1H26 Profitability Improved and AI Products Began to Show Growth; Maintain Overweight but Lower Target Price to HK$12

Overview

The report believes Kingdee International delivered solid execution in 1H26: revenue maintained double-digit growth, cloud services and subscription businesses continued to expand, and gross margin, expense efficiency, net profit, and operating cash flow all improved significantly. AI-native products have gained initial market traction, but their revenue contribution remains limited and is not yet sufficient to eliminate concerns that AI may reshape ERP pricing, product cycles, and long-term software economics. Based on more prudent long-term revenue growth and perpetual growth assumptions, J.P. Morgan lowered its DCF-based target price, but still maintains an Overweight rating due to Kingdee's growth visibility, margin potential, policy benefits, and relative valuation advantage.

Core views

Short-term fundamental improvement mainly comes from cloud services growth, subscription revenue expansion, and the release of expense leverage. The medium-term investment thesis depends on whether core enterprise SaaS can reaccelerate and whether AI products can turn from the current low revenue share into sustainable incremental revenue. Compared with Yonyou, Kingdee has better growth visibility, stronger margin improvement potential, and a lower EV/revenue valuation; however, compared with Oracle and SAP, its profitability is weaker and China's software demand is more cyclical, making a valuation discount reasonable.

Analysis framework

The report adjusts FY26E to FY28E forecasts based on 1H26 P&L, business segments, ARR, margins, expense ratios, and cash flow performance, and uses DCF as the primary valuation method for the target price, while cross-checking with forward EV/revenue multiples of global ERP leaders and Chinese software peers.

Methodology notes

• Absolute ValuationDCF

  Discounted cash flow valuation

  The target price is based on a 10.5% WACC and a 2.5% perpetual growth rate, with the valuation horizon adjusted to December 2027; more conservative long-term revenue growth and perpetual growth assumptions drove the target price down from HK$18 to HK$12.

• Relative ValuationEV/Revenue

  Enterprise value to revenue multiple comparison

  The new target price implies approximately 3 to 4 times forward EV/revenue, below the roughly 5 times level of Oracle and SAP; the report believes the approximately 30% discount reflects Kingdee's lower profitability and the stronger demand cyclicality of China's SaaS industry.

• Peer ComparisonComparable Company Analysis

  Cross-sectional comparison of Chinese software and global ERP companies

  The report compares Kingdee's roughly 3 times EV/revenue with Yonyou's roughly 4 times, and judges Kingdee to be more attractive within China's software sector based on growth visibility, margin potential, and business execution.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Kingdee International（0268.HK）

  Core subject of the report, with Overweight rating maintained

  Strengths

  Cloud services and subscription revenue continue to grow, gross margin and expense efficiency are improving, and inflection points in profitability and cash flow are gradually emerging; the company benefits from Digital China and information technology application innovation localization policies and has AI product commercialization opportunities.

  Weaknesses

  AI revenue contribution remains low, with core AI+SaaS growth only about 10%; overall profitability remains weaker than global ERP leaders, and the business is affected by the demand cycle of China's enterprise software market.

  Comparison

  Approximately 3 times EV/revenue, lower than Yonyou's approximately 4 times and also at a clear discount to Oracle and SAP's approximately 5 times.

  Risks

  Investor withdrawal from China's software sector, macro pressure leading to lower-than-expected revenue growth, and PaaS and large-enterprise strategic investments weighing on profits.

• Yonyou Network-A（600588.SS）

  Chinese enterprise software comparable company

  Strengths

  Has market coverage and industry position in China's enterprise software market.

  Weaknesses

  The report believes its recent business trends are weaker.

  Comparison

  Valuation is about 4 times EV/revenue, higher than Kingdee's roughly 3 times; the report prefers Kingdee's growth visibility and margin potential.

  Risks

  Weak enterprise software demand and lower-than-expected profit improvement may pressure valuation.

• Oracle and SAP

  Global ERP valuation references

  Strengths

  Stronger profitability, business model maturity, and global business scale.

  Weaknesses

  The global software sector has already experienced some valuation de-rating.

  Comparison

  Forward EV/revenue is about 5 times, while Kingdee's target price implies about 3.5 times, a discount of about 30%.

  Risks

  Further valuation de-rating among global software peers may lower Kingdee's valuation anchor.

Key data

• 1H26 RevenueRMB3.625 billionUp 14% YoY and down 5% HoH.
• 1H26 Cloud Services RevenueRMB3.116 billionUp 17% YoY, accounting for about 86% of total revenue.
• 1H26 Subscription RevenueRMB2 billionUp 20% YoY.
• Subscription ARRRMB4.4 billionUp 18% YoY.
• AI-Native Product RevenueRMB296 millionUp 189% YoY, accounting for about 8% of total revenue.
• 1H26 Gross Margin67.7%Up 2.1 percentage points YoY.
• 1H26 Net ProfitRMB54 millionLoss of RMB98 million in the same period last year.
• 1H26 Operating Cash FlowInflow of RMB142 millionOutflow of RMB18 million in the same period last year.
• FY26E RevenueRMB7.865 billionExpected to increase 12.3% YoY.
• FY26E Adjusted Net ProfitRMB533 millionCorresponding to an adjusted net margin of 6.8%.
• Target PriceHK$12.00Previously HK$18.00, with a target horizon of December 2027.
• DCF ParametersWACC 10.5%, perpetual growth rate 2.5%More conservative long-term growth assumptions are used.

Impact & implications

1H26's return to profitability, gross margin expansion, and cash flow improvement indicate that Kingdee's operating leverage is being released, helping improve the credibility of its path to profitability. The rapid growth of AI-native products provides a new optional growth avenue, but their revenue scale remains small, and the market will focus more on whether AI adoption can drive reacceleration in the core enterprise SaaS business, rather than merely forming an independent small-scale revenue source. The significant target price cut shows that long-term valuation is highly sensitive to revenue growth and perpetual growth assumptions, and investment returns will depend on both profit delivery and the quality of AI commercialization.

Risks

• Investor withdrawal from China's software sector may trigger further valuation de-rating.
• Macroeconomic headwinds may cause enterprise IT spending and revenue growth to fall short of expectations.
• Continued investment in PaaS and large-enterprise strategies may cause margin improvement to be slower than expected.
• AI may disrupt traditional ERP pricing, product cycles, and long-term software economics before monetization reaches scale.
• AI-native product revenue currently accounts for only about 8%, and early rapid growth may not necessarily be sustainable.
• If core enterprise SaaS cannot reaccelerate alongside AI adoption, valuation recovery potential may be limited.
• The DCF target price is relatively sensitive to assumptions for long-term revenue growth, WACC, and perpetual growth rate.

What to watch

• AI-native product revenue share, renewal rates, and actual commercialization scale.
• Whether AI adoption can drive a renewed increase in core enterprise SaaS revenue growth.
• Whether subscription business growth for large and medium-sized enterprises can improve from the current approximately 9%.
• Subscription ARR growth and its conversion efficiency into revenue and cash flow.
• Subsequent changes in gross margin, sales and marketing expense ratio, and R&D expense ratio.
• Whether FY26E revenue of RMB7.865 billion and adjusted net profit of RMB533 million can be delivered.
• The effect of Digital China and information technology application innovation localization policies in driving orders from large enterprises and SOEs.
• Changes in EV/revenue valuations of Chinese software and global ERP companies.