Yonyou hosted (2 April) an earnings conference call following its 2024 annual results. In 2024, Yonyou’s total revenue reached RMB9.2bn, down 7% YoY, owing to postponed customer demand amid macro headwinds, and Yonyou’s strategy to promote the subscription business model with greater intensity. Net loss attributable to ordinary shareholders expanded to RMB2.1bn in 2024 (2023: RMB967mn), mainly due to: 1) the decline in revenue generation; 2) compensation provided to the employees that have left their jobs; and 3) provisions for goodwill impairment. Management guided to strive for large-scale loss reduction in 2025 through improving labour productivity and improving the quality and efficiency of product delivery. Although we remain positive that Yonyou will benefit from increasing digitalization demand nationwide over the long term, and think the international expansion plan should help revive revenue growth in the coming years, we remain cautious in the near term. The 40% rise in its stock price YTD has largely priced in positive market sentiment regarding incremental benefits brought by the “DeepSeek moment”, in our view, and concrete evidence on incremental monetization from AI is the next key to watch to drive a further rerating. We lift our TP to RMB14.49 (was RMB9.08) based on 5.3x 2025E EV/sales, in line with its two-year average. Maintain HOLD.

Solid progress made in large enterprise customer acquisition. By the end of 2024, Yonyou recorded 7 new contract wins from central state-owned enterprises, bringing the total number of contract wins to 44. Revenue generation from the core BIP3 product reached RMB3.14bn in 2024, and its revenue contribution to total revenue was up by 2.4ppts YoY. The overall subscription revenue growth of 26% YoY was also higher than that of total revenue, demonstrating an improvement in revenue structure. Subscription related contract liabilities reached RMB2.31bn in 2024, up 25.9% YoY.

High R&D capitalization rate remains a concern. In 2024, Yonyou’s R&D expenditure came in at RMB2.1bn, flat YoY, which in our view demonstrated Yonyou’s effort in optimizing cost while maintaining investment to drive product feature enhancement. However, R&D capitalization rate rose to a record high of 52% (vs. 48/50% in 2022/2023, compared to Kingdee’s 32% in 2024). Although Yonyou suspended the disclosure of ARR contribution in 2024, it needs to improve ARR contribution and further optimize R&D capitalization, to drive a better long-term profitability outlook, in our view. The number of employees for Yonyou was 21,283, down 3,666 YoY (or 15% YoY), and we expect the improvement in labor productivity to help drive better operating efficiency ahead.

Maintain HOLD with a new TP of RMB14.49. We lower 2025E and 2026E revenue forecast both by 18% to factor in slower-than-expected revenue growth in both large-sized enterprises and mid-sized enterprises. However, our TP is lifted to RMB14.49 based on 5.3x 2025E EV/sales (previously RMB9.08 on 3.1x 2024E EV/sales), in line with its two-year average, to factor in the industrywide rerating trend brought by more positive sentiment on AI-related monetization.