Péndulo del TRRL Es el aparato de la Figura 1, desarrolladc y diseñado por el Road Research Laboratory.

As we discuss in our accompanying report on the cloud computing sector “Navigating the growing cloud ecosystem”, we believe the cloud computing

ecosystem is maturing and the market will enter a fast-deployment phase in the next couple of years. There are three main business models in cloud computing:

Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS) and Software-as-a- Service (SaaS). SaaS is the most mature business model representing more than half of the cloud computing industry. We prefer SaaS vendors over PaaS and IaaS vendors, and prefer domestic SaaS vendors over foreign ones given the cloud computing related investment opportunity in China.

SaaS ERP application penetration in China is extremely modest currently with less than 5% of the overall ERP market, compared with 8-10% of the global ERP market, according to Gartner. However the SaaS ERP market in China is growing fast: Gartner estimates a five-year revenue CAGR of 40% in 2013-2018 (Exhibit 9) vs 29% for the overall SaaS market (Exhibit 10).

EXHIBIT 10: SaaS ERP market forecasts EXHIBIT 11: SaaS market forecasts

Source: Gartner, 2014 Source: Gartner, 2014

Among enterprises that adopt SaaS, medium-sized enterprises tend to be earlier adopters than large enterprises. SaaS has the effect of lowering upfront IT capital investment and is appealing to companies that do not have the IT resources to deploy or maintain on-premises software, which is especially prevalent among SMEs. For small or micro enterprises, however, the limited internal IT budget could deem the subscription-based SaaS infeasible.

Kingdee was one of the first domestic software vendors that invested in the cloud and is starting to realize the growth momentum in cloud-related services. K/3 cloud was the first domestic cloud ERP product in China launched in 2012 and monetized since 2013. In 1H14, Kingdee’s cloud revenue grew by 125% y-y reaching 6% of revenue. K/3 cloud revenue grew 287% y-y in 1H14. We believe that Kingdee’s K/3 cloud and other integrated mobile applications such as the Cloud Hub targeting medium-sized enterprises are well positioned as the SaaS market takes off in China. We expect Kingdee’s cloud revenue to grow at a 2013-2018 CAGR of 77% and to

0 20 40 60 80 100 120

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

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SaaS is to gain momentum in China

Medium-sized enterprises are at the SaaS adoption sweet spot

EXHIBIT 12: Kingdee’s cloud revenue

Sources: Company; BNP Paribas estimates

Enterprise mobile Internet to accelerate SaaS take-up in China

Although the current SaaS adoption among software revenue is low in China compared to the global average (2% in China vs 13% globally in 2013 according to Gartner), end-user awareness of SaaS has been significantly increasing due to vendors' education efforts in the past few years, topping the Chief Information Officer (CIO) priority list in China in the latest Gartner Survey.

With the world's largest population of active users of mobile devices, enterprise mobile Internet development in China following the flourishing consumer market will play a key role in nurturing the SaaS market and speed up SaaS adoption in the next couple of years, in our view.

Kingdee’s Cloud Hub, an enterprise social media platform (Exhibit 13) that integrates with its ERP applications on both the PC and mobile end, is considered a strategic investment in enterprise mobile Internet. It is also an open platform that allows third party apps. Customers of Cloud Hub include many domestic medium-sized

enterprises like Vanke (200002 CH, NR).

Other established internet companies with already established user traffic in the consumer market also made moves to the enterprise market. Tencent, for example, has recently launched the fee-based ‘Enterprise Account’ on its WeChat mobile messaging platform. It is designed to help a company manage internal

communications and interaction with external parties; company employees will be able to conduct online meetings, set up company inboxes, establish individual pages and groups for specific departments, manage clients and employees. It also

connects employees to third party enterprise applications on mobile devices. Kingdee is one of the first batch of software partners of ‘Enterprise Account’ and users can access to Kingdee’s ERP applications and Cloud Hub through the ‘Enterprise Account’ on WeChat (Exhibit 13).

We believe these developments are very positively nurturing the enterprise SaaS market in China, and that software companies that made early investments in cloud services have first-mover advantages as the market takes off. While established Internet companies like Tencent (700 HK, BUY) is positioned in creating platforms in the enterprise market by leveraging their experience and traffic in the consumer market, they are not in direct competition with software manufacturers like Kingdee.

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(RMB m) Cloud revenue (LHS) Non-cloud revenue (LHS)

Cloud as % of revenue (RHS)

Tencent recently launched ‘Enterprise Account’ for WeChat

Internet companies are not in direct competition with enterprise software manufacturers

EXHIBIT 13: Enterprise mobile Internet driving SaaS take-up

Source: BNP Paribas

Scalability of SaaS model offers scope for market consolidation

In the long run, the SaaS model should have better margins compared to traditional licensing models because various costs associated with traditional software distribution such as implementation and maintenance costs can be spread over a larger customer base. While the traditional enterprise software market in China tends to be fragmented, especially among SMEs, we expect Kingdee (which already has the No 1 market share in ERP software among SMEs in China according to IDC) to leverage its first-mover advantage and take further market share from many domestic competitors which have not transitioned to the cloud fast enough. EXHIBIT 14: China ERP software market share by revenue (2013)

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