china software & it services

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15 June 2012 Asia Pacific/China Equity Research

Technology / Software & Services (Software & Services) / OVERWEIGHT

China Software & IT Services SECTOR FORECAST

Cloud computing revolution: App store for social enterprises Figure 1: Four major competitors in China’s enterprise App store field

Source: Company websites, Credit Suisse

■ A total revolution. The software industry will probably merge with Internet within this decade, thanks to the ongoing revolution led by cloud computing across the world. Cloud computing is not only a change in technology, but also a business model transformation. More and more clients will lease software functions from Internet rather than buy licenses and install. This scenario is already true for individuals and is becoming true for enterprises too.

■ China is following the example. The SaaS (software as a service) and PaaS (platform as a service) models are successful in the US, led by Salesforce.com. The company is building an “App Store” for enterprise clients, together with its proprietary software offerings, an example that the Chinese software vendors are actively following. If the model is proved in China, it may create a market worth billions of renminbi.

■ Yonyou leads the way. In April 2012, Yonyou announced its public cloud strategy: an App store, an enterprise storage space, a developers’ platform and an enterprise SNS. The company has become the leader of China’s cloud computing revolution. Meanwhile, Kingdee, Aliyun and Hundsun have also joined the game. We expect sooner or later, most major software firms in China to become cloud computing firms.

Research Analysts

Vincent Chan 852 2101 6568

[email protected]

Significant Contributor

Archibald Pei

15 June 2012

China Software & IT Services 2

Focus charts and table Figure 2: Global cloud computing revenue is likely to

reach US$160 bn by 2020 (US$ bn)

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Source: Forrest Research Figure 4: Social enterprise—the way to the future

Source: Company material

Figure 3: Software and services have never been the

mainstream of Chinese enterprises’ IT spending so far

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Source: Gartner (2011) Figure 5: Yonyou’s enterprise App store strategy

Source: Company material, Credit Suisse

Figure 6: Comparison of the four major enterprise App stores in China Aliyun Yonyou Kingdee Salesforce

IaaS Yes No No No

PaaS Yes Yes Entering Yes

SaaS Yes Yes Yes Yes

Mobile Desktop Yes No Yes No

e-Commerce Platform Yes No No No

Enterprise Application Yes Yes Yes Yes

Personal Application No Yes Yes No

SNS Yes Yes Yes Yes

IM Yes No No Yes

Source: Company data, our estimates

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Cloud computing revolution: App store for social enterprises A business model revolution The software industry will probably merge with Internet within this decade, thanks to the ongoing revolution led by cloud computing all over the world. It is not only a technology revolution, but also one of business model. In the near future, we believe neither enterprises nor individuals will have to buy software and install it; instead, they would just lease it and run it online. The revolution is being promoted by Google, Amazon and Salesforce.com for years now. IT infrastructure, platform and software themselves will gradually become services. We believe it is a revolution that software firms must catch up with or perish.

What is the influence on China? China’s enterprise software market should become at least ten times larger than it is now within the next ten years, if cloud computing is widely accepted. At present, the majority of the 40 mn Chinese SMEs have no software spending at all, a situation that cloud computing could change. We believe most of the SMEs in China will agree to pay Rmb1,000–5,000 a year for basic management applications. This business model is already proved by Salesforce.com in the US. The emergence of third-party development platform will allow enterprises to choose from thousands of management software online, just like one chooses mobile applications from App Store or Google Play.

The way to “social enterprises” “Social enterprises” is a definition for those who actively catch business opportunities from SNS (Social networking service) and LBS (Location-based service), who rely heavily on “social marketing”, and who build their organisation on network community. Management software, e.g. ERP and CRM, will connect and share data with SNS or IM (Instant messenger) when necessary. If the vision becomes true, the gap between software and Internet industries will gradually disappear. Given the popularity of SNS and micro-blogging in China, we believe it is a matter of time before “social enterprises” become a mainstream topic and create huge market here.

Yonyou has become the frontrunner In April 2012, Yonyou issued its public cloud strategy, which included a developers’ platform, an enterprise App Store, an enterprise storage space, and a business SNS. Yonyou has become the first Chinese firm to have complete PaaS and SaaS solutions for enterprises. Meanwhile, Aliyun, Kingdee and some other competitors also have strong presence in this field. We expect the market to become a bit crowded in the long run, but Yonyou should remain a frontrunner for the next few quarters.

Implications on companies in our coverage While Yonyou has already begun its enterprise App store, we believe Hundsun may also benefit from the tide. Smaller software companies will leverage their products with the more efficient platforms provided by Yonyou, Kingdee, Aliyun or others. We expect Yonyou’s App store to generate revenue of Rmb450 mn in 2015, and Rmb5–10 bn by 2020. The bottom line is that all listed Chinese software companies will face a change in their fate. They must prepare, and we believe those who prepare better will win.

Cloud computing is a revolution of business model. Any software firm who cannot catch up with it must perish

Cloud computing will allow China’s enterprise software market to grow at least ten times within the next ten years

Social enterprises rely heavily on SNS, IM and LBS.As they emerge, the gap between software and Internet firms may close

Yonyou is the first Chinese firm to provide a complete enterprise App store. More competitors are joining in

Focus on Yonyou and Hundsun, but the whole software sector in China should benefit in the long run

15 June 2012


Valuation summary Figure 9: Credit Suisse China Software & IT Services sector coverage summary Ticker Name Rating Last close Target Price Up/down to TP FY12E P/E FY13E P/E

600588.SS Yonyou Software O 15.86 20.83 31% 22.7 15.2

600570.SS Hundsun Technologies O 14.33 17.00 19% 27.0 19.0

600271.SS Aisino O 19.05 28.00 47% 18.0 12.9

002063.SZ YGSoft N 13.61 14.50 7% 20.3 15.1

002073.SZ Mesnac O 10.78 13.00 21% 10.4 9.6

002410.SZ Glodon U 24.60 21.50 (13%) 27.4 20.9

300059.SZ East Money O 13.12 18.75 43% 30.6 20.9

Source: Company data, Credit Suisse estimates

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A business model revolution The software industry will probably merge with Internet within this decade, thanks to the revolution brought by cloud computing. Cloud computing means to deliver IT capacity (storage, computing, development or application capacities) in the form of services. Traditionally, most IT capacities are deployed on local devices, e.g. PC, tablets or smartphones. However, as cloud computing emerges, users can easily access IT capacities from any server located anywhere in the world and order them to fulfil their needs.

As a result, a user will no longer need to build IT infrastructure and buy software licenses; the only thing he will need is a simple device, access to the Internet, and order the services they need from third parties (“public clouds”). Large institutions can also build in-house cloud computing centres to serve their own needs, which are called “private clouds”. Of course, this revolution has just begun, and may take a few more years to gain widespread acceptance; but it is on its way. Through cloud computing, both individual and business users can gain the flexibility they never had before, at significantly lower cost.

Figure 7: The world of cloud computing as a whole

Source: Wikipedia

Private clouds, IaaS, PaaS and SaaS There are two major types of cloud computing, based on the nature of provider: private cloud, which is provided by an institution to its own insiders; and public cloud, which is provided by a professional third party to its clients. Both private cloud and public cloud are based on similar technology, i.e., server virtualisation, broadband network and distributed file system, but the business nature is totally different.

Private cloud is an internal service provided by an institution to its own insiders, just like a university library that only serves its students. Public cloud, on the other hand, is more like a public library that provides service to clients from everywhere. An institution can choose to fulfil its IT demand by building its own private cloud, or buy services from public clouds, or even a combination of the two.

Cloud computing is a revolution not only of technology but also of IT industry’s business model

Cloud computing includes private and public clouds. Public cloud consists of IaaS, PaaS and SaaS

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In our view, private cloud is just an evolution, while public cloud is a total revolution. Under public cloud, neither individuals nor institutions need to build IT infrastructure, buy software licenses and maintain the systems; they just need to buy the computing and application capacities as a service. As a result, the whole IT hardware and software industries will gradually be transformed into services. In this report, we mainly talk about public cloud.

Figure 8: Comparison between private cloud and public cloud Private Cloud Public Cloud

Business nature Internal service External service

Storage In-house data centre Large-scale public data centre

Technology Virtualisation, broadband, distributed file system, etc

Transmission Local area network Internet

Product structure Relatively simple Can be quite diversified

User Employees of the institution Clients from everywhere

Significance Improvement of internal IT efficiency Material change of IT industry as a whole

Source: Credit Suisse

Public clouds, by their functions, can be classified into IaaS (infrastructure as a service), PaaS (platform as a service) and SaaS (software as a service).

IaaS: The IT infrastructure, i.e., computing and storage capacity, is delivered as a service. Amazon is the world’s leading IaaS vendor, providing the capacity of its own data centres to enterprise clients. In China, all three major telecommunication operators have plans of expanding into IaaS businesses.

PaaS: The software development platform is delivered as a service. Google and Apple both provide PaaS environment for third parties to develop their own applications. In China, many Internet and software giants have issued their own PaaS.

SaaS: The software application itself is delivered as a service. Salesforce.com is the world’s largest SaaS vendor with thousands of enterprise clients. Yonyou and Kingdee are among the strongest Chinese SaaS vendors.

Figure 9: Three types of public clouds—IaaS, PaaS and SaaS Type Major Global Player Major Chinese Player

IaaS Amazon China Mobile, China Telecom

PaaS Google Sina, Tencent, Aliyun, Yonyou

SaaS Salesforce.com Yonyou, Kingdee, 800App


SaaS gaining momentum faster than ever Cloud computing has been consistently on Gartner’s “Top Ten Strategic Technology Areas” list since 2008. Both Gartner and IDC forecast that within ten years, cloud computing will account for most of global IT spending, while traditional IT business model will decline. Forrest Research estimated that global cloud computing market will grow from US$25.5 bn in 2011 to US$159.3 bn in 2020; Forrest also estimated that SaaS will become the most important cloud computing sub-sector, accounting for 83% of the global cloud computing market in 2020.

The reason why SaaS will become the most important in cloud computing is simple: software application is the ultimate tool to solve problems and improve work efficiency of clients. IT infrastructure and platform are useful only because they support software system and applications. As the cloud computing revolution goes on, it is a matter of time before the leading force changes from IaaS vendors to PaaS and SaaS vendors.

We believe SaaS will become the most important cloud computing business. Mobile Internet will likely accelerate its development

15 June 2012


Figure 10: Global market forecast for IaaS, PaaS, SaaS and BPaaS (US$ bn)

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Note: BPaaS means “business process as a service”, an emerging new type of cloud computing.

We believe the growth of cloud computing will be accelerated by the development of mobile Internet, especially 4G and Wi-Fi. According to a survey done in North America, 56% of the respondents believed that cloud computing will be the application to define 4G. Enterprise, storage, media and applications all lead the demand for mobile cloud computing. The more heavily people rely on mobile office and entertainment, the more important cloud computing will be in their lives.

Figure 11: What application will define 4G? Figure 12: Who will help mobile cloud computing in 2012?

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Video CloudComputing

Access Games Music Health Others

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Source: Chetan Sharma Consulting Source: Chetan Sharma Consulting

Enterprise clients hold the key to growth Cloud computing applies to both individuals and institutions. Although individuals can use cloud to entertain and process personal affairs, it is the enterprises who hold the vast majority of IT spending and would enjoy the most benefit from cloud computing. Nowadays, IT spending is usually the largest sub-category of operating expense for enterprises all over the world; nevertheless, many business professionals still complain that the IT

Enterprise clients hold the key to cloud computing growth. They are the most important users who define the whole industry

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capacity they get can never meet their needs. Cloud computing provides a great opportunity to solve these problems.

According to a survey by HfS Research in the US and Europe, 66% of IT professionals and 58% of business managers emphasised that cloud computing may lower total IT cost; a slightly lower percentage expected cloud computing to increase IT efficiency. Another survey by Accenture in China showed a similar result.

Figure 13: What characteristics of cloud computing strongly attracts you?

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It lowers total cost ofsolution

It enables us to deploysolution faster

It brings solutions withhigher quality

It is good for distributedorganization

It helps us to improvebusiness process

Business Managers IT Professionals

Source: HfS Research

However, information security is always the biggest concern that keeps many enterprises away from cloud computing, especially in emerging markets such as China where there is not enough legal protection. As a result, enterprises tend to try private clouds in the first stage; we believe they will tend to use public clouds as data security improves and legal protection strengthens. At any rate, we strongly believe that enterprise clients are the key to growth for cloud computing, even in an emerging market. It is a matter of time before their demand for IaaS, PaaS and SaaS rises, in our view.

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What is the influence on China? Cloud computing is already a hot topic all over the world; here, we discuss its influence on China, especially on the enterprise IT market. In our view, the rise of cloud computing would meet the IT demand of entry-level enterprises that has not been fulfilled before. As a result, cloud computing would create a multi-billion renminbi market, just like search engine and social media did before. We believe it will not only reshape the enterprise software industry, but also the whole TMT industries in China.

Why is China’s enterprise software market so underdeveloped? China’s enterprise software market has been growing rapidly in recent years, but remains underdeveloped. As of 2011, total enterprises software revenue in China was US$19.63 bn, much smaller than what it should have been. There are around 20 mn enterprises in China, which means that every enterprise spends less than Rmb1,000 on software on average, which is an embarrassingly low level. Software has not been an important spending item for Chinese enterprises.

Compared to the developed world, software accounts for a much smaller portion of IT spending in China. In 2010, software and services accounted for 82% of IT expenditure in the US, while they only accounted for 20% of that in China. On the other hand, while software spending accounts for 15–20% of enterprise capital expenditure in the US, we estimate it only accounts for 2–3% of enterprise capital expenditure in China.

Figure 14: China enterprise software market size (US$ mn) Figure 15: China IT spending composition, 2010

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Why is enterprise software market so underdeveloped in China? Inefficient protection on intellectual property is certainly an important reason, but we believe there are other important reasons:

Total deployment cost: While buying a software license may only cost several thousand renminbi, the total deployment cost, which includes IT infrastructure, hardware and maintenance, could be much greater. Many proprietorships and entry-level enterprises cannot afford such high total costs.

Little flexibility: In a rapidly changing economy like China, traditional enterprise software can hardly meet the latest need of clients. SMEs may also find it difficult to access software functions in business trips. In conclusion, there is not enough flexibility.

The rise of cloud computing will meet the IT demand of Chinese SMEs that has never been met before

China’s enterprise software market should have been much larger than it is. The SME market is still largely undeveloped

15 June 2012


Sales coverage: Because the IT budget of most SMEs and proprietorships are too small, software companies are reluctant to cover them with direct sales network. Therefore, they are covered by third-party distributors, get little support from software vendors, and have almost no brand loyalty. These factors limit their software demand in the long run.

Cheap labour effect: If labour is cheap and abundant, who needs software to improve efficiency? This is especially true for manufacturing firms in coastal China. Instead of deploying management or professional software, many enterprises simply deploy more human resources, since they are cheaper than software on an average.

Management software, or pan-ERP software, is the biggest victim of the factors above. As of 2010, Chinese enterprises spent only Rmb13.77 bn on management software (less than Rmb700 for each enterprise on an average). The majority of SMEs have only minimal ERP modules, while most entry-level enterprises do not use ERP at all.

From SAP and Oracle to Yonyou and Kingdee, several software vendors made numerous efforts to improve management software penetration in China. These efforts have seen little payoff, until the cloud computing business model emerged with a new hope.

Figure 16: Management software market in China, 2005–2010 (Rmb bn)

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Salesforce.com and Google set great examples Cloud computing, or more specifically, SaaS, is most likely to solve the problems that limit the enterprise software demand in China. By delivering software in the form of Internet service, we can reasonably expect the following effects:

Lower total deployment cost: Under the SaaS model, corporate clients no longer need to build complex IT infrastructure and buy servers. They only need to rent applications on a monthly or annual basis. As a result, their total deployment cost is greatly lowered.

More flexibility: Unlike traditional software, SaaS can update every day and every hour, so it is able to better serve clients’ latest needs. Moreover, users can easily use the SaaS applications no matter where they are, as long as they have Internet access.

Better sales coverage: SaaS applications are bought and sold in an “App Store” environment—imagine how one buys applications from Apple App Store or Google Android Market. It is easier to get sales coverage and after-sales services in such an environment. Of course, one must have a strong platform first.

Salesforce.com and Google are two great examples on how to develop an enterprise SaaS business

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Meanwhile, the “cheap labour effect” is also disappearing, thanks to the wage inflation trend in recent years all over China. Although it has little to do with cloud computing, it is a positive for the management software industry as a whole.

Two great examples of SaaS have been set in the US and Europe: Salesforce.com that provides CRM and other ERP modules, and Google Apps that includes a wide range of enterprise applications. Indeed, the SaaS business model for corporate clients has been defined by these two companies.

Founded in 1999, Salesforce.com initially provided online CRM solutions to enterprises. Nowadays, the company’s offerings include five broad categories: the Sales Cloud, which provides a CRM accessible for salespeople from everywhere, either on PC or mobile devices; the Service Cloud, which helps enterprises to process customer service requests in an efficient way; the Chatter, which is a real-time collaborative platform with networking and information spreading functions (quite similar to Facebook); Force.com, a development platform which allows independent software vendors (ISV) to develop and market their own applications to Salesforce.com users; and Radian6, which enables corporate clients to monitor and join in conversations with customers on social media.

Salesforce.com was made famous for its “rent-on-a-monthly-basis” business model. Its flagship CRM solution can be rented for US$5 to US$250 per month. Corporate clients can not only get the company’s proprietary applications but also the third-party applications through Force.com. Moreover, Salesforce.com has invented the concept of “social enterprise”, i.e., to connect management software with social media such as Facebook, Twitter, LinkedIn, etc.

Figure 17: Salesforce.com’s CRM offerings are rented on a monthly basis

Source: Salesforce.com

Google Apps was created in 2006 to provide Google’s proprietary commercial applications, e.g., Gmail, Google Docs, Google Calendar and Google Page Creator, to enterprises. These applications can be rented as a package for US$5 per month or US$50 per year. Google Apps has put grave pressure on Microsoft Office, which was much more expensive; as a result, Microsoft had to issue its own commercial SaaS, Office 365, in 2010.

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In addition to its proprietary applications, Google Apps also offers a third-party platform, Google Apps Marketplace, for ISVs to develop and issue their applications; some of which are even free. Unlike Google’s proprietary offering that focuses on office software, Google Apps Marketplace provides many types of applications, from scheduling and documenting to sales and marketing.

Figure 18: Google Apps provides office and management applications for businesses

Source: Google.com

The business model of Salesforce.com and Google Apps are quite similar, and we conclude it into four main points.

Each of them faces corporate clients, primarily SMEs and proprietorships, and allows them to rent applications on monthly or annual basis.

Each of them enables customers to run applications and store data online, without the necessity of downloading and installing (in contrast, most applications on iOS App Store, Mac App Store and Android Market are still installed and run on local devices).

Each of them offers a proprietary product line that focuses on a specific area (CRM for Salesforce.com, and office suite for Google Apps) as well as a third-party platform with a wide range of applications (Force.com for Salesforce.com and Apps Marketplace for Google Apps); it is a business model of SaaS + PaaS.

Each makes it possible to connect enterprise software with social media (Salesforce.com with almost every major SNS, and Google Apps with Gmail and Google+).

Although followers do not need to copy all the four points above, they must learn from them and build their own sustainable business model, in order to become a successful enterprise SaaS vendor in the long run.

Major Chinese followers’ move in recent years Cloud computing has been a hot topic in China’s telecommunication, software and Internet industries since 2007. In the early stage, most of the IT vendors were focused on constructing large-scale data centres in order to build IaaS business; but in recent years, following the successful stories of Google and Salesforce.com, more and more Chinese companies are seriously considering joining the PaaS and SaaS businesses.

Salesforce.com can be used as a reasonable benchmark for the Chinese PaaS and SaaS operators. Despite the economic depression, Salesforce.com recognised earnings CAGR

There are several major Chinese IT vendors following the U.S. examples, though their business models differ.

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of 35% from FY07 to FY12, and its FY12 revenue stood at US$2.23 bn. Meanwhile, the Chinese management software market in 2011 was only about Rmb16 bn, or US$2.5 bn. That means the revenue of Salesforce.com alone was equivalent to almost all management software companies’ revenue in China!

The business model of Salesforce.com can be even more successful in China, as long as it catches the “long tail” of enterprise software market. There are millions of entry-level enterprises in China that never spend a penny on software, many of which may consider spending money under the cloud computing model.

In our view, the effect of cloud computing on China is similar to that of online advertising ten years ago. By that time, most Chinese small businesses had almost no advertising budget; however, nowadays they spend considerable money on paid search, Internet portal or SNS, which offer a cheap and flexible way of marketing. We are confident that in the next five to ten years, cloud computing will create another great growth story for both software and Internet sectors in China.

Figure 19: Salesforce.com remains a great growth story, 2007-2012 (US$ mn)

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We divide the major Chinese cloud computing vendors into three tiers, as follows:

IaaS + PaaS: These companies are only interested in providing infrastructure and platform, not software itself, to corporate and government clients. The major telecommunication operators (China Mobile, China Telecom and China Mobile) are all in this tier. Aliyun and Baidu can also be sorted here (Aliyun used to have its own SaaS arm focused on CRM, but it was closed in 2009).

PaaS + SaaS: These are the true followers of Google Apps and Salesforce.com. They offer proprietary online applications together with development platforms available for independent vendors. Clients can buy a wide range of applications from their websites. Yonyou, Kingdee and Sina all belong to this tier; the first two face enterprise clients, while the latter faces mainly individuals.

SaaS only: These companies, in general, only provide their proprietary applications online. Since they do not provide development and issuance platforms to independent vendors, there are few or no third-party applications on their websites. 800App, XTools and Cnsaas are in this tier. Yonyou and Kingdee were also in this tier until they built their third-party development platforms.

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Figure 20: Major Chinese cloud computing vendors, as of 2012 Company Business Strategy

China Telecom IaaS and PaaS China Telecom was focused on building data centres to provide IaaS; but it plans to provide PaaS to enterprises and governments in near future.

Aliyun SaaS; IaaS and PaaS Aliyun had run a proprietary enterprise SaaS website, AliSoft; it was reorganized in 2010 into Aliyun, which is focused on IaaS and PaaS instead.

Baidu IaaS and PaaS Baidu has been developing its IaaS and PaaS arms, but it has no intention to provide SaaS until now.

Sina PaaS and SaaS Sina opened its PaaS, Sina App Engine (SAE) in 2009, and built an App Store, which is focused on individual clients rather than enterprises.

Kingdee PaaS and SaaS Kingdee opened management SaaS, Youshang.com, in 2007. Since 2011, the company has been planning to provide PaaS to third-party developers.

Yonyou PaaS and SaaS Yonyou opened management SaaS, K.cn, in 2008. In 2012, the company reorganized its public cloud business, setting up a PaaS + SaaS model.

800App SaaS 800App is the largest online CRM vendor in China, which follows the model of Salesforce.com.

XTools SaaS XTools provides online CRM, with similar business model with Salesforce.com and 800App.

Cnsaas.com SaaS Cnsaas is a strategic partner of Tencent in SaaS, and provides mainly CRM and other ERP functions.


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The way to “social enterprises” In 2011, Salesforce.com launched a grand campaign on “Social Enterprise”, which then became the theme of almost all of the company’s offerings. The company quoted in its presentation: “Either company gets social or it gets left behind.” And it made detailed guidelines on how enterprises benefit from social media and networks.

Surprisingly, major Chinese management software vendors quickly reacted and followed that concept: Kingdee launched its own SNS, Kingdee Weibo, in 2011; Yonyou launched a similar SNS in 2012; and both firms are trying to connect social networks with their ERP, OA and BI software. Therefore, “social enterprise” has also become an emerging concept in China, yet still controversial among professionals.

“Social enterprise” built on social networks What is a “Social Enterprise”? In brief, it is a business with open mind, clear objective and formal roadmap on utilizing social information to address its professional goals. In fact, a social enterprise should be built on social networking services (SNS), instant messaging as well as location-based services (LBS).

For example, Salesforce.com allows its clients to connect with almost every major SNS, from Facebook and Twitter to LinkedIn and Google+; clients can monitor, analyse and integrate the information from these websites. The company also runs a proprietary SNS and IM application, the Chatter, and a file sharing system.

Figure 21: Social enterprise, a concept adopted by Salesforce.com in 2011

Source: Salesforce.com

Social media has been proved to be quite useful for sales and marketing professionals. According to a Clickfox survey, 97% of customers said they are “somewhat influenced” or “very influenced” by other customers’ comments about companies on social media; a Nielsen poll showed that 53% of active adult SNS users would follow at least one brand. Because social media is so important, “social marketing” has already become a popular topic. Moreover, the increasing use of LBS in social media enables salespeople to learn and find local sales opportunities.

On the other hand, social networking can improve after-sales-services quality and significantly reduce companies’ service expense. It is especially true in China, where thousands of major consumer brands communicate with customers through Sina Weibo,

Social enterprises are those who integrate social media into their marketing and internal management process

Salesforce.com adopted the Social enterprise concept in 2011, making it a core strategy of the company

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Renren.com and Dianping.com; millions of customer requests or complaints are processed on these social media every day.

Moreover, social networking can increase enterprises’ internal management efficiency. Traditionally, an enterprise’s internal communication is done through face-to-face interactions, phone calls, e-mail, calendar software, OA and workflow software. It is widely argued that the communication and coordination efficiency can be improved by internal SNS or IM. For example, Salesforce.com Chatter can be used not only for chasing or serving clients, but also communicating with workmates. Many large-scale enterprises have launched their own internal SNS for employees to share information.

According to third-party surveys, 63% of employees feel that social media increases sharing among workmates, while 51% feel they are more productive with social media. It is hard to predict whether social networking will become the mainstream way of enterprise internal communication all over the world, but it is quite possible.

Figure 22: Social enterprise to become mainstream Figure 23: Social enterprise may have higher efficiency

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Source: IDC Source: Altimeter Group, Forrester Research

Aliyun, Yonyou and Kingdee on social enterprises Even before Salesforce.com adopted the concept of “social enterprise”, some Chinese firms had started making efforts to build social networks for corporate clients. The most notable example was Aliyun, which has been providing a series of SNS and IM services for its small business clients. Since 2011, more software and Internet firms have been developing social enterprise platforms and solutions. Aliyun, Yonyou and Kingdee are among the most successful ones as of now.

Aliyun: The parent company of Aliyun operates a popular IM, Aliwangwang, for both Aliyun and Taobao clients, through which they can easily communicate with customers or suppliers. Aliyun and its affiliates have launched three SNS platforms: Renmaitong (2009), Taojianghu (2009) and Laiwang (2011). The results of these efforts are mixed: although the IM of Aliyun attracted numerous business users, its SNS have never been popular.

Unlike Salesforce.com, the founder of Aliyun is an e-Commerce operator, not a software vendor; it lacks management software offerings. The company used to run a SaaS website, Alisoft, with similar business model as Salesforce.com, but it did not grow well and was closed in 2010. Therefore, Aliyun cannot create synergy between management software and SNS, like Salesforce.com does. Instead, the company has been consistently trying to create synergy between e-Commerce platform and SNS.

Aliyun, Yonyou and Kingdee are three major IT vendors that have social enterprise initiatives in China

15 June 2012


Figure 24: Aliwangwang on mobile devices—Nokia (left) and iPhone (right)

Source: Aliwangwang.com

Kingdee International: Kingdee was the first Chinese software company to join the “social enterprise” tide. In 2010, the company issued its desktop system, Kingdee Desktop, which is available for both PC and mobile devices. The company operates two business SNS, namely Kingdee CVN, which was launched in 2010 and focuses on entrepreneurs and high-end professionals; and Kingdee Weibo, which was launched in 2011 and serves all kinds of business organisations and their employees.

As the second largest management software vendor in China, Kingdee has been paying a lot of efforts to create synergy between its ERP products and SNS. For example, the company encourages its corporate clients to build internal SNS on Kingdee Weibo and use it as an alternative way of internal communication. Kingdee CEO Mr Xu Shaochun has announced that Kingdee Weibo would be “integrated with ERP, middleware and our other important product” in the near future.

However, Kingdee’s road to “social enterprise” has just started. As of Mar 2012, there were around 10,000 enterprises and 100,000 individual users on Kingdee Weibo—small when compared with Sina Weibo; moreover, few users had ever linked Kingdee Weibo to their ERP system.

15 June 2012


Figure 25: Kingdee mobile desktop (left) and Kingdee Weibo (right)

Source: Kingdee presentation

Yonyou Software: Yonyou seems to be a little late to join in the tide of social enterprise. The company had not initiated any SNS or IM businesses until Apr 2012, when it issued a brand-new cloud computing strategy. In that strategy, “social enterprise” suddenly became the core issue of Yonyou’s long-term plan on cloud computing, and it opened a business SNS, UU.com.cn.

Yonyou UU looks quite like Kingdee Weibo or Aliyun Laiwang at the first glance. However, it has some unique characters and functions, which makes us interested:

(1) UU serves as the hub of Yonyou’s public cloud offerings. No matter you want to buy SaaS applications, use cloud storage service, or to get online after-sales-service from Yonyou, you must have a UU account. All client information and history data are also stored on UU.

(2) UU is connected with applications you buy from Yonyou’s online App Store. If you buy an application, your friends can see it from UU, and you can choose to share certain data from that application with them.

Although Yonyou UU is still at the very beginning, we believe the company has built a right vision and adopted a right strategy. Given the company’s large customer base, good brand reputation and strategic focus on social enterprise, it is quite possible that Yonyou UU will become the largest enterprise SNS in China in the long run.

Communication, coordination and integration Although “social enterprise” is developing rapidly in both the U.S. and China, many management software professionals still doubt this concept. Their questions are simple: why should management software become social at all? As a senior ERP consultant said on a recent conference in Beijing: “There is social networking and social marketing, but I do not see any necessity for ‘social enterprise’. Connecting ERP with SNS is considered weird by almost all ERP professionals.”

That represents a popular viewpoint in China: management software does not need to be connected with social media. Indeed, neither Aliyun and Kingdee nor Yonyou have

In the long run, SNS, ERP and other management applications should be integrated together

15 June 2012


achieved the integration between SNS and management software; what they have done is just to open some business-focused SNS for enterprises.

The real “social enterprise”, like Salesforce.com has been campaigning for, should meet the following requirements, in our view:

(1) Enterprises should be able to monitor and analyse the data easily from a wide range of social media. They should be provided professional tools so as to find business opportunity from these social data.

(2) Management software must be connected with SNS and IM. Users should be able to download data from social media to ERP, or vice versa. The data transfer between management software and social media must be smooth.

(3) Internal SNS should become a business coordination platform (not just a communication tool) in an enterprise. It should be integrated into management system, and improve overall management efficiency.

As China’s leading management software vendors, both Yonyou and Kingdee noticed the significance of social media for businesses. Yonyou’s cloud computing strategy stated that “SNS for business coordination” is an important layer between management software and clients. Kingdee’s management also admitted that social media will change the whole management software sector and should be paid great attention to.

Social media has already been used for corporate communications in China, but is still far from the target of becoming a business coordination platform and integrating with management software. However, since there are many Chinese software vendors working towards that target, it will probably be met sooner or later.

Figure 26: Integration of development platform, App store, SNS and mobile Internet

Source: Yonyou presentation

15 June 2012


Yonyou has become the frontrunner As we concluded, there are more than a dozen Chinese IT vendors operating PaaS and SaaS businesses, and a handful operating business SNS. Moreover, there are dozens of software or Internet firms planning to join in the battlefield. However, we believe there is only one solid frontrunner in China, which is Yonyou. Since the launch of its new public cloud platform in Apr 2012, Yonyou has gained significant advantage against most peers, and that could be crucial for its long-term development.

Yonyou public cloud: A complete platform Cloud computing was confirmed as a “core strategy” of Yonyou in December 2009. The company issued its first “cloud computing plan” in 2010, but it was not very detailed. In April 2012, Yonyou released a brand-new public cloud platform for enterprise clients. In fact, it is the first complete enterprise public cloud we see in China, which consists of six parts.

Figure 27: Yonyou’s public cloud strategy, issued in April 2012

Source: Yonyou.com

Yonyou UU Community: Serves as the hub of Yonyou public cloud services. Either enterprises or individuals can register on UU, and all their activities are recorded here. The interface and functions of UU are very similar to those of Sina Weibo. Enterprise can build their internal SNS on UU, the information on which are not made public.

Yonyou App store: Has thousands of business applications developed by both Yonyou itself and independent software vendors (ISV). It is focused on office suite, management software and administrative tools, but also provides some personal applications. Most of these applications are run in SaaS model (users do not need to download and install).

Yonyou is the frontrunner in operating App Store for enterprise clients in China

Yonyou provides a complete enterprise public cloud with six parts

15 June 2012


Yonyou Developers’ Centre: ISVs use it to develop third-party applications. They also share their development experiences with each other here. Yonyou provides and maintains a third-party development engine, as Salesforce.com and Google Apps do.

Yonyou e-Store: Yonyou’s traditional management software sells here. These products are delivered in physical, rather than online. It is not a real “cloud computing” service, but an e-Commerce website instead.

Yonyou Space: An SNS more closely connected with ERP software. Yonyou said it will “integrate ERP, SNS and ISV altogether”. However, this space is not completed yet, and it is unknown what exactly the difference it makes compared to other SNS.

Yonyou Cloud Service: Now it is a professional question-and-answer website focused on enterprise management. In the long run, Yonyou plans to provide more services, e.g. data storage, enterprise website construction, and online client services, through this website.

Although it has been operating for only one month, Yonyou App Store already has hundreds of third-party applications. These applications were developed by ISVs using Yonyou Application Engine (YAE), a standardized development environment. Notable third-party developers on Yonyou App Store include Shanda, Kingsoft and Caakee. For example, the SaaS version of Kingsoft WPS Office is a most popular application on Yonyou App Store. The growth speed of Yonyou App Store is the key to the development of Yonyou cloud computing as a whole – if it grows well, more and more enterprises will be attracted, and Yonyou’s overall cloud computing business will gain.

Figure 28: Yonyou App Store, WPS Office is on the front page

Source: Yonyou.com

What is a successful enterprise App store like? We all use several kinds of App Stores for individuals, no matter on PC or mobile devices. But few of us have ever used any enterprise App store, since it is too new and too professional. What should a successful enterprise App store look like? In other words, how do we tell whether an enterprise App Store will succeed? We can use the experience of using individual App store to support judgement.

A successful enterprise App store should have as many developers as possible and a wide range of applications

15 June 2012


Number of applications and developers: If there are a dozen of App stores, one is likely to choose those with the most applications. If you are able to attract more third-party developers (ISVs), you will probably provide more applications and generate more users.

Yonyou App Store’s objective is to provide 30% of total applications from Yonyou itself, 50% from business ISV (professional development firms), and 20% by individual ISV (personal developers). Whether this objective can be achieved depends on the quality of Yonyou’s development engine. If the company is able to build a convenient environment for third-party applications, more ISVs will consider joining in.

Figure 29: Yonyou App Store’s objective application matrix

Source: Yonyou presentation

Overall quality of applications: Enterprise clients are more concerned than individuals about application quality. However, this problem can be solved by generating more ISVs. The more ISVs you have, the more high-quality applications you will get. You do not need to care about the quality of every third-party application.

Diversity of applications: An enterprise App store should have a complete line of enterprise applications, e.g., documenting, scheduling, finance, general management, administration and marketing. Moreover, client stickiness may be improved if the App Store offers some personal applications as well.

As an example, within Yonyou App Store’s recommended application portfolio, around 40% are personal applications, e.g., social, reading, travelling or even entertainment. The logic is that personal applications may encourage users to spend more time on Yonyou’s platform, and increase the usage of Yonyou SNS.

15 June 2012


Figure 30: Yonyou App Store’s recommended apps for different user categories User Type Total Apps Business Apps Personal Apps

Business Professional 28 12 16

Marketing Manager 20 8 12

Human Resource Manager 42 35 7

Financial Manager 35 20 15

Sales Manager 32 17 15

Administrative Manager 35 20 15

Average 32 19 13

Source: Yonyou App Store, Credit Suisse

Efficiency of client service: Under the SaaS business model, client service is consistent. Enterprise clients are generally more demanding and need better service than individuals. The bigger the enterprises are the better service they may demand. Therefore, it is a great challenge to provide timely and quality service to them.

Yonyou Software, in its cloud computing white book, plans to generate 10,000 applications, 1,000,000 paid clients and 10,000,000 total clients on its enterprise App Store by 2015. Although the plan seems way too optimistic, we believe it is reasonable for Yonyou to generate around 3,000,000 total clients and 300,000 paid clients within the next four years. In our bull, base and bear cases, total revenue of Yonyou App Store would total Rmb1 bn, Rmb450 mn and Rmb150 million, respectively, in 2015. After then, we expect Yonyou App Store to keep up the rapid growth and generate revenue of Rmb5–10 bn by 2020.

Figure 31: Bull, base and bear cases for Yonyou App Store revenue 2015 Total clients Paid clients Apps per client Fee per paid

client Total revenue

Bull Case 5,000,000 500,000 30 Rmb2,000 Rmb1 bn

Base Case 3,000,000 300,000 25 Rmb1,500 Rmb450 mn

Bear Case 1,500,000 150,000 20 Rmb1,000 Rmb150 mn

Source: Company data, our estimates

From non-scalable to scalable business What influence will cloud computing make on the software business in China? Of course, PaaS and SaaS will bring new customers and thus new revenue stream; the enterprise App store market will likely be much larger than the current enterprise software sector. However, we estimate a more important effect will come: the Chinese software sector will change from non-scalable to scalable business.

China’s software sector is not scalable now, but cloud computing will help it transition into a scalable business

15 June 2012


Figure 32: Cloud revolution will change the sales and service model of software vendors


Until now, China’s software sector is not scalable, which means software companies cannot enjoy the economies of scale, for the following reasons:

(1) Personal software market should have been most scalable, since personal software is standardised and easy to distribute. However, because of weak intellectual property protection, China’s personal software market never grows big, except only for free software.

(2) SME software is standardised, but since China is too big and complex, it is hard for software vendors to reach SME clients. Most of the software vendors use multiple layers of distribution channels to reach clients, which weaken client loyalty and bring problems to client service.

(3) Large-scale enterprises generally demand custom-made solutions that require huge implementation staff and maintenance services. It is a high-end-labour intensive business in nature, and thus not scalable.

Cloud computing will change the situation in the SME software market. First, enterprise App store will enable software vendors to directly access SME clients and rely less heavily on channels. Second, software vendors will be able to conduct most of the client service activities online, so as to enhance customer experience and brand loyalty. In such process, software vendors would save substantial amount of selling and marketing expenses, which usually accounts for 20–30% of Chinese software companies’ revenue.

If the cloud computing business model develops well, software companies’ growth trend will become much more stable and sustainable. In the long run, software industry will merge with Internet industry to form a cloud computing industry. That is why we said in the beginning of this report that we think the software industry will disappear within this decade.

Comparison of four major enterprise App stores There are four major enterprise App Stores currently operating in China: Aliyun (including Taobao App), Yonyou, Kingdee, and Salesforce.com. The market is not much crowded compared to individual App store market, where there are dozens of operators competing.

Yonyou has the most complete offering among peers. It is focused on PaaS and SaaS, providing both business and personal applications, and runs two proprietary SNS. Kingdee

Yonyou has first-mover advantage, but Aliyun and Kingdee cannot be ignored

15 June 2012


is similar to Yonyou, although its PaaS has not yet opened for third party developers. These two are the traditional software vendors who want to leverage their enterprise client base with cloud computing and mobile Internet.

Aliyun, on the other hand, has not determined its development strategy in enterprise App Store market. It operates an IaaS and PaaS business, as well as an entry-level SaaS facing Taobao shop runners. The company and its affiliates do not provide SaaS to professional enterprises outside their own e-Commerce platform now, but if it chooses to do so, it will be a matter of time before it becomes a major player in this field.

Salesforce.com has entered China, but with little advances so far. The company lacks client base in China, and its price-to-quality ratio is not competitive to peers. Meanwhile, its social media analysis function does not apply well to Chinese social networks. As a result, we do not expect Salesforce.com to become a winner here. However, the latest innovations of Salesforce.com will continue to be followed by Chinese peers.

Figure 33: Comparison of the four major enterprise App Stores in China Aliyun Yonyou Kingdee Salesforce.com

IaaS Yes No No No

PaaS Yes Yes Entering Yes

SaaS Entering Yes Yes Yes

Mobile Desktop Yes No Yes No

e-Commerce Platform Yes No No No

Enterprise Application Yes Yes Yes Yes

Personal Application Yes Yes Yes No

SNS Yes Yes Yes Yes

IM Yes No No Yes


There will be more big players in the enterprise App store market. For instance, Tencent has already built strategic partnership with SaaS vendor Cnsaas.com, integrating its online CRM into Tencent QQ and TM; it is Tencent’s long-term strategy to expand its presence in enterprise communication and application market. Although Yonyou is the current frontrunner, the market leadership will only be determined after fierce competition in the next few years. Software vendors, Internet companies and even telecommunication operators, all have their own opportunity in this emerging field.

15 June 2012


Asia Pacific / China Software

Yonyou Software (600588.SS / 600588 CH)

Frontrunner of cloud computing in China ■ Current cloud computing leader. Yonyou has been investing heavily on

cloud computing since 2010. After it completes the ongoing equity placement, Rmb700 mn will be dedicated into cloud computing R&D. In April 2012, the company released a new public cloud, which includes an enterprise App Store, a third-party development engine, and two business SNS. Therefore, Yonyou has built the most complete public cloud for enterprises in China.

■ Large client base and a correct strategy. The two advantages of Yonyou in cloud computing era include its large enterprise client base and correct strategy. Management noticed the importance of cloud computing, as early as 2009; it adopted a strategy to provide private cloud to large enterprises and private cloud (especially PaaS and SaaS) to SMEs. We believe Yonyou can leverage its client base with its cloud computing platform to transition into a more scalable and sustainable business model in the long run.

■ Two stories at the same time. Two factors make Yonyou’s investment thesis strong. First, the company is solidly enhancing its presence in high-end large-scale enterprises, providing more professional solutions and services. Second, it is also exploiting the SME and entry-level market through cloud computing. The former endeavour will improve ARPU, while the latter will greatly expand customer base, in our view.

■ Valuation very attractive. We believe the cloud computing revolution is a long-term positive but will not bear fruit in the short run. For the next three years, the company has to invest heavily on cloud-related research and marketing. We slightly lower our FY12–14E EPS to Rmb0.69, Rmb1.01 and Rmb1.34, respectively. Our target price of Rmb21.00 (up from Rmb20.83) is derived from 0.75x FY13–14E P/E/G, or 30x FY12E P/E. We maintain our OUTPERFORM rating on the stock.

Share price performance

6080100120140

010203040

Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the MSCI CHINA F IDX which closed at 5384.37 on 14/06/12 On 14/06/12 the spot exchange rate was Rmb6.37/US$1

Performance Over 1M 3M 12M Absolute (%) 0.4 -9.0 -6.3 Relative (%) 5.6 3.6 12.3

Financial and valuation metrics

Year 12/11A 12/12E 12/13E 12/14E Revenue (Rmb mn) 4,122.2 5,433.2 7,085.8 8,959.2 EBITDA (Rmb mn) 441.3 579.7 903.6 1,230.8 EBIT (Rmb mn) 372.2 569.9 874.7 1,183.3 Net profit (Rmb mn) 536.8 749.0 1,098.4 1,466.4 EPS (CS adj.) (Rmb) 0.66 0.69 1.01 1.34 Change from previous EPS (%) n.a. -1.9 -3.8 -1.8 Consensus EPS (Rmb) n.a. 0.74 0.98 1.34 EPS growth (%) 61.7 4.3 46.6 33.5 P/E (x) 24.1 23.1 15.8 11.8 Dividend yield (%) 2.5 1.6 2.3 3.1 EV/EBITDA (x) 33.5 21.8 13.4 9.1 P/B (x) 4.4 3.4 2.9 2.5 ROE (%) 19.6 18.7 20.1 22.9 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, our estimates.

*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.

Research Analysts


[email protected]


Archibald Pei

Rating OUTPERFORM* Price (14 Jun 12, Rmb) 15.86 Target price (Rmb) (from 20.83) 21.00¹ Upside/downside (%) 32.4 Mkt cap (Rmb mn) 15,528 (US$ 2,438) Enterprise value (Rmb mn) 12,642 Number of shares (mn) 979.08 Free float (%) 98.7 52-week price range 20.3 - 13.4 ADTO - 6M (US$ mn) 59.9

15 June 2012


Figure 34: Income statement Rmb million 2009A 2010A 2011A 2012E 2013E 2014E

Revenue 2347.01 2978.83 4122.16 5461.73 7126.39 8972.62 COGS 391.17 517.22 623.62 874.82 1163.55 1510.55 Gross Profit 1955.84 2461.61 3498.55 4586.91 5962.84 7462.07 Business Tax and surcharge 63.25 80.91 139.18 163.85 206.67 251.23 S&M Expense 1049.72 1359.25 1815.63 2315.77 2921.82 3598.02 G&A Expense 658.38 897.18 1171.55 1540.21 1981.14 2440.55 Financial Expense -10.87 -1.49 31.83 0.86 -13.67 -11.96 Loss from Asset Write-down 9.23 21.58 37.99 27.00 26.00 26.00 Gain from Fair-value change 49.13 0.00 0.00 0.00 0.00 0.00 Net Investment Gain 243.98 8.97 7.68 8.00 11.00 12.00 Operating Income 479.23 113.14 310.06 547.22 851.89 1170.22 Non-operating Revenue 201.79 236.13 297.07 296.83 389.12 499.92 Non-operating Expense 6.78 1.58 1.22 1.00 3.00 4.00 Income before Taxes 674.24 347.68 605.91 843.06 1238.01 1666.14 Corporate Income Tax 60.26 1.65 55.06 75.88 117.61 158.28 Income after Taxes 613.98 346.03 550.85 767.18 1120.40 1507.86 Minority Interest 20.28 14.00 14.06 20.00 31.00 44.00 Net Income for Shareholders 593.70 332.03 536.78 747.18 1089.40 1463.86


Figure 35: Balance sheet Rmb million 2009A 2010A 2011A 2012E 2013E 2014E

Current Assets 2,215.16 2,386.85 2,790.66 5,102.15 6,383.05 7,983.91 Non-current Assets 1,604.35 2,379.07 2,671.01 2,846.95 3,074.44 3,284.38 Total Assets 3,819.51 4,765.92 5,461.68 7,949.10 9,457.49 11,268.29

Current Liabilities 1,192.17 2,034.97 2,238.54 2,407.74 3,064.24 3,759.33

Non-current Liabilities 13.86 165.15 196.01 190.50 190.50 190.50 Total Liabilities 1,206.04 2,200.12 2,434.56 2,598.24 3,254.75 3,949.83 Shareholders’ Equity 2,613.48 2,565.81 3,027.12 5,350.85 6,202.74 7,318.46 Minority Interests 32.90 39.81 71.56 91.56 122.56 166.56 Shareholders’ Equity excl. Minority Interests 2,580.58 2,525.99 2,955.56 5,259.29 6,080.18 7,151.89


Figure 36: Cash Flow statement Rmb million 2009A 2010A 2011A 2012E 2013E 2014E

Cash Flow from Operations 399.96 489.38 471.62 1,129.70 1,058.84 1,600.02 Cash Flow from Investing 8.34 -676.95 -628.70 -292.80 -290.10 -289.20 Cash Flow from Financing 130.34 -34.24 155.62 1,051.45 -254.85 -380.18 Net Change in Cash 539.17 -223.72 -1.62 1,888.36 513.90 930.64


15 June 2012


Asia Pacific / China Software

Hundsun Technologies Inc (600570.SS / 600570 CH)

Cloud computing for securities industry ■ Cloud computing for fund managers. Hundsun has recently launched a

cloud computing trading application for private-offered funds, small mutual funds and trust companies. As long as there is Internet access, fund managers can place orders, analyse risks and maintain records; all the data are saved in a cloud environment. This application is very cost-effective for small asset management firms with limited IT budget.

■ Integrating everything into cloud. The next step is to integrate research, information and quantitative analysis functions into the cloud computing application. In the next few years, fund managers will be able to do their research, analysis and investment anywhere. Hundsun’s strong brand recognition and monopoly market position make it easier for small asset management firms to accept its cloud solutions.

■ Securities brokers also need cloud. Securities brokers in China are facing consistent drop of commission rate as well as rising labour cost. Cloud computing becomes a reasonable method to solve cost pressure. Meanwhile, the emerging wealth management and investment consulting businesses may also bring huge demand for cloud-based IT solutions. We expect that many Chinese securities brokers will use both private and public clouds as the foundation of their IT platform.

■ Maintain OUTPERFORM, TP Rmb17.00. We keep our FY12–14E EPS of Rmb0.53, 0.76 and 1.04, respectively. Although its short-term profitability is shadowed by fiercer competition, we are bullish on its long-term future as China’s dominant financial software vendor. Our target price of Rmb17.00 is derived by 0.8x FY13–14E P/E/G, or 32x FY12E P/E. We maintain OUTPERFORM on the stock.

Share price performance

6080100120140

010203040

Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the MSCI CHINA F IDX which closed at 5384.37 on 14/06/12 On 14/06/12 the spot exchange rate was Rmb6.37/US$1

Performance Over 1M 3M 12M Absolute (%) 0.9 7.8 1.7 Relative (%) 6.1 20.4 20.3

Financial and valuation metrics

Year 12/11A 12/12E 12/13E 12/14E Revenue (Rmb mn) 1,048.2 1,367.0 1,870.0 2,443.6 EBITDA (Rmb mn) 213.0 257.7 372.3 523.1 EBIT (Rmb mn) 190.7 242.7 356.3 506.2 Net profit (Rmb mn) 254.4 330.8 471.2 646.7 EPS (CS adj.) (Rmb) 0.41 0.53 0.76 1.04 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rmb) n.a. 0.53 0.69 0.93 EPS growth (%) 16.3 30.0 42.4 37.3 P/E (x) 35.1 27.0 19.0 13.8 Dividend yield (%) 0.3 1.1 1.6 2.2 EV/EBITDA (x) 42.2 33.3 22.8 15.8 P/B (x) 7.3 5.9 4.7 3.7 ROE (%) 23.0 24.2 27.7 30.2 Net debt/equity (%) 4.6 net cash net cash net cash

Source: Company data, our estimates.

*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.

Research Analysts


[email protected]


Archibald Pei

Rating OUTPERFORM Price (14 Jun 12, Rmb) 14.33 Target price (Rmb) 17.00¹ Upside/downside (%) 18.6 Mkt cap (Rmb mn) 8,938 (US$ 1,404) Enterprise value (Rmb mn) 8,573 Number of shares (mn) 623.75 Free float (%) 100.0 52-week price range 16.3 - 10.3

15 June 2012


Figure 37: Income statement Rmb million 2009A 2010A 2011A 2012E 2013E 2014E

Revenue 729.71 867.23 1,048.19 1,367.01 1,870.01 2,443.56 COGS 213.99 214.17 213.70 295.42 420.65 547.90 Gross Profit 515.72 653.05 834.49 1,071.59 1,449.35 1,895.66 Business Tax and surcharge 21.20 31.12 39.73 47.85 61.71 80.64 S&M Expense 131.22 144.34 174.33 226.92 299.20 373.86 G&A Expense 214.99 326.03 421.43 546.81 725.56 928.55 Financial Expense -2.48 -0.64 1.02 2.92 0.82 -0.57 Loss from Asset Write-down 2.71 4.09 8.32 7.30 6.60 6.43 Gain from Fair-value change 12.11 -8.20 -7.69 0.00 0.00 0.00 Net Investment Gain 25.20 15.99 34.73 25.00 25.00 30.00 Operating Income 185.40 155.90 216.71 264.80 380.46 536.74 Non-operating Revenue 48.23 88.84 70.61 109.36 149.60 190.60 Non-operating Expense 0.95 1.09 1.48 1.00 1.00 1.00 Income before Taxes 232.68 243.65 285.85 373.16 529.06 726.33 Corporate Income Tax 22.72 21.97 23.84 37.32 52.91 72.63 Income after Taxes 209.96 221.68 262.01 335.84 476.15 653.70 Minority Interest 4.35 3.01 7.60 5.00 5.00 7.00 Net Income for Shareholders 205.61 218.67 254.41 330.84 471.15 646.70


Figure 38: Balance sheet Rmb million 2009A 2010A 2011A 2012E 2013E 2014E

Current Assets 938.79 890.09 890.79 1,446.32 1,937.73 2,583.77 Non-current Assets 398.65 708.59 855.98 633.93 640.40 646.46 Total Assets 1,337.44 1,598.68 1,746.78 2,080.24 2,578.12 3,230.23

Current Liabilities 356.09 373.27 362.92 395.89 516.36 655.32

Non-current Liabilities 56.63 142.36 79.98 75.82 77.83 80.13 Total Liabilities 412.72 515.63 442.90 471.71 594.19 735.45 Shareholders’ Equity 924.72 1,083.05 1,303.87 1,608.53 1,983.93 2,494.78 Minority Interests 116.28 92.29 85.89 90.89 95.89 102.89 Shareholders’ Equity excl. Minority Interests 808.45 990.76 1,217.99 1,517.64 1,888.04 2,391.90


Figure 39: Cash Flow statement Rmb million 2009A 2010A 2011A 2012E 2013E 2014E

Cash Flow from Operations 112.88 173.39 196.09 348.25 422.39 604.05 Cash Flow from Investing 85.85 -366.82 1.67 253.48 2.50 7.00 Cash Flow from Financing 86.42 94.66 -62.55 -78.08 -99.56 -139.99 Net Change in Cash 285.22 -98.46 134.74 523.66 325.33 471.06


15 June 2012


Companies Mentioned (Price as of 12 Jun 12) Aisino Co., Ltd (600271.SS, Rmb19.05, OUTPERFORM [V], TP Rmb28.00) Amazon.com, Inc (AMZN.OQ) Baidu Inc (BIDU.OQ, $117.94, NEUTRAL [V], TP $127.50) China Telecom (0728.HK, HK$3.51, OUTPERFORM, TP HK$4.30) China Unicom Hong Kong Ltd (0762.HK, HK$10.80, OUTPERFORM, TP HK$18.80) East Money Information Co Ltd (300059.SZ, Rmb13.12, OUTPERFORM [V], TP Rmb18.75) Glodon Software Co Ltd (002410.SZ, Rmb24.60, UNDERPERFORM, TP Rmb21.50) Google Inc (GOOG.OQ) Hundsun Technologies Inc (600570.SS, Rmb14.02, OUTPERFORM, TP Rmb17.00) Kingdee International (0268.HK) Kingsoft Co Ltd (3888.HK) Mesnac Co Ltd (002073.SZ, Rmb10.78, OUTPERFORM, TP Rmb13.00) Microsoft Corporation (MSFT.OQ) Oracle Corporation (ORCL.OQ, HK$27.02) Renren Inc. (RENN.N, $4.59, NEUTRAL [V], TP $4.80) Salesforce.com, Inc. (CRM.N) SAP AG (ADR) (SAP.N) Shanda Game (GAME.OQ, $4.16) Sina Corporation (SINA.OQ, $52.40, OUTPERFORM [V], TP $76.00) Sohu.com (SOHU.OQ, $44.63, OUTPERFORM [V], TP $65.00) YGSoft Inc. (002063.SZ, Rmb13.61, NEUTRAL [V], TP Rmb14.50) Yonyou Software (600588.SS, Rmb15.09, OUTPERFORM, TP Rmb21.00)

Disclosure Appendix Important Global Disclosures The persons primarily responsible for this research report certify that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies and securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for 600570.SS 600570.SS Closing

Price Target

Price

Initiation/ Date (Rmb) (Rmb) Rating Assumption 15-Nov-11 14.18 18.3 O X 29-May-12 14.35 17

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O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

15 June 2012


3-Year Price, Target Price and Rating Change History Chart for 600588.SS 600588.SS Closing

Price Target

Price

Initiation/ Date (Rmb) (Rmb) Rating Assumption 18-Mar-11 17.5 15.833 U X 1-Apr-11 16.758 14.833 29-Aug-11 20.242 16.083 1-Nov-11 17.2 16.667 4-Jan-12 14.083 20.5 O 13-Mar-12 16.817 20.833

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O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

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*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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15 June 2012


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See the Companies Mentioned section for full company names. Price Target: (12 months) for (600570.SS) Method: Our target price of Rmb17.00 is derived by 0.8x FY13-14E P/E/G, or 32x FY12E P/E, based on our FY12E EPS of Rmb0.53. Our target valuation is 25% lower than the traditional 1.0x P/E/G for technology companies to reflect the company's exposure to the volatile Chinese securities market and the instability of its earnings growth. Risks: Risks to our target price include A-share market performance risk (both upside and downside), policy risk (both upside and downside), competition risk, corporate strategy risk and valuation risk. Price Target: (12 months) for (600588.SS) Method: Our target price of Rmb21.00 for Yonyou Software is based on 0.75x FY13-14E P/E/G, or 30.0x FY12E P/E Risks: Risks to our target price of Rmb21.00 for Yonyou Software include ERP market risk (both upside and downside), strategy and execution risk, wage inflation risk and integration risk. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names. As of the end of the preceding month, Credit Suisse beneficially owned 1% or more of a class of common equity securities of (600588.SS). This holding is calculated according to U.S. regulatory requirements which are based on Section 13(d) of the Securities and Exchange Act of 1934. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (600570.SS, 600588.SS) within the past 12 months.

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Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan-based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. The non-U.S. persons, Vincent Chan & Archibald Pei are not registered/qualified as research analysts with FINRA. They are not associated persons of CSSU and therefore are not subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Founder Securities Limited is a joint venture established in the People's Republic of China between Credit Suisse AG and Founder Securities Co., Ltd. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

15 June 2012 Asia Pacific / China

Equity Research

TC1679.doc

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