % nmf -7.8 nmf 14.5 EPS Growth (adj) % nmf -2.9 58.0 19.8

PE (rep) x 89.3 85.8 54.5 45.6 PE (adj) x 84.5 87.1 55.1 46.0

EBITDA Margin % 19.9 -46.2 -0.5 -32.0 Total DPS 0.14 0.14 0.22 0.26 EBIT Margin % 19.9 -46.2 -0.5 -32.0 Total Div Yield % 0.7 0.7 1.1 1.4 Earnings Split % 221.9 -36.8 16.7 -60.2 Basic Shares Outstanding m 1,464 1,494 1,524 1,555 Revenue Growth % nmf 8.5 6.6 9.5 Diluted Shares Outstanding m 1,497 1,483 1,513 1,543 EBIT Growth % nmf -9.7 89.7 17.6

Profit and Loss Ratios 2015A 2016E 2017E 2018E Cashflow Analysis 2015A 2016E 2017E 2018E

Revenue Growth % nmf 7.4 10.4 9.0 EBITDA m -166 -40 154 261 EBITDA Growth % nmf 76.1 nmf 69.4 Tax Paid m 0 0 0 0 EBIT Growth % nmf 76.1 nmf 69.4 Chgs in Working Cap m -128 17 -14 15 Gross Profit Margin % 67.9 67.1 67.2 67.5 Net Interest Paid m 0 0 0 0 EBITDA Margin % -3.7 -0.8 2.9 4.5 Other m 844 482 501 523 EBIT Margin % -3.7 -0.8 2.9 4.5 Operating Cashflow m 550 460 641 800 Net Profit Margin % 7.3 7.0 10.1 11.4 Acquisitions m 0 0 0 0 Payout Ratio % 63.0 63.6 62.8 62.3 Capex m 0 0 0 0 EV/EBITDA x -147.5 -630.0 166.4 100.5 Asset Sales m -263 -300 -300 -300 EV/EBIT x -147.5 -630.0 166.4 100.5 Other m -693 -106 -112 -118

Investing Cashflow m -956 -406 -412 -418 Balance Sheet Ratios Dividend (Ordinary) m -506 -225 -212 -336 ROE % 5.2 5.3 8.2 9.5 Equity Raised m 1,899 0 0 0 ROA % -1.5 -0.4 1.4 2.2 Debt Movements m -131 0 0 0 ROIC % nmf -1.6 5.3 7.9 Other m 52 0 0 0 Net Debt/Equity % -61.8 -57.9 -55.3 -53.4 Financing Cashflow m 1,313 -225 -212 -336 Interest Cover x nmf nmf nmf nmf

Price/Book x 4.5 4.5 4.4 4.3 Net Chg in Cash/Debt m 907 -172 18 46 Book Value per Share 4.3 4.3 4.4 4.5

Free Cashflow m 550 460 641 800

Balance Sheet 2015A 2016E 2017E 2018E Cash m 3,879 3,707 3,725 3,771 Receivables m 1,617 1,736 1,916 2,088 Inventories m 0 0 0 0 Investments m 0 0 0 0 Fixed Assets m 1,990 2,211 2,424 2,630 Intangibles m 2,201 2,277 2,356 2,437 Other Assets m 1,232 1,232 1,232 1,232 Total Assets m 10,919 11,164 11,653 12,158 Payables m 1,182 1,234 1,311 1,405 Short Term Debt m 0 0 0 0 Long Term Debt m 0 0 0 0 Provisions m 1,824 1,824 1,824 1,824 Other Liabilities m 1,850 1,935 2,024 2,118 Total Liabilities m 4,856 4,993 5,159 5,347

Shareholders' Funds m 5,727 5,835 6,158 6,476 Minority Interests m -208 -208 -208 -208 Other m 544 544 544 544 Total S/H Equity m 6,063 6,171 6,494 6,811

Total Liab & S/H Funds m 10,919 11,164 11,653 12,158

All figures in Rmb unless noted.



29 April 2016 28

HONG KONG

268 HK Outperform

Price (at 07:59, 28 Apr 2016 GMT) HK$2.55

Valuation HK$ 3.40 - Sum of Parts 12-month target HK$ 3.40

Upside/Downside % +33.3

12-month TSR % +33.3

Volatility Index High

GICS sector Software & Services

Market cap HK$m 7,479

Market cap US$m 964

Free float % 63

30-day avg turnover US$m 8.0

Number shares on issue m 2,933

Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E

Revenue m 1,586.2 1,725.6 1,903.7 2,176.3 EBIT m 211.2 206.8 333.2 507.3 EBIT growth % -28.5 -2.1 61.1 52.3 Reported profit m 105.8 139.2 229.3 373.7 Adjusted profit m 90.4 139.2 229.3 373.7 EPS rep Rmb 0.04 0.05 0.07 0.12 EPS rep growth % -48.3 22.1 64.8 63.0 EPS adj Rmb 0.03 0.05 0.07 0.12 EPS adj growth % -54.7 39.3 64.8 63.0 PER rep x 57.9 47.4 28.8 17.6 PER adj x 66.0 47.4 28.8 17.6 Total DPS Rmb 0.00 0.00 0.01 0.02

Total div yield % 0.0 0.0 0.6 0.9 ROA % 4.3 3.7 5.8 8.4 ROE % 3.5 4.2 6.6 10.1 EV/EBITDA x 11.4 10.7 8.4 6.5 Net debt/equity % -22.1 -22.7 -26.6 -31.7 P/BV x 1.9 1.9 1.8 1.6

268 HK rel HSI performance, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.


(all figures in Rmb unless noted, TP in HKD)

Analyst(s) Hillman Chan, CFA +852 3922 3716 [email protected] Wendy Huang, CFA +852 3922 3378 [email protected] Jake Lynch +852 3922 3583 [email protected] Julia Pan +852 3922 4211 [email protected] Joe Yu +852 3922 1160 [email protected]


Kingdee More competition in mobile office Event

Kingdee’s Cloud Hub will face more intense competition from Ding Ding and the

emerging Enterprise Weixin with strong social networking and upcoming third-

party enterprise apps, in our view. We reduce our cloud revenue growth

forecast from 80% to 70% for FY16 but retain 50% for FY17-18, and thus trim

FY16-18E revenue by 1%, earnings by 3%, and TP from HK$3.55 to HK$3.40.

We transfer coverage from Jake Lynch to Hillman Chan. Reiterate OP.

Impact

Threat from new strong social networking entrants. Kingdee’s Cloud Hub

had the first mover’s advantage, with its registered enterprises amounting to

over 1.5m with more than 15m registered users, ahead of Yonyou’s BizChat’s

200k registered enterprises and Weixin’s 600k enterprise accounts. But

Alibaba’s Ding Ding, rolled out in early 2015, has caught up fast, as it has

already achieved a share similar to Cloud Hub in medium-sized and small

enterprises, though still lags in large enterprises, according to IDC. Strong

promotion and social networking features such as Dingtalk and Snapchat-like

ephemeral chat mode are driving Ding Ding’s penetration. User subsidies

such as free phone calls are also particularly useful (Cloud Hub’s free 500min/

user/month vs Ding Ding’s 60-1,000min/user/month). Enterprise Weixin,

released in April, has started competing in the mobile office market.

Integration with ERP an edge but not necessarily an entry barrier. Cloud

Hub connects to its own suite of ERP applications including its popular CRM.

But this is not necessarily an entry barrier, as Ding Ding, with its open

platform, also introduces enterprise applications to fill the void, e.g. ikCRM, in

CRM. Enterprise Weixin, still in the early stage, also plans to open up its APIs

for third-party enterprise applications in future. Hence, factoring in more

intense competition, we reduce Kingdee’s cloud revenue growth forecast from

80% to 70% for FY16 but maintain 50% for FY17-18.

Stable ERP business to fund cloud investments. Overall we expect

Kingdee’s ERP revenue to stay flat YoY in FY16, as growth in EAS for large

enterprises and KIS for SMEs is offset by softness in K/3 for medium-sized

enterprises due partly to the macro impact and partly to cloud cannibalization.

Earnings and target price revision

We trim our FY16-18E earnings by 3%, and SOTP-based TP from HK$3.55 to

HK$3.40

Price catalyst

12-month price target: HK$3.40 based on a Sum of Parts methodology.

Catalyst: deal flow, returning excess cash to shareholders

Action and recommendation

Reiterate OP.


29 April 2016 29

Competition intensifies in mobile office cloud

First-mover advantage in mobile office

Kingdee’s Cloud Hub started as early as 2012 with deep roots in enterprises. Its registered

enterprises amounted to over 1.5m, with more than 15m registered users, ahead of Yonyou’s

BizChat’s 200k registered enterprises and Weixin’s 600k enterprise accounts.

Fig 1 Comparison across mobile office offerings

Cloud Hub (Kingdee)

Ding Ding (Alibaba) Enterprise Weixin (Tencent)

Weixin's enterprise account (Tencent)

BizChat (Yonyou, Chanjet)

Launch date Aug-12 Feb-15 Apr-16 2014 Feb-14 No. of enterprise users 1m+ (Dec 2015)

1.5m+ (Mar 2016) 1m+ (Dec 2015) 600k+ (Dec 2015) 200k+ (Mar 2016)

No. of registered users 10m+ (Dec 2015) 15m+ (Mar 2016)

10m+ (Dec 2015) 10mn+ (Dec 2015)

Third-party apps (ISV model) - partner with WPS, Coremail, Didi, Agora, Seeyon

- announce C++ strategy and invest

Rmb1bn to see SaaS developers

- partners include Landray, Tower,

Fumasoft, ikCRM

- focus on API and partner with third-party SaaS based

apps in verticals

Open platform Y Y API set-up the next step

Y

Integration with management software Y (e.g. finance, supply chain,

manufacturing, CRM)

Y (e.g. with T+)

IM Y Y Y Y Call Y Y Y Y Approval Y Y Y Y Sign-in (LBS) Y Y Y Y Announcement Y Y Y Y Calendar Y Y Y Y Document sharing Y Y, C-space Y Y


Threat from new entrants of strong social networking

The fast-growing Alibaba (BABA US, US$77.65, Neutral, TP: US$71.00, Wendy Huang) Ding Ding,

which was rolled out only in early 2015, has caught up fast. According to IDC, other than large-scale

enterprises where Cloud Hub still maintains its leadership position, Ding Ding has already achieved a

share similar to Cloud Hub in medium-sized and small enterprises (see below charts).

Strong promotion and social networking features, notably Dingtalk and Snapchat-like ephemeral chat

mode, drive Ding Ding’s faster penetration. User subsidies such as free phone calls are also

particularly useful. Cloud Hub and BizChat are giving out free 500min per user each month. Ding

Ding, dependent on user tiers, offers free 60-1,000min per user each month. Enterprise Weixin,

released in April, starts to compete in the mobile office market.

Fig 2 No. of large-scale enterprise customers

Source: IDC, Macquarie Research, April 2016

0

0.5

1

1.5

2

2.5

3

('0000)


29 April 2016 30

Fig 3 No. of medium-sized enterprise customers


Fig 4 Free phone calls as user subsidies

Cloud Hub (Kingdee) BizChat (Yonyou) Ding Ding (Alibaba)

User subsidy (per user per month) 500min free call 500min free call 60min (personal)

90-400min (team)

400-1000min (enterprise)


Distinctions in personal and enterprise demand

Nevertheless, there is a clear distinction between personal and enterprise demand. Enterprises

evaluate the software adoption based on different parameters, and social networking and

communications, surely relevant to the enterprise environment, e.g. in work collaboration, may not be

the single most important factor. According to IDC’s Mobile Enterprise Applications Survey in 2015,

increasing revenue, improving worker productivity, ease of information access, and improving

customer services are the most important factors in adopting mobile enterprise apps. Against this

backdrop, various mobile office applications are increasing their productivity offerings.

Fig 5 Why adopt mobile enterprise apps?


0

5

10

15

20

25

30

('0000)

0% 2% 4% 6% 8% 10% 12% 14% 16%

Accelerate innovation

Eliminate paperwork

Improve field service response time

Enhance portability within the office or work environment

Accelerate key business processes

Decrease costs

Speed decision making

Improve customer service/support

Improve competitive advantage/market share

Provide ease of information access

Improve/enhance employee productivity

Increase sales/revenue


29 April 2016 31

Integration with ERP an edge but not necessarily an entry barrier

Cloud Hub connects its own suite of ERP applications including its popular CRM. Yonyou’s Biz Chat

can access its ERP as well, e.g. T+. Integration with ERP at the back, linked to company financials,

etc, is in high demand and can be a differentiator.

However, this is an entry barrier, in our view. Ding Ding, with its open platform, also introduced

enterprise applications to make up for its shortfall, e.g. ikCRM, in the area of CRM. Enterprise

Weixin, still in the early stage, also plans to open up its APIs for third-party enterprise applications in

the future.

Fig 6 Revenue breakdown of worldwide mobile enterprise apps (2015)


Thus, enterprises are dealing with two groups of mobile office choices. The first one led by Kingdee

and Yonyou, which with a strong footing in ERPs are now rolling out cloud-based mobile office

offerings and bundling their own suite of applications, and to a lesser extent, opening up to third-party

applications. The second group, led by Ding Ding and upcoming Enterprise Weixin, with a focus on

social networking and communications, is gradually building its own enterprise customer base and

introducing third-party office applications – with more of a platform approach. That said, data security

and privacy are also concerns to enterprises, as they perceive that Alibaba/Ding Ding and Tencent

(700 HK, HK$161.00, Outperform, TP: HK$196.00, Wendy Huang)/Weixin are collecting enterprise

data for future use.

The bottom line is newcomers take share in mobile office

All in all, Kingdee’s Cloud Hub, even though with first mover’s advantage and natural integration of its

ERP suite, faces more intense competition from Ding Ding and the emerging Enterprise Weixin with

strong social networking and upcoming third-party enterprise applications, in our view. As such, we

reduce our cloud revenue growth forecast from 80% to 70% for FY16 but maintain 50% in FY17-18.

Stable ERP business to fund cloud investments

Overall we expect Kingdee’s ERP revenue to stay flat YoY in FY16, as growth in EAS for large-

enterprises and KIS for SMEs ERP is offset by softness in K/3 for medium-sized enterprises due

partly to macro impact and partly to cloud cannibalization.

KIS – rising competition from Chanjet. Kingdee’s KIS historically dominates the small and micro

enterprise space. Yonyou’s recent spin-off of Chanjet fuels growth in its T series and cloud

offerings. We model for 3% revenue growth for both Kingdee and Yonyou in the low-end segment

in FY16.

K/3 – soft macro and cloud cannibalization. The mid-range K/3 is impacted partly by a soft

macro economy and partly by cloud cannibalization, thus failing to gain traction when competitor

Yonyou’s U8 was in transition to indirect sales in FY15. We currently model a 15% revenue

decline for Kingdee and flat growth for Yonyou for the mid-range segment in FY16.

EAS – product cycle drives growth. Kingdee is under-represented among large enterprises, as

its new products, such as the centralized financial resource management solutions (up 3x in

FY15), continue to drive its growth further. With regards to the large enterprises, we now model for

9% revenue growth for Kingdee and flat growth for Yonyou in FY16.

Enterprise resource mgmt

26%

Operations & manufacturing

19%

Collaborative apps17%

CRM14%

Content apps12%

Otheres12%


29 April 2016 32

Fig 7 Kingdee vs Yonyou by ERP enterprise customer

Fig 8 Kingdee’s ERP is stable on the back of robust EAS and KIS


Fig 9 Key assumptions

(Rmb m) 2013 2014 2015 2016E 2017E 2018E

-KIS 198 238 246 253 261 269 -K/3 261 244 196 167 142 121 -EAS 216 209 232 253 278 311 -Others (third party software) 74 60 53 53 53 53 Sales of software license (excl. Cloud) 750 752 727 726 734 753 -Implementation 434 331 321 312 302 293 -Consultation, training and maintenance 313 316 327 343 360 378 -Hardware 48 41 20 20 20 21 Implementation, consultation, hardware 795 688 668 675 683 692

Total ERP Business (Non Cloud) 1,545 1,440 1,395 1,401 1,417 1,446 Cloud revenue 57 106 191 325 487 730 Total Revenue 1,602 1,547 1,586 1,726 1,904 2,176


0

100

200

300

400

500

600

700

800

900

1,000

Yonyou Kingdee Yonyou Kingdee Yonyou Kingdee


2016E

(RMB mn)

-15%

-10%

-5%

0%

5%

10%

0

100

200

300

400

500

600

700

800

2013 2014 2015 2016E

-KIS -K/3 -EAS Total YoY%

(RMBmn)


29 April 2016 33

Valuation and estimates revision

Kingdee’s Cloud Hub will face intense competition from Ding Ding and the emerging Enterprise

Weixin with strong social networking and upcoming third-party enterprise applications, in our view.

We reduce our cloud revenue growth forecast from 80% to 70% for FY16 but maintain 50% for

FY17-18.

We also trim Kingdee’s ERP OPM from 21% to 20%, in line with the one we use for Yonyou and

global peers.

We trim FY16-18E revenue by 1%, earnings by 3%, and TP from HK$3.55 to HK$3.4.

Fig 10 We assume a 20% OPM for Kingdee’s ERP

Revenue EBIT

FY15A FY16E FY17E FY15A FY16E FY17E

ERP (non-cloud) 1,395 1,401 1,417 279 280 283 …ERP OPM assumes flat at 20% 20% 20% 20% Cloud 191 325 487 -68 -73 50 ….implied Cloud OPM -36% -23% 10% Total 1,586 1,726 1,904 211 207 333 ….Overall OPM 13% 12% 18%


Fig 11 Kingdee’s sum of parts valuation

Methodology Rmb m Per share HK$ %

Value of ERP 14x EV/EBIT FY17E 3,966 1.53 45% Value of Cloud 4x P/S FY17E 1,948 0.75 22% NAV of property DCF 2,143 0.83 25% Cash Book Value 2,147 0.83 25% -Convertible bonds Book Value (1,108) -0.43 -13% -Borrowings Book Value (378) -0.15 -4% Total 8,718 100% Value per share HKD 3.36


Fig 12 Estimates revision

New estimates YE 31 Dec (Rmb m) 1H16E 2016E 2017E 2018E

Revenue 777 1,726 1,904 2,176 OP 93 207 333 507 Net profit 63 139 229 374 EPS 0.020 0.045 0.075 0.121 Adjusted net profit 63 139 229 374 Adjusted EPS 0.020 0.045 0.075 0.121 Old estimates 1H16E 2016E 2017E 2018E

Revenue 785 1,745 1,932 2,219 OP 95 211 341 522 Net profit 64 143 236 386 EPS 0.021 0.046 0.077 0.125 Adjusted net profit 64 143 236 386 Adjusted EPS 0.021 0.046 0.077 0.125 Estimate change 1H16E 2016E 2017E 2018E

Revenue -1% -1% -1% -2% OP -2% -2% -2% -3% Net profit -3% -3% -3% -3% EPS -3% -3% -3% -3% Adjusted net profit -3% -3% -3% -3% Adjusted EPS -3% -3% -3% -3%



29 April 2016 34

Macquarie Quant View

The quant model currently holds a strong negative view on Kingdee

International Software Group. The strongest style exposure is Growth,

indicating this stock has good historic and/or forecast growth. Growth

metrics focus on both top and bottom line items. The weakest style

exposure is Earnings Momentum, indicating this stock has received

earnings downgrades and is not well liked by sell side analysts…

Displays where the

company’s ranked based on

the fundamental consensus

Price Target and

Macquarie’s Quantitative

Alpha model.

Two rankings: Local market

(China) and Global sector

(Software & Services)

599/656 Global rank in

Software & Services

% of BUY recommendations 73% (8/11)

Number of Price Target downgrades 0

Number of Price Target upgrades 0

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score

(higher is better).

For the comparable firms this chart shows the key underlying styles and their

contribution to the current overall Alpha score.

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions

signal that favours analysts who have more timely and higher conviction

revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes

in forward earnings estimates and the resulting change in earnings multiple.

What drove this Company in the last 5 years How it looks on the Alpha model

Which factor score has had the greatest correlation with the company’s

returns over the last 5 years.

A more granular view of the underlying style scores that drive the alpha (higher is

better) and the percentile rank relative to the sector and market.

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

Fu

nd

am

en

tals

Quant

Local market rank Global sector rank

Attractive

-1.9

-1.6

-0.4

0.3

0.6

0.7

1.2

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Yonyou

Kingdee International Sof…

Linx

Kingsoft

SAP

salesforce.com

Oracle

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

Yonyou


Linx

Kingsoft

SAP

salesforce.com

Oracle

Valuations Growth Profitability Earnings

Momentum

Price

Momentum

Quality

-0.1

0.3

-0.8

0.8

-0.2

1.1

0.3

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Yonyou


Linx

Kingsoft

SAP

salesforce.com

Oracle

-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%

Yonyou


Linx

Kingsoft

SAP

salesforce.com

Oracle

Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

-34%

-32%

-31%

-30%

26%

27%

27%

27%

-40% -20% 0% 20% 40%

⇐ Negatives Positives ⇒

Earnings Stability

Altman Z-Score

RNOA

Quick Ratio (Worldscope)

Price to Book LTM

Price to Book FY0

Price to Book FY1

EV/EBITDA FY1

0 1

Technicals & TradingRisk

LiquidityCapital & Funding

QualityPrice Momentum

Earnings MomentumProfitability

Growth

ValuationAlpha Model Score

-0.47-0.89

-0.57 0.38

-0.01-0.34

-1.10-0.40 0.08

-0.45-1.56

0 1

Normalized

Score

0 50 100

Percentile relative

to sector(/656)

0 50 100

Percentile relative

to market(/819)


29 April 2016 35

Kingdee International Software Group (268 HK, Outperform, Target Price: HK$3.40) Interim Results 2H/15A 1H/16E 2H/16E 1H/17E Profit & Loss 2015A 2016E 2017E 2018E

Revenue m 828 777 949 857 Revenue m 1,586 1,726 1,904 2,176 Gross Profit m 693 629 769 694 Gross Profit m 1,292 1,398 1,542 1,763 Cost of Goods Sold m 136 148 180 163 Cost of Goods Sold m 294 328 362 413 EBITDA m 217 247 267 312 EBITDA m 482 514 657 849

Depreciation m 18 20 20 22 Depreciation m 37 40 44 51 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 117 133 133 139 Other Amortisation m 234 267 278 290 EBIT m 81 93 114 151 EBIT m 211 207 335 509

Net Interest Income m -32 -18 -22 -26 Net Interest Income m -64 -40 -58 -58 Associates m 0 0 0 0 Associates m 0 0 0 0 Exceptionals m 15 0 0 0 Exceptionals m 15 0 0 0 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Other Pre-Tax Income m 0 -0 0 -0 Other Pre-Tax Income m 0 0 -0 -0 Pre-Tax Profit m 64 75 92 125 Pre-Tax Profit m 162 166 277 450 Tax Expense m -49 -13 -16 -21 Tax Expense m -57 -28 -47 -76 Net Profit m 15 62 76 104 Net Profit m 106 138 230 374 Minority Interests m -1 0 1 0 Minority Interests m 0 1 1 1

Reported Earnings m 14 63 77 104 Reported Earnings m 106 139 231 375 Adjusted Earnings m -1 63 77 104 Adjusted Earnings m 90 139 231 375

EPS (rep) fen 0.5 2.0 2.5 3.4 EPS (rep) fen 3.7 4.5 7.5 12.1 EPS (adj) fen 0.0 2.0 2.5 3.4 EPS (adj) fen 3.2 4.5 7.5 12.1 EPS Growth yoy (adj) % nmf -38.2 nmf 66.0 EPS Growth (adj) % -54.7 39.3 65.9 62.5

PE (rep) x 59.2 48.5 29.2 18.0 PE (adj) x 67.5 48.5 29.2 18.0

EBITDA Margin % 26.2 31.7 28.2 36.4 Total DPS fen 0.0 0.0 1.2 1.9 EBIT Margin % 9.8 12.0 12.0 17.6 Total Div Yield % 0.0 0.0 0.5 0.9 Earnings Split % -1.4 45.0 55.0 45.0 Basic Shares Outstanding m 2,918 2,918 2,918 2,918 Revenue Growth % 4.0 2.4 14.6 10.3 Diluted Shares Outstanding m 2,868 3,089 3,089 3,089 EBIT Growth % -48.7 -28.5 40.2 61.9

Profit and Loss Ratios 2015A 2016E 2017E 2018E Cashflow Analysis 2015A 2016E 2017E 2018E

Revenue Growth % 2.6 8.8 10.3 14.3 EBITDA m 162 166 275 449 EBITDA Growth % -15.0 6.5 27.8 29.4 Tax Paid m -11 -57 -28 -47 EBIT Growth % -28.5 -2.1 61.9 52.0 Chgs in Working Cap m 143 -39 -35 -56 Gross Profit Margin % 81.5 81.0 81.0 81.0 Net Interest Paid m 0 0 0 0 EBITDA Margin % 30.4 29.8 34.5 39.0 Other m 262 310 325 343 EBIT Margin % 13.3 12.0 17.6 23.4 Operating Cashflow m 556 380 537 690 Net Profit Margin % 5.7 8.1 12.1 17.2 Acquisitions m 0 0 0 0 Payout Ratio % 0.0 0.0 15.8 15.8 Capex m -301 -334 -353 -373 EV/EBITDA x 11.7 11.0 8.6 6.7 Asset Sales m 0 0 0 0 EV/EBIT x 26.8 27.4 16.9 11.1 Other m -624 0 0 0

Investing Cashflow m -924 -334 -353 -373 Balance Sheet Ratios Dividend (Ordinary) m -30 0 0 -34 ROE % 3.5 4.2 6.7 10.1 Equity Raised m 0 0 0 0 ROA % 4.3 3.7 5.8 8.4 Debt Movements m -447 30 8 13 ROIC % 6.0 6.8 10.7 16.2 Other m 1,120 0 0 0 Net Debt/Equity % -22.1 -22.7 -26.6 -31.7 Financing Cashflow m 644 30 8 -22 Interest Cover x 3.3 5.1 5.8 8.7

Price/Book x 2.0 1.9 1.8 1.6 Net Chg in Cash/Debt m 266 76 192 295 Book Value per Share 1.1 1.2 1.2 1.3

Free Cashflow m 256 46 184 317

Balance Sheet 2015A 2016E 2017E 2018E Cash m 2,174 2,250 2,442 2,737 Receivables m 669 746 796 880 Inventories m 4 4 4 5 Investments m 0 0 0 0 Fixed Assets m 1,709 1,716 1,722 1,728 Intangibles m 601 621 643 668 Other Assets m 326 304 270 247 Total Assets m 5,484 5,640 5,878 6,265

Payables m 357 395 410 439 Short Term Debt m 244 244 244 244 Long Term Debt m 105 135 142 155 Provisions m 0 0 0 0 Other Liabilities m 1,532 1,503 1,522 1,551 Total Liabilities m 2,237 2,276 2,318 2,389 Shareholders' Funds m 3,217 3,356 3,551 3,869 Minority Interests m 30 8 10 10 Other m 0 0 0 0 Total S/H Equity m 3,247 3,364 3,561 3,878

Total Liab & S/H Funds m 5,484 5,640 5,879 6,267

All figures in Rmb unless noted. Source: Company data, Macquarie Research, April 2016


29 April 2016 36

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada

Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be

expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 March 2016

AU/NZ Asia RSA USA CA EUR Outperform 50.34% 59.09% 46.67% 44.76% 60.66% 46.12% (for global coverage by Macquarie, 3.72% of stocks followed are investment banking clients)

Neutral 34.14% 25.66% 32.00% 49.90% 30.33% 35.10% (for global coverage by Macquarie, 4.79% of stocks followed are investment banking clients)

Underperform 15.52% 15.26% 21.33% 5.33% 9.02% 18.78% (for global coverage by Macquarie, 2.31% of stocks followed are investment banking clients)

268 HK vs HSI, & rec history

(all figures in HKD currency unless noted)

ORCL US vs S&P 500, & rec history

(all figures in USD currency unless noted)

600588 CH vs HSI, & rec history

(all figures in CNY currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.


12-month target price methodology

268 HK: HK$3.40 based on a Sum of Parts methodology

ORCL US: US$46.00 based on a DCF methodology

600588 CH: Rmb29.00 based on a PER methodology

Company-specific disclosures: 268 HK: Macquarie Capital Limited makes a market in the securities of Kingdee International Software Group Co Ltd. Macquarie Group Limited together with its affiliates beneficially owns 1% or more of the equity securities of Kingdee International Software Group Co Ltd. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures. 600588 CH: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

Target price risk disclosures: 268 HK: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. ORCL US: Investment risks include: 1) failure to execute on the cloud transition story for the applications business; 2) public cloud vendors targeting the higher margin/value-add layer of the cloud going forward with superior SaaS applications, thereby increasing competition; 3) risks to the database business from alternative competitive solutions, which have been around for over half a decade without materially impacting the market share of leading database vendors today; 4) global macroeconomic slowness given Oracle’s diverse customer base, though we expect Oracle to outperform many software vendors given its sizable recurring maintenance revenue stream; 5) FX headwinds that accelerate; and 6) investor confusion around the impact to license revenues from the transition to cloud revenues. We would view M&A favourably and though Oracle does not appear to have any ambitious M&A plans today, we believe that should the repatriation debate in Washington D.C. result in a favourable outcome, and market valuations remain repressed, Oracle could re-engage in M&A, in particular to speed-up its cloud transition efforts.

Analyst certification:


29 April 2016 37

We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. 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Banks and Non-Bank Financials

Matthew Smith (China) (8621) 2412 9022

Suresh Ganapathy (India) (9122) 6720 4078


Keisuke Moriyama (Japan) (813) 3512 7476

Leo Nakada (Japan) (813) 3512 6050

Chan Hwang (Korea) (822) 3705 8643

Gilbert Lopez (Philippines) (632) 857 0892

Thomas Stoegner (Singapore) (65) 6601 0854

Dexter Hsu (Taiwan) (8862) 2734 7530

Passakorn Linmaneechote (Thailand) (662) 694 7728

Conglomerates


Consumer and Gaming

Linda Huang (China, Hong Kong) (852) 3922 4068

Kai Tan (China) (852) 3922 3720

Zibo Chen (Hong Kong) (852) 3922 1130

Amit Mishra (India) (9122) 6720 4084

Fransisca Widjaja (Singapore) (65) 6601 0847

Hendy Soegiarto (Indonesia) (6221) 2598 8369

Toby Williams (Japan) (813) 3512 7392

HongSuk Na (Korea) (822) 3705 8678

Karisa Magpayo (Philippines) (632) 857 0899

Emerging Leaders

Jake Lynch (China, Asia) (852) 3922 3583

Aditya Suresh (Asia) (852) 3922 1265

Neel Sinha (ASEAN) (65) 6601 0562

Timothy Lam (Hong Kong) (852) 3922 1086

Mike Allen (Japan) (813) 3512 7859

Kwang Cho (Korea) (822) 3705 4953

Industrials

Janet Lewis (Asia) (852) 3922 5417

Patrick Dai (China) (8621) 2412 9082

Inderjeetsingh Bhatia (India) (9122) 6720 4087


Kenjin Hotta (Japan) (813) 3512 7871

James Hong (Korea) (822) 3705 8661

Insurance

Scott Russell (Asia, Japan) (852) 3922 3567

Leo Nakada (Japan) (813) 3512 6050


Software and Internet

Wendy Huang (Asia) (852) 3922 3378

David Gibson (Asia) (813) 3512 7880

Hillman Chan (China, Hong Kong) (852) 3922 3716

Nitin Mohta (India) (9122) 6720 4090

Nathan Ramler (Japan) (813) 3512 7875

Prem Jearajasingam (Malaysia) (603) 2059 8989

Oil, Gas and Petrochemicals

James Hubbard (Asia) (852) 3922 1226

Aditya Suresh (Asia) (852) 3922 1265

Duke Suttikulpanich (ASEAN) (65) 6601 0148

Abhishek Agarwal (India) (9122) 6720 4079

Polina Diyachkina (Japan) (813) 3512 7886

Anna Park (Korea) (822) 3705 8669

Isaac Chow (Malaysia) (603) 2059 8982

Pharmaceuticals and Healthcare

Abhishek Singhal (India) (9122) 6720 4086

David Lee (Korea) (822) 3705 8686

Property

Tuck Yin Soong (Asia, Singapore) (65) 6601 0838

David Ng (China, Hong Kong) (852) 3922 1291

Kai Tan (China, Hong Kong) (852) 3922 3720

Raymond Liu (China, Hong Kong) (852) 3922 3629

Wilson Ho (China) (852) 3922 3248

Abhishek Bhandari (India) (9122) 6720 4088

William Montgomery (Japan) (813) 3512 7864

Aiman Mohamad (Malaysia) (603) 2059 8986

Kervin Sisayan (Philippines) (632) 857 0893

Corinne Jian (Taiwan) (8862) 2734 7522

Patti Tomaitrichitr (Thailand) (662) 694 7727

Resources / Metals and Mining

Rakesh Arora (India) (9122) 6720 4093

Stanley Liong (Indonesia) (6221) 2598 8381

Polina Diyachkina (Japan) (813) 3512 7886

Anna Park (Korea) (822) 3705 8669

Technology

Damian Thong (Asia, Japan) (813) 3512 7877

Allen Chang (852) 3922 1136 (China, Hong Kong, Taiwan)

Nitin Mohta (India) (9122) 6720 4090

David Gibson (Japan) (813) 3512 7880

George Chang (Japan) (813) 3512 7854

Daniel Kim (Korea) (822) 3705 8641

Soyun Shin (Korea) (822) 3705 8659

Patrick Liao (Taiwan) (8862) 2734 7515

Louis Cheng (Taiwan) (8862) 2734 7526

Telecoms

Nathan Ramler (Asia, Japan) (813) 3512 7875

Danny Chu (852) 3922 4762 (China, Hong Kong, Taiwan)

Abhishek Agarwal (India) (9122) 6720 4079

David Lee (Korea) (822) 3705 8686

Prem Jearajasingam (Malaysia, Singapore) (603) 2059 8989

Kervin Sisayan (Philippines) (632) 857 0893

Transport & Infrastructure

Janet Lewis (Asia) (852) 3922 5417

Azita Nazrene (ASEAN) (603) 2059 8980

Corinne Jian (Taiwan) (8862) 2734 7522

Utilities & Renewables

Alan Hon (Hong Kong) (852) 3922 3589

Inderjeetsingh Bhatia (India) (9122) 6720 4087

Prem Jearajasingam (Malaysia) (603) 2059 8989

Karisa Magpayo (Philippines) (632) 857 0899

Commodities

Colin Hamilton (Global) (4420) 3037 4061

Ian Roper (65) 6601 0698

Jim Lennon (4420) 3037 4271

Lynn Zhao (8621) 2412 9035

Matthew Turner (4420) 3037 4340

Rakesh Arora (9122) 6720 4093

Economics

Peter Eadon-Clarke (Global) (813) 3512 7850

Larry Hu (China, Hong Kong) (852) 3922 3778

Tanvee Gupta Jain (India) (9122) 6720 4355

Quantitative / CPG

Gurvinder Brar (Global) (4420) 3037 4036

Woei Chan (Asia) (852) 3922 1421

Anthony Ng (Asia) (852) 3922 1561

Danny Deng (Asia) (852) 3922 4646

Per Gullberg (Asia) (852) 3922 1478

Strategy/Country

Viktor Shvets (Asia, Global) (852) 3922 3883

Chetan Seth (Asia) (852) 3922 4769

Peter Eadon-Clarke (Japan) (813) 3512 7850

David Ng (China, Hong Kong) (852) 3922 1291

Erwin Sanft (China, Hong Kong) (852) 3922 1516

Rakesh Arora (India) (9122) 6720 4093




Conrad Werner (Singapore) (65) 6601 0182

Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512

Alastair Macdonald (Thailand) (662) 694 7753

Find our research at Macquarie: www.macquarie.com.au/research Thomson: www.thomson.com/financial Reuters: www.knowledge.reuters.com Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access

Asia Sales Regional Heads of Sales

Miki Edelman (Global) (1 212) 231 6121

Jeffrey Chung (Asia) (852) 3922 2074

Jeff Evans (Boston) (1 617) 598 2508

Jeffrey Shiu (China, Hong Kong) (852) 3922 2061

Thomas Renz (Geneva) (41) 22 818 7712

Riaz Hyder (Indonesia) (6221) 2598 8486

Nick Cant (Japan) (65) 6601 0210

John Jay Lee (Korea) (822) 3705 9988

Nik Hadi (Malaysia) (603) 2059 8888

Eric Roles (New York) (1 212) 231 2559

Gino C Rojas (Philippines) (632) 857 0861

Regional Heads of Sales cont’d

Paul Colaco (San Francisco) (1 415) 762 5003

Ruben Boopalan (Singapore) (603) 2059 8888

Erica Wang (Taiwan) (8862) 2734 7586

Angus Kent (Thailand) (662) 694 7601

Ben Musgrave (UK/Europe) (44) 20 3037 4882

Julien Roux (UK/Europe) (44) 20 3037 4867

Sales Trading

Adam Zaki (Asia) (852) 3922 2002

Stanley Dunda (Indonesia) (6221) 515 1555

Sales Trading cont’d

Suhaida Samsudin (Malaysia) (603) 2059 8888

Michael Santos (Philippines) (632) 857 0813

Chris Reale (New York) (1 212) 231 2555

Marc Rosa (New York) (1 212) 231 2555

Justin Morrison (Singapore) (65) 6601 0288

Isaac Huang (Taiwan) (8862) 2734 7582

Brendan Rake (Thailand) (662) 694 7707

Mike Keen (UK/Europe) (44) 20 3037 4905

CHINA/HONG KONG China Internet and Software -...

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