Investment Summary

The traditional ERP and cloud business are developing well in 2017. As China’s future IT spending increases and the SaaS market continues to grow, we expect the businesses to maintain growth in the future. We predict the growth rate of total revenue to be 21.9%/22.2% in 2018/19F. The management also expects that the cloud business will be out of red in 2019, and will replace the traditional ERP as the main business in 2021.

With our target price $8.94 derived by the sum of the parts valuation, we believe the stock is slightly overvalued, though its fundamentals are satisfactory. With 2.72% downside, we initiate “Neutral” recommendation. (Closing price at 5 June 2018)

Performance review

The financial performance of the company was remarkable in 2017, and will focus on its development on cloud services. The revenue rose by 23.7% YoY; the net profit increased by 80.8% YoY to RMB 378 million; and the operating cash flow also increased by 34.6% to RMB 824 million. The growth of revenue for cloud services remained strong, with a rise of 66.7% YoY, to RMB 568 million. However, the net loss rose to RMB 113 million, and the company expected to record a net loss until 2019. The R&D cost increased to RMB 345 million, while the proportion to revenue slightly decreased by 0.3%.