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　　Kingdee International reported solid 2017 results. Its 23.9% top-line growth in 2017, the highest since 2012, is very encouraging. Traditional ERP products reported 14% YoY growth in 2017, also the fastest in 2012-2017. Management reiterated its positive view on outlook for the Company in 2018, given the continuous growth in traditional ERP products and fast-growing cloud services. Despite its YTD share-price outperformance in 2017, we remain positive on Kingdee, given its leading position in the enterprise resource planning market in China and cloud-based products. We believe that the market remains positive on Kingdee, as the Company remains a proxy for cloud computing development in China. We believe the market will continue to re-rate Kingdee, given its high exposure to cloud-related business, improvement in profitability, and growth potential from new business. We maintain our BUY rating with a new target price of HK$8.06 . We believe that the market is willing to pay a premium for companies like Kingdee, with exposure to high-growth areas. 

　　Investment Highlights 

　　2017 recurring net profit grew 46%. Kingdee reported turnover of RMB2,303.5m in 2017, up 23.7% YoY and higher than our expectation of RMB2,273.8m. Kingdee’s 2017 net profit was RMB310m, up 8% YoY from RMB288m in 2016. Excluding discontinued operations, Kingdee’s 2017 net profit rose 46.4% YoY. Kingdee’s top-line growth was driven by: a) a 14% YoY increase in sales of traditional ERP products, and b) a 67% YoY increase in turnover from cloud services. Turnover of both traditional ERP and cloud services were higher than our expectations. EAS contract value increased 26.4% YoY in 2017, which is likely to translate into turnover growth in 2018. Cloud services accounted for 25% of total turnover, up from 18% in 2016. Kingdee’s cloud services division reported an operating loss of RMB136m in 2017 due to initial user acquisition costs. Kingdee also booked RMB96.4m in fair value gains on investment properties in 2017, up from RMB33.9m in 2016, which is one of the reasons for the better-than-expected results. Kingdee resumed its dividend payment in 2017, declaring a final dividend of RMB1.3 cents per share vs. nil in 2016.、

　　Both traditional ERP and cloud computing are growth drivers. Management reiterated its target of about 60% of turnover coming from cloud-based services by 2020. The key statistics related to its cloud-related business are: a) 120% increase in customer base, b) 74% of cloud services customers new to Kingdee, and c) a retention ratio of over 97m, which indicates that growth of Kingdee’s cloud business remains strong. 

　　Management highlighted that the growth momentum of traditional ERP products is expected to continue in 2018 as the Company’s customers are looking for growth through innovation, smart manufacturing and data sharing. On the cloud services side, Kingdee management maintained its guidance for top-line growth of 55-68% in 2017-2020. Management expects its cloud services division to break even in 2019. Kingdee management mentioned that the Company built the platform for the Industrial Internet and that it believes Cloud ERP is a key enabler for smart manufacturing and Industry 4.0. We believe that Kingdee is one of the few HK-listed names with exposure to the Industrial Internet, which is expected to attract market attention .   

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