Yonyou reported 4Q23 and full-year financial results. For 4Q23, revenue came in at RMB4.1bn, up 12% YoY (4Q22: -8%), but was 8% short of Bloomberg consensus forecast, and net income was RMB63mn, worse than consensus of RMB925mn. The miss in revenue and net income can be attributed to slower- than-expected revenue growth in large enterprise business and worse-than- expected cost control, respectively, in our view. The already high and increasing R&D capitalization rate (50% in 2023) and still low cloud service ARR as % of cloud revenue (33% vs. 63% for Kingdee) remains a concern, which likely speak to a dampened profitability outlook over the long term, although Yonyou has demonstrated an ongoing recovery trend in fundamentals, with 2023 new contract value growth at 17.6% YoY (>26% YoY in 2H23) and subscription contract liability growth at 38.8% YoY. We lower TP to RMB12.33, based on 3.7x 2024E EV/sales (was 6.0x); maintain HOLD.

Recovery of fundamentals ongoing although slower than market

expectation. The reorganization impacted Yonyou’s financial performance in 2023, especially revenue from large enterprises, but the impact is gradually wearing off. Management highlighted an ongoing recovery in fundamentals: revenue generated from large enterprises was up 12% YoY in 2H23 (vs. -9% YoY in 1H23), and new contract value from large enterprises was up over 30% YoY in 2H23. In 2H23, overall cloud services revenue was RMB4.7bn, up 17.0% YoY (1H23: 2.0%; 2H22: 6.3%), and accounted for 74% of total revenue (2H22: 71%).

High R&D capitalization and low ARR as % of cloud revenue remains

a concern. Although Yonyou’s ARR growth remained healthy (+15% YoY to RMB2.4bn), ARR accounted for only 33% of cloud revenue (2022: 32%), which implies that the majority of Yonyou’s cloud revenue is not charged on a subscription basis and is not recurring in nature, and this could be explained by Yonyou’s customer mix that skews towards large-sized enterprises (67% of 2023 cloud service revenue). Also, in 2023, Yonyou increased R&D expenditure by 10% YoY to RMB3.2bn as the company continues to develop cloud-native products. However, R&D capitalization rate rose to a record high of 50% (vs. 36/48% in 2021/2022, and Kingdee’s 32% in 2023). Yonyou needs to improve ARR contribution and further optimize R&D capitalization, to drive a better long-term profitability outlook, in our view.

Lower TP to RMB12.33 and maintain HOLD. We lower 2024-2025E

revenue by both 2% and net profit forecast by 19-36% to reflect lower-than- expected cloud revenue growth and slower-than-expected profitability improvement. Maintain HOLD with a new target price of RMB12.33, based on 3.7x 2024E EV/sales, in line with two-year average minus two s.d.