Cosmic And Galaxy AI Solutions Will Improve Operational Efficiency And Profitability

Key Takeaways

• Focus on enhanced cloud services and AI-powered solutions aims to drive revenue, improve cash flows, and enhance net margins and profitability.
  
• Shift to cloud-based SaaS models and AI integration seeks to expand customer base, reduce R&D costs, and boost earnings growth.
  
• Transition to cloud services and AI poses revenue risks, while competition, economic factors, and delayed profitability challenge market position and investor confidence.

Catalysts

An investment holding company, engages in the enterprise resource planning business.

• Kingdee plans to continue its focus on high-quality growth through enhanced cloud service business, positioning it as a significant contributor to revenue growth in 2025 by leveraging contract liabilities and low accounts receivables.
  
• The company expects profitability improvements in its cloud service business, aiming for a higher operational profit margin due to the timing of revenue confirmations and improved cash flows, thus impacting net margins positively.
  
• Kingdee's investment in AI-powered solutions, such as the Cosmic and Galaxy products, aims to provide differentiated services to large enterprises and SMEs, potentially driving revenue and earnings growth through innovative features and efficiency gains.
  
• Expansion of customer base and contracts in large enterprise markets, with a focus on new customer engagement and high-value contracts, aims to increase ARR and secure incremental revenue, enhancing overall earnings potential.
  
• A strategic shift from traditional licensing to cloud-based SaaS models and planned AI integration is expected to improve operational efficiencies, reduce R&D costs over time, and result in higher net margins and earnings growth.

Kingdee International Software Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kingdee International Software Group's revenue will grow by 15.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.3% today to 7.3% in 3 years time.
• Analysts expect earnings to reach CN¥694.0 million (and earnings per share of CN¥0.19) by about March 2028, up from CN¥-142.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥972.2 million in earnings, and the most bearish expecting CN¥506.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 95.4x on those 2028 earnings, up from -307.9x today. This future PE is greater than the current PE for the HK Software industry at 26.8x.
• Analysts expect the number of shares outstanding to decline by 0.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.14%, as per the Simply Wall St company report.

Kingdee International Software Group Future Earnings Per Share Growth

Risks

• The transition from traditional licensing to cloud-based services presents potential risks in revenue stability, especially if the cloud adoption does not accelerate as expected, impacting the company's overall revenue growth and financial projections.
  
• The company's ongoing net loss and delayed break-even point imply that profitability is still a challenge, which could affect earnings and investor confidence in the short to medium term.
  
• The AI investment focus is significant, yet there is uncertainty in the market acceptance and monetization strategy for AI-powered solutions, potentially impacting future revenue and market position.
  
• The competitive landscape in China’s enterprise management software market, particularly from global and local players, could pressure Kingdee's market share and pricing, affecting its revenue growth and margins.
  
• Macroeconomic factors and external environments, such as Chinese regulatory policies and global economic challenges, could impact both revenue projections and operational efficiency, posing risks to achieving high growth targets.

Valuation

• The analysts have a consensus price target of HK$16.265 for Kingdee International Software Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$19.22, and the most bearish reporting a price target of just HK$7.87.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥9.5 billion, earnings will come to CN¥694.0 million, and it would be trading on a PE ratio of 95.4x, assuming you use a discount rate of 8.1%.
• Given the current share price of HK$13.2, the analyst price target of HK$16.27 is 18.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.