Santuario Nacional Lagunas de Mejía

We believe Kingdee will widen its first-mover advantage as the enterprise SaaS market gains momentum in China by claiming a greater market share in the cloud ERP market than in the traditional ERP market. The scalability of the SaaS model and its better long-term margins than the traditional licencing model offer further scope for market consolidation in the otherwise-fragmented China SME software market. Near-term earnings-wise, 2014 will be the first year with normalized earnings after two years of transition. We see upside to the Bloomberg consensus 2015-2016 earnings as top-line growth returns and margins expand significantly upon

completion of its sales channel mix shift.

Initiate at BUY with a HKD3.80 TP. Our target price is set at 25x FY15E PE equating to 0.8x FY15E PEG which is roughly on a par with domestic peer Yonyou (600588 CH) but lower than global peers (Exhibit 17). Globally, SaaS companies like

Salesforce.com are trading at a premium valuation to traditional software companies like SAP and Oracle (Exhibit 18). We see upside to our target multiple for Kingdee as its cloud contribution rises and its competitive edge in the cloud era becomes more visible to investors.

Given the strong cash flow generative nature of software licensing business, valuations based on DCF tend to be higher than those based on P/E multiples. Our DCF valuation with a WACC of 11.4%, terminal/medium-term growth rate of 5.0%/10.3%, terminal/medium-term EBIT margin of 25%/25% is HKD5.60.

EXHIBIT 16: 12m fwd P/E EXHIBIT 17: 12m fwd EV/revenue

Sources: Bloomberg; BNP Paribas estimates Sources: Bloomberg; BNP Paribas estimates

EXHIBIT 18: P/E vs earnings growth

Priced on 7 Oct

Kingdee = BNP Paribas estimates. Others = 2015 PE and EPS growth calendarized on Bloomberg adjusted EPS. Sources: Bloomberg; BNP Paribas

0.0 1.0 2.0 3.0 4.0

Jun-12 Dec-12 Jun-13 Dec-13 Jun-14

(HKD) 20x 25x 15x 30x 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

Jun-12 Dec-12 Jun-13 Dec-13 Jun-14

(RMB m) 5x 2x 4x 3x Kingdee Oracle SAP Yongyou Microsoft 0 5 10 15 20 25 30 0 5 10 15 20 25 30 35 CY15E P/E (x)

EXHIBIT 19: Cloud computing valuation comps

BBG Company name Price Mkt. cap --- P/E --- PEG --- EV/EBITDA --- --- EV/revenue --- 2014E 2015E 2016E 2015E 2014E 2015E 2016E 2014E 2015E 2016E (LC) (USD m) (x) (x) (x) (x) (x) (x) (x) (x) (x) (x) SaaS CRM US Salesforce.com 58.3 36,088 117.0 84.2 62.9 2.16 36.9 28.6 22.9 6.7 5.4 4.4 CNQR US Concur Technologies 127.8 7,294 185.4 119.8 na 2.19 66.4 51.0 39.3 10.3 8.3 6.7 N US NetSuite 91.7 7,005 353.9 210.7 129.8 3.10 149.5 114.6 77.0 12.4 9.6 7.5 WDAY US Workday 83.0 15,420 na na 9,668.7 na na 468.8 211.3 18.3 12.5 9.0 NOW US ServiceNow 60.5 8,819 na 301.1 124.5 na 379.1 105.7 57.8 12.8 9.2 7.1 Traditional software SAP GR SAP 56.6 87,675 16.3 15.0 13.7 1.65 11.3 10.3 9.5 4.0 3.8 3.5 ORCL US Oracle 39.1 173,175 13.1 12.2 11.4 1.67 7.3 7.1 7.2 3.9 3.7 3.6 DATA US Tableau Software 71.2 4,888 na 515.6 171.0 na 208.9 114.8 44.9 11.4 8.4 6.5

268 HK Kingdee 2.4 795 20.7 15.6 12.4 0.48 8.7 7.7 6.7 3.3 3.1 2.7

600588 CH Yonyou 16.7 3,167 30.5 24.2 19.4 0.93 31.8 22.7 19.4 4.0 3.5 2.9 1588 HK Chanjet 15.7 439 13.4 10.4 9.1 0.37 25.0 18.4 na 4.3 3.0 2.5 PaaS & IaaS

MSFT US Microsoft 46.1 379,775 16.9 15.3 13.8 1.46 9.2 8.4 8.0 3.2 3.0 2.9 AMZN US Amazon 322.2 148,868 128.5 70.8 35.4 0.87 23.3 17.3 12.7 1.6 1.3 1.1 IDC VNET US 21Vianet 17.6 1,167 53.6 22.1 11.9 0.16 14.2 9.2 5.8 2.9 2.0 1.5 600804 CH Dr Peng 16.8 3,811 36.6 25.8 18.6 0.61 na na na 3.0 2.4 1.9 300017 CH ChinaNetCenter 55.9 2,856 35.8 25.3 16.5 0.61 32.8 21.4 13.0 8.6 5.5 3.6 EQIX US Equinix 206.5 10,986 65.0 35.6 26.8 0.43 13.0 11.4 10.3 6.0 5.4 4.9 RAX US Rackspace 34.0 4,861 48.8 38.5 31.1 1.44 7.9 6.7 5.7 2.6 2.2 1.9

Kingdee = BNP Paribas estimates. Others = PE and EPS growth calendarized on Bloomberg adjusted EPS. Priced at close 7 Oct 2014

Appendix

Company profile

Kingdee is a leading provider of ERP and cloud services in China founded in 1991 and headquartered in Shenzhen, China. It has traditionally been considered the Chinese comparable to an SAP or Oracle. It has over 20 years history selling ERP software (Enterprise Resource Planning is the integrated suite of software necessary to operate core business processes connecting accounting, sales transactions, inventory, HR, customer relationship management (CRM) and other similar functions) to over 1m customers. It was listed on the main board of the HKSE in 2005.

After a brief period of strategy disruption in 2011-2012 and with the return of its founder Mr Xu Shao Chun as chairman and CEO, Kingdee is now focused on its core strength of selling ERP software and investment in cloud platform. Constituting cloud computing, mobile apps and social networking, its cloud platform allows both upselling opportunities by leveraging demand for mobile solutions and cross selling opportunities in the existing enterprise customer base.

Building a cloud platform is key preparation for China’s eventual migration to online ERP using a traditional SaaS (software as a service) model and Kingdee aspires to become the largest work and business platform in China.

EXHIBIT 20: Key products

Product Description Target market Function Price KIS (“Keep it Simple”) All sold through indirect sales

channel

Small & Medium Sized Enterprises; +1m customers

Provides one-stop business management function, including financial accounting, purchase, sales and inventory

management, fixed assets management, cashier management, AR/AP, report analysis

ASP averaging around RMB1,800 for each sale.

K/3 More comprehensive ERP system particularly suited to single site manufacturers; about 20% sold through indirect sales

Medium Sized Enterprises; +100k customers

Professional industry solutions for manufacturing sector, including functions for supply chain, production and costing management

ASP is approximately RMB100- 300k per contract.

Enterprise Application Suite (EAS)

EAS is the upgrade of K/3 to meet the collaboration needs of larger sized business

Large- and Medium-Sized Enterprises; +3000 customers

Major functions cover group management, financial management, HR management, customer relationship management, supply chain management, vendor relationship management etc

ASP is above RMB300k per contract

Mobile Internet, Cloud computing, Social Networking

Cloud ERP, financial SaaS, enterprise mobile internet applications

All companies but medium- sized enterprises tend to be the early adopters

K/3 Cloud; Cloud Hub, financial SaaS service (youshang.com), express query service (Kuaidi100.com), Wise Note etc

Varies

EXHIBIT 21: Revenue breakdown (2013) EXHIBIT 22: Software licence revenue breakdown (2013)

Source: Company Source: Company

Management team

§ Chairman & CEO: Mr Xu Shao Chun founded Kingdee in 1991. He has

successfully transformed the company from a small software company to a global organization with over 6,300 employees today. Mr Xu holds a degree in computer science from the Southeast University, a master's degree in accounting from the Institute of Ministry of Finance and an EMBA from China Europe International Business School.

§ Chief Financial Officer (CFO): Mr Yang Jian joined Kingdee in 2003. He is in charge of financial, audit, investment and business development functions. Mr Chen holds a bachelor's degree in economy from Guangdong University of Finance & Economics and a bachelor's degree in law from China University of Political Science and Law.

§ Chief Technology Officer (CTO): Mr Tian Rong Ju joined Kingdee in 1999. He is responsible for research, product management and testing functions. He holds a degree from Chongqing Yuzhou University and has abundant experience in program, design, research in Chinese management software.

Shareholding structure

EXHIBIT 23: Major shareholders as of 1H14

Implementation 28.1% Maintenance & Training& consulting 20.8% Hardware 3.0% Sales of software license 48.1% KIS 26.0% K/3 34.8% EAS 29.2% APUSIC 5.9% Others 4.1% CEO, Xu Shao Chun 30.7% Others

Margin-wise, we expect gross margin to improve from 79% this year to 81% in 2016 as the company continues to optimise sales channel mix. We expect OP margin to improve by 4.7ppt from 21.2% this year to 25.9% in 2016, primarily driven by gross margin expansion and lower sales and marketing costs as a percentage of revenue. EXHIBIT 24: P&L

Income statement 2011 2012 2013 2014E 2015E 2016E (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) Revenue 2,022 1,765 1,602 1,630 1,733 1,898 Cost of sales (605) (619) (396) (337) (349) (362) Gross profit 1,418 1,147 1,206 1,293 1,385 1,536 OpEx (1,653) (1,571) (1,266) (1,157) (1,212) (1,305) Other gains 425 321 299 209 241 261 Operating income 190 (103) 239 345 414 492 Profit before tax & minority interest 181 (162) 137 256 344 432 Tax (28) (2) (17) (23) (34) (43) Minority interest (8) 24 7 2 3 4 Net income 145 (140) 127 235 313 393 Margins (%) Gross margin 70.1 65.0 75.3 79.3 79.9 80.9 Operating margin 9.4 (5.8) 14.9 21.2 23.9 25.9 EBITDA margin 17.7 5.7 30.9 38.0 40.3 41.1 Pre-tax margin 9.0 (9.2) 8.5 15.7 19.9 22.8 Net margin 7.2 (7.9) 7.9 14.4 18.0 20.7

Sources: Company; BNP Paribas estimates

Balance sheet

Kingdee has a healthy and improving balance sheet. With the issuance of a RMB1b CB this year with a low interest rate of 4%, its interest expense fell as debt was partially retired. With current net debt of RMB540m on its balance sheet, we expect net debt to equity to fall from 28% this year to 10% in 2016 as borrowing is repaid with strong operating cash flow. The potential sale of its Beijing software park, which Kingdee expects to generate cash proceeds of about RMB1b, could improve the balance sheet further by restoring the company to a net cash position.

EXHIBIT 25: Balance sheet

Balance sheet 2011 2012 2013 2014E 2015E 2016E (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) Cash & cash equivalents + bank deposits 650 913 999 1,134 1,122 1,127 Current assets 698 650 581 614 642 723 Total current assets 1,347 1,563 1,580 1,748 1,764 1,850 Non-current assets 1,687 2,419 2,348 2,409 2,456 2,491 Total Assets 3,034 3,981 3,928 4,157 4,220 4,341 ST borrowings / current portion of LT borrowings 20 227 420 220 120 20 Current liabilities 687 731 532 521 529 536 Total current liabilities 707 958 952 741 649 557 LT borrowings 598 1,364 1,155 405 355 305 Other LT liabilities 86 69 66 66 66 66 Convertible bond - - - 1,048 1,048 1,048 Total liabilities 1,390 2,391 2,173 2,260 2,119 1,976 Share capital 1,208 1,061 1,226 1,192 995 749 Reserves 436 529 529 705 1,106 1,617 Total equity 1,644 1,590 1,755 1,897 2,101 2,366 Total equity & liabilities 3,034 3,981 3,928 4,157 4,220 4,341 Net debt to equity (%) (2.0) 42.6 32.8 28.4 19.1 10.4

Sources: Company; BNP Paribas estimates

Cash flow

We expect the improving operating outlook to generate strong and rising operating cash flow. We forecast free cash flow yield to rise from 4.3% in 2014 to 7.2% in 2016. EXHIBIT 26: Cash flow

Cash flow 2011 2012 2013 2014E 2015E 2016E (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) Net Profits 153 (164) 120 233 310 389 Depreciation & amortization 169 204 257 274 284 287 Working cap adjustment 83 (17) (8) (39) (0) (43) Other adjustments (253) (11) 47 - - - Operating cash flow 151 12 415 469 594 634 Interest inc / (exp) (9) (59) (102) (89) (69) (60) Taxes paid (28) (2) (17) (23) (34) (43) Capex (193) (253) (139) (130) (139) (152) Free cash flow (79) (303) 157 226 351 379 Free cash flow yield (%) (1.53) (5.88) 3.03 4.31 6.69 7.22