(Report Producer/Analyst: Guojin Securities, Meng Can, Chen Yijiao)
1. Company fundamental analysis - from ERP to intelligent manufacturing, 360° enterprise digital solution provider
1.1 Company positioning: the leader of intelligent manufacturing in the discrete track, and the innovation star of ERP information technology of state-owned enterprises
The company has been deeply engaged in the field of pan-ERP + intelligent manufacturing MOM for many years, and has accumulated rich business lines and customers.
Since its establishment, the company's development can be divided into three stages:
1.0 stage (2005-2009): The company was born out of the IT department of the United States, established in 2005, before 2009, the company mainly provides ERP and supply chain system construction implementation and development services.
2.0 stage (2010-2013): Since 2009, the company is not satisfied with only using ERP system to help improve its own internal management, and began to focus on the integration of internal resources to the expansion of external resource management, and a number of enterprise management software products with independent intellectual property rights to the market.
Stage 3.0 (2014-2021): The company continued to expand its business lines, improve its self-research capabilities, and was officially listed on the Shenzhen Stock Exchange in August 2017.
The company has formed products and solutions for 23 key industries and 11 business lines such as communications, electronics, home appliances and home furnishings, has more than 6,000 senior employees, and has accumulated more than 1,000 high-quality enterprise customers, including leading enterprises in the industry such as Huawei Group, Midea Group, Robam Appliances, Vipshop, Opai Home, and CVTE Electronics.
Phase 4.0 (2022-present): The company has maintained a long-term and good cooperative relationship with Huawei, and is an in-depth partner of Huawei and a partner of HUAWEI CLOUD. In 23, the company signed a cooperation agreement with HUAWEI CLOUD on the Pangu large model, and will continue to explore intelligent generation, intelligent quality inspection, and intelligent supply chain management in the future, so as to jointly promote the intelligent development of the manufacturing industry.
In addition, the company established the central state-owned enterprise division at the end of 21, and has obtained customers such as XCMG Group and China Construction Fourth Bureau, and has made breakthroughs in the digitalization and intelligent manufacturing of central state-owned enterprises. In 2023, the company will also acquire Sinobo, which is mainly aimed at large central enterprises and group enterprises, to help expand the northern market and enter the state-owned enterprise customers.
1.2 Main business: pan-ERP and intelligent manufacturing two-wheel drive, 360° coverage of enterprise digital solutions
The company's full-stack products and services help enterprises grow their business. The company's current main products and services are divided into two major sectors:
Pan-ERP: It covers user-oriented front-end applications (business operation middle platform) and back-end applications for enterprise internal management (core ERP). The application fields of the business operation middle platform include supply chain procurement middle platform, business and finance digital middle platform, marketing and channel middle platform, etc., to help enterprises achieve the digital transformation goals of online business, data-based operation, and intelligent decision-making. The core ERP system is positioned as a digital core system to meet the internal management needs of enterprises, and the company's solutions based on mature ERP software such as SAP and Oracle cover the core and stable business management needs of enterprise business, ERP (enterprise resource planning), and related HCM (human resource management) such as organizational personnel and payroll and other traditional modules.
Intelligent Manufacturing: Focusing on the S-MOM manufacturing and operation product family, with the smart factory as the framework blueprint, it is mainly for customers in discrete industries, especially consumer electronics, automotive electronics, communication equipment and components and equipment manufacturing, and independently designs and develops a set of industrial software product groups, including a full and complete set of sub-products from the supply chain end, to material flow, planning and scheduling, manufacturing execution, quality control, warehouse management, equipment management, working condition data collection and other omnidirectional and complete sub-products.
The core ERP and intelligent manufacturing are closely synergistic, and the business supports each other obviously. Digital systems at the planning level and real-time collaboration at the execution level enable manufacturing companies to leverage their combined capabilities to transform traditional factories into truly smart factories. Taking its subsidiary Jingtong Technology as an example, due to meeting the customer's requirements for suppliers' full-stack comprehensive capabilities, more than 15% of its annual contract orders were core ERP + intelligent manufacturing product portfolio projects, which were jointly implemented by multiple back-end delivery units.
1.3 Financial analysis: the growth momentum of intelligent manufacturing is strong, and pan-ERP continues to grow steadily
The performance was under pressure in the short term, and the growth rate of revenue and net profit attributable to the parent company declined. On the revenue side, the company will achieve operating income of 2.271 billion yuan in 2022, a year-on-year increase of 17.4%, and in the first three quarters of 2023, it will achieve operating income of 1.682 billion yuan, a year-on-year increase of 1.0%, and the operating income CAGR in 2017~2022 will reach 26.2%.
On the profit side, the company will achieve a net profit attributable to the parent of 249 million yuan in 2022, a year-on-year increase of 11.1%, a CAGR of 19.8% in 2017~2022, and a net profit attributable to the parent of 128 million yuan in the first three quarters of 2023, a year-on-year decrease of 15.9%.
The proportion of the intelligent manufacturing sector continues to expand, and the pan-ERP sector develops steadily.
In terms of products, the company's intelligent manufacturing sector business development maintained a good growth rate throughout the year, with a year-on-year increase of 35.7% in operating income in 2022, accounting for 35.7% in 17-22 years, and a compound growth rate of 61.6% in 5 years.
The proportion of intelligent manufacturing business increased rapidly, from 10.4% to 35.7% in 17-22 years, and correspondingly, the proportion of pan-ERP business decreased from 84.1% to 54.6%.
The increase in the proportion of intelligent manufacturing will improve the gross profit structure and drive profit growth.
In 2022, the company's consolidated gross profit margin reached 35.7%. In terms of products, the gross profit margin of pan-ERP services reached 32.7%, and the gross profit margin of intelligent manufacturing services reached 43.2%, thanks to the continuous improvement of product modularity, the standardization of industry suites, and the continuous optimization of related prototype implementation methodologies, the gross profit margin of the intelligent manufacturing sector has steadily increased, and the profitability contribution ability of the company's main business is gradually reflected. In 2019, the business of some EPP customers was dragged down by the fluctuation of Sino-US relations, resulting in fluctuations in the price level of some orders, resulting in large fluctuations in the gross profit margin of the pan-ERP business in 2019.
The sales and research rate rebounded slightly, and the human efficiency index was stable for a long time.
In 2022, the company's R&D fee rate will reach 11.8%, a year-on-year increase of 1.5pcts, the sales rate will reach 6.6%, a year-on-year increase of 1.3pcts, and the management fee rate will reach 6.0%, a year-on-year decrease of 0.7pct. In the first three quarters of 2023, selling, R&D and management fees all increased slightly compared with the whole year of 22. In 2022, the company's per capita revenue will reach 322,000 yuan, a year-on-year increase of 2.5%, and the per capita profit will be 35,000 yuan, a year-on-year decrease of 2.7%, and the overall human efficiency index will remain stable.
The company has abundant orders in hand. On the market operation side, the company actively implements the regional expansion strategy, actively lays out economically active regions such as Wuhan, Xiamen and Chongqing, builds a regional local sales team to expand the sales coverage covering Central China, Southeast China and Southwest China, and continuously obtains intelligent manufacturing orders from leading customers in the industry in the fields of semiconductor packaging and testing and medical devices, and has made a breakthrough, and the scale of order signing has been improved compared with previous years. In 2022, the company signed new orders of about 3 billion yuan, a year-on-year increase of about 18%.
1.4 Equity analysis: The equity structure is stable, and the equity incentive binds high-quality talents
The company's shareholding structure is relatively stable, and the main shareholders have maintained good cooperative relations for a long time. Zhang Chengkang, Liu Weichao, Liu Guohua, Ouyang Xiangying and Cao Jinqiao have always ranked first among the shareholders of the company in terms of the proportion of shares held by the company, and the five people are acting in concert with each other. As of the third quarter of 2023, the five people together hold 30.7% of the company's equity, and Midea Investment holds 5.43% of the company's equity.
Four equity incentives are bound to the backbone team. The company has a total of four equity incentives before and after listing, covering a large number of talents:
In July 2018, the first phase of the employee stock ownership plan was implemented, covering 340 people.
In November 2020, the second phase of the employee stock ownership plan was implemented, covering 156 people.
In July 2021, the equity incentive with the partnership Hangzhou Yuancheng as the shareholding platform was implemented, covering 64 people.
In January 2022, the stock option incentive plan was implemented, covering 171 people.
The increase in holdings and share repurchase of core executives demonstrate the company's confidence and value recognition for future development. Liu Ziheng, secretary of the board of directors and deputy general manager of the company, increased his holdings of shares by a total of 3.4557 million yuan from May 11, 2023 to September 5, 2023, accounting for about 0.03% of the company's total share capital after deducting the number of repurchased shares.
On December 18, 2023, the company will use its own funds to repurchase the company's shares in a centralized bidding transaction, with a total amount of repurchased shares of not less than 20 million yuan and no more than 40 million yuan, and the repurchase price will not exceed 37.14 yuan per share, accounting for about 0.13~0.27% of the total share capital, and the repurchased shares will be used for equity incentives or employee stock ownership plans.
2. Industry Beta Analysis - Enterprise digitalization accelerates, and industry information innovation is in progress
2.1 Industrial chain combing: the company spans two major tracks of production control and information management
Generalized industrial software covers four categories, and the company spans two major tracks of production control and information management. According to the different product forms, uses and characteristics, the industrial software market can be subdivided into R&D and design software, production control software, information management software and embedded software. Among them, the company spans the MES and ERP tracks, and belongs to the production control and information management categories, and the two-wheel drive empowers the company's growth.
The ERP industry chain is complete and the downstream applications are widespread. The upstream of the ERP industry chain includes the manufacturing of hardware equipment and the development of general software, among which software development mainly includes operating systems, databases, middleware and development tools, etc., and hardware equipment is mainly servers and storage systems. The middle stream of the ERP industry chain is the ERP software system, which includes three major links: consulting, implementation, and operation and maintenance. The downstream of the ERP software industry chain covers many industries, mainly industrial manufacturing, but also involves high-tech, energy resources, construction real estate, food retail and other fields.
2.2 ERP track - there is still a lot of room for improvement in the localization rate of mid-to-high-end ERP
2.2.1 The domestic ERP market is expected to reach nearly 100 billion yuan in 2025 and 62.06 billion yuan in 2022
The scale of the mainland ERP market will reach 62.06 billion yuan in 2022, and it may accelerate growth in the future. According to relevant data from iResearch, the mainland ERP market will reach 62.06 billion yuan in 2022 and may reach 69.51 billion yuan in 2023.
Combined with the data of the World Bank, China's GDP in 2021 is equivalent to 76% of the United States, combined with the statistics of Grand View Research on the size of the ERP market in the United States, the size of China's ERP market in 2021 is only equivalent to 54% of the ERP market in the United States, and the market size is expected to accelerate from 2024 onwards.
2.2.2 There is still a lot of room for improvement in the high-end market share of ERP
Various departments of the state have issued a series of policies closely related to domestic independent and controllable, industry information and innovation substitution, etc., which have effectively stimulated the demand for ERP substitution in downstream industries. The State-owned Assets Supervision and Administration Commission (SASAC) issued the "Notice on Carrying out Value Creation Actions for Benchmarking World-class Enterprises", which comprehensively guided and required state-owned enterprises to implement the localization transformation of information innovation in the information system and accelerate the layout of ERP in state-owned enterprises.
The localization rate of ERP is 78%, but the localization rate of mid-to-high-end ERP is only 25%. According to the "2021 China Industrial Software Development White Paper", in 2021, the market share of domestic ERP software in mainland China will be as high as 78% (40% of UFIDA, 20% of Inspur, and 18% of Kingdee), but the market share of mid-to-high-end ERP software is only 25%, and the products of domestic ERP manufacturers mainly occupy the small and medium-sized enterprise market, while the high-end ERP software of large and medium-sized enterprises is still dominated by foreign manufacturers.
There is still a big gap between domestic high-end ERP technology and products compared with overseas leading manufacturers. Domestic ERP software has developed rapidly in recent years and has occupied a huge share of the domestic ERP market (78%), but compared with overseas leading manufacturers, domestic ERP manufacturers started late.
Huawei's self-developed ERP accelerates the process of domestic ERP substitution, and relevant partner manufacturers are expected to benefit. On April 20, 2023, Huawei announced that its self-developed MetaERP full-stack software is self-developed and controllable, which is based on Huawei's Euler operating system and GaussDB, and uses advanced technologies such as cloud-native architecture, metadata multi-group architecture, and real-time intelligence technology, covering 100% of Huawei's business scenarios and 80% of its business volume. MetaERP is expected to narrow the gap between domestic manufacturers and foreign manufacturers, help domestic manufacturers enter the high-end ERP market, and release a certain market capacity.
In addition, Huawei has collaborated with many partners to develop MetaERP, and the successful implementation of MetaERP is expected to benefit both partners in the upstream, midstream and downstream of the industrial chain.
2.3 MES track - low product penetration, large space for domestic substitution
2.3.1 MES - production information management system at the executive level of the workshop of manufacturing enterprises
Manufacturing Execution System (MES): Manufacturing Execution System (MES) is a set of production information management system for the execution layer of the workshop of manufacturing enterprises.
MOM (Manufacturing Operation Management): Manufacturing operation management system, MOM not only includes MES software system and various functions related to manufacturing management, but also includes functional extension and value-added part used to solve specific problems outside the main body of MES.
MOM is improved and expanded on the basis of MES, which is the evolution of MOM. MOM is a comprehensive production operation management platform system that is further developed in the fields of factory planning, product quality, production logistics and production data analysis on the basis of MES. Compared with MES, MOM covers more complete fields in the form of a platform, covering the whole manufacturing process such as product design, manufacturing simulation, and big data analysis. And the scope of MES support is wider and the coverage is wider.
2.3.2 The domestic MES market size reached 4.62 billion yuan, and there is a lot of room for improvement in the penetration rate of most industries
The global MES market size is likely to be 142 billion yuan. According to Huajing Industry Research Institute, the global MES market size may reach 142 billion yuan in 2022, a year-on-year increase of 15.2%, and a CAGR of 15.5% in 2017~2022. According to IDC, the size of the mainland MES market will reach 4.62 billion yuan in 2022. The overall penetration rate of MES in mainland China is low.
According to Huajing Industry Research Institute, in 2020, the penetration rate of tobacco, energy and chemical industry and furniture manufacturing in the domestic MES application industry is relatively high, exceeding 40%, while other fields are 30% and below, of which equipment manufacturing, electrical machinery and equipment, textiles and clothing are all less than 10%.
2.3.3 The localization rate of MES is about 21%, and there is a large space for domestic substitution
The localization rate of MES is about 21%. According to IDC, the top 7 MES market shares in mainland China in 2022 are Siemens, Baoxin Software, SAP, Black Lake Technology, Xinhe Cloud, Hand Information and SIE Information. Local manufacturers account for five seats, with a total market share of 21%, and there is a large space for domestic substitution.
3. The company's alpha growth logic - two-wheel drive step by step, endogenous extension and show results
3.1 Endogenous: Expand the product range and extend the ability range, and pay attention to R&D investment and high technical barriers
The company continues to develop from ERP to pan-ERP, from MES to MOM, and its business development is synergistic.
The company's development first practiced internal skills, and expanded the pace in an orderly manner.
The company started from the agency of foreign ERP software, and in 2005, it began to enter the domestic ERP market with Oracle's product agent as the entry point, and then gradually expanded to other pan-ERP products after developing to a leading position.
After 2011, the company provided core ERP business for the market based on SAP, Oracle and other mature set of ERP software, and provided enterprises with software with functions such as procurement management, financial management, customer relationship management, and supplier portal.
In addition, we will expand our own digital middle platform products, and maximize the value of data by building a data middle platform and data asset system to meet the needs of enterprise business and financial integration. Its pan-ERP business, which is composed of core ERP products and digital middle platform products, includes a series of information and digital platforms and tools that help enterprise managers manage business processes, optimize business operations, and improve work efficiency.
Starting from MES, the company has developed a mature and professional intelligent manufacturing comprehensive suite MOM.
In 2012, the company began to provide intelligent manufacturing products with S-MES as the core to the market, and expanded into a set of highly professional, mature and integrated intelligent manufacturing software suite SMOM in 2018 through continuous independent research and development and upgrading, including SMDC (manufacturing digital interconnection platform), SMI (manufacturing intelligent platform), SMDC (equipment digital operation platform), SQMS (quality management system) and other industrial management software products. Integration of manufacturing operations with multi-level management of the IoT layer, manufacturing execution layer and digital decision-making layer. The solution is dominated by the idea of real-time collaboration, with dynamic scheduling as the core, equipment and IoT as the means of real-time implementation, and based on the closed-loop management of the whole manufacturing process, to achieve the factory construction goals of transparent manufacturing process, visualization of manufacturing data, and controllable manufacturing quality.
At the same time of business development, we pay attention to our own innovation and research and development.
The establishment of SIE Research Institute to plan the development path and enhance the competitiveness of technology. In 21 years, the establishment of SIE Innovation Research Institute, the establishment of the company-level research institute and the formation of related professional consulting teams will help the customers served by the company in cloud computing, Internet, In the environment of massive data, it reasonably plans the path of its information system to internal and external integration, and assists its application system to evolve from a system-supported business to a business-driven system, which will also enable the company to further form a revenue growth pole to provide customers with forward-looking planning and analysis services, and further enhance the company's core technology competitiveness and maintain a relatively leading position in the industry.
R&D investment continues to grow rapidly, focusing on R&D team construction and maintenance of R&D results. The company focuses on SMOM platform and self-developed ERP research and development. Continuous R&D investment drives the company to develop new product and service areas to ensure that it maintains market competitiveness and technological leadership. The company has been focusing on the construction of the R&D team, and has continuously expanded the company's R&D team while continuously increasing R&D investment, with the total number of personnel growing steadily and the structure continuously optimized.
At present, the company has 13 invention patents, 296 software copyrights, rich R&D achievements, and R&D products have won many awards, such as "SIE-MES Manufacturing Execution Management Software" was recognized as a high-tech product in Guangdong Province in 2014. Based on the accumulation of industrial knowledge in the past ten years, the company continues to innovate products and solutions to maintain a relatively leading position in the industry.
The proportion of the company's R&D expenditure to revenue ranks among the upper middle level of its peers. The company's R&D expenditure to revenue ratio in 2020/2021/2022 is 12.1%/15.3%/17.5% respectively, which is higher than that of most domestic peers.
3.2 Extension: The capability boundary has been continuously expanded through many successful investment and M&A cases
Investment, mergers and acquisitions, and improve business layout. From June 2018 to September 2019, the company acquired the entire equity of Jingtong Technology, quickly obtained the consulting service delivery capability in the SAP digital core business field, and carried out in-depth application research in the field of SAP digital innovation, especially in the field of intelligent manufacturing industrial cloud, to obtain new business driving capabilities.
In December 2019, the acquisition of 19% equity of Xinguang Intelligent strengthened the company's vertical competitiveness in the field of intelligent manufacturing and further expanded the company's customer resource coverage.
From December 2020 to June 2022, the company acquired the entire equity of Gideon Technology, which further strengthened the company's strength in the field of middle-end software products, and consolidated the company's self-developed product foundation in the field of pan-ERP, especially in the field of financial digitalization such as industry-finance integration, management accounting, budgeting and consolidation.
In August 2022, it acquired a 51% stake in EMC, increased innovation and development in the field of industrial software, and accelerated the company's ability to build full-stack independent product advantages from ERP to intelligent manufacturing in the PCB industry in line with the national strategic direction.
The acquisition of 100% equity of Sinobo in September 2023 is expected to accelerate the business development of the company's self-developed products, strengthen the channel layout in the north and the breakthrough efforts of state-owned enterprises.
3.3 Pan-ERP + intelligent manufacturing, 360° enterprise information solution coverage has significant advantages
3.3.1 Macro perspective: The demand for digital transformation urgently needs to improve the programmatic capacity on the supply side
The digital transformation of enterprises involves the whole business chain of production and operation, and the programmatic characteristics are obvious. Enterprise digital transformation refers to the process in which enterprises use a new generation of digital technology to open up the entire business process of production and operation, form data assets, feedback effective information, and empower production and operation decisions, so as to achieve the purpose of reducing costs, increasing efficiency and improving quality.
Based on the above background, on the demand side, large downstream customers represented by group companies often expect manufacturers to provide a complete range of digital transformation solutions to avoid the problems of difficult integration of data processes and complex operation and maintenance service management caused by separate procurement;
3.3.2 Micro perspective: The company takes the core ERP as the fulcrum to build a 360° programmatic capability from contract to delivery
The company uses the core ERP system as the fulcrum to expand the application and build a 360° enterprise information solution. There is a close synergistic relationship between core ERP and intelligent manufacturing, and the enterprise strategy or business plan needs to be implemented and integrated from the enterprise to the factory, to the workshop, to the production line and equipment unit level. Pan-ERP business is managed from the perspective of typical enterprise strategy and operation, while intelligent manufacturing business is the real-time concept of the production process; pan-ERP is biased towards planning and co-ordination, and industrial management and control software is biased towards production execution, the former realizes strategy formulation, and the latter is responsible for operation.
For example, in an ERP environment, business units develop master production plans based on sales forecasts or sales orders, as well as material and labor costing based on the materials required for the activity, and communicate them to the factory, while manufacturing units elevate them to another level of detail by defining and managing detailed production routes, mapping physical resources to ERP cost centers, and tracking the reality of each operation performed. Digital systems at the planning level and real-time collaboration at the execution level enable manufacturing companies to leverage combined capabilities to transform traditional factories into truly smart factories.
Taking the PCB printed circuit board industry solution disclosed on the company's official website as an example, through EAP automation and MES manufacturing informatization, it helps PCB enterprises realize the "four modernizations" of intelligent manufacturing, namely process digitalization, manufacturing informatization, process automation and equipment integration.
3.4 Expand the industry territory, bind benchmark customers, optimize the customer group structure, and reduce revenue risks
The company continues to expand the industry territory, and cooperates with customers with high quality and reliability. The company's core senior management team all have a Midea background, and the identity of ERP implementers of early overseas manufacturers is abundant.
Before its listing in 2016, the company mainly covered industries including equipment manufacturing, electronic assembly, consumer services, steel and petrochemicals, and its benchmark customers included Huawei, Midea, Panasonic and other well-known enterprises at home and abroad;In 2017, the company opened up the track of customized home furnishing and semiconductor PCB industry, and added new major customers including Robam Appliances, Oppai Home Furnishing and Shiyuan Electronics;In 2017~2020, SIE acquired Gideon Information to strengthen its financial information service capabilities, and added new coverage of automobiles and parts, Internet, medical, In the financial sector, new major customers include Nissan, SAIC Volkswagen, Beijing Benz, Didi, Baiyunshan, Chinese Life, etc., and the industry territory has steadily expanded.
The customer concentration has been steadily reduced, and the customer group structure has developed healthily. In recent years, on the one hand, SIE has continued to expand the industry track, set up model solutions for leading enterprises in the service field, and on the other hand, it has continued to expand the number of small and medium-sized customers to gradually reduce the risk of excessive customer concentration. In 2014, the total sales of SIE's top five customers accounted for 80.3% of the year's revenue, and in 2021, it has been significantly reduced to 46.0%, and the customer group structure continues to develop healthily.
4. Near-term marginal catalysis - three positive resonances, and the industry concentration is expected to continue to increase during the low boom period
4.1 Marginal Catalysis 1: Huawei officially announced that Meta ERP is independent and controllable, and its core partners are expected to expand its customer base
In 2019, in the face of the pressure of the external environment and its own business challenges, Huawei decided to replace the old ERP system and start developing its own and controllable Meta ERP system. On April 20, 2023, Huawei announced that it has developed its own and controllable Meta ERP and completed the replacement of its old ERP system. To recognize the teams and individuals who have made significant contributions to this project, Huawei held a Meta ERP Commendation Ceremony for "Heroes Crossing the Dadu River" at the Xiliubeipo Village Campus in Dongguan. On May 23, 2023, Huawei completed a large-scale switch of Meta ERP for 88 subsidiaries around the world in just 15 hours. The cutover starts at 9 a.m. on May 13 and is scheduled to be completed within 24 hours. At 0:00 on May 14, Huawei's Global Switchover Command Center announced that the Meta ERP switchover was successful in May, nine hours ahead of schedule.
Huawei's Meta ERP is fully controllable. Based on root technologies such as Huawei's Euler operating system and GaussDB, and working with many partners, Huawei Meta ERP adopts advanced technologies such as cloud-native architecture, metadata multi-lease architecture, and real-time intelligence technology, which can effectively improve business efficiency and operation quality. Huawei will continue to focus on the goals of "simplified architecture, high quality, low cost, and excellent experience", and work with partners to build autonomous, controllable, efficient, and secure enterprise core business systems in the fields of ERP and PLM.
Covering many regions and industries around the world. In 2023, Huawei's more than 200 subsidiaries around the world will switch to Meta ERP in two batches, and this is the first batch of large-scale switchovers, involving 5 regional departments in Asia Pacific, Europe, the Middle East and Central Asia, Southern Africa, and Latin America, 6 accounting sharing centers, and 75 countries, with a total of 88 subsidiaries, covering multiple industries such as ICT, HUAWEI CLOUD, and devices. In the future, Huawei's Meta ERP is expected to gradually replace the ERP systems of overseas manufacturers such as SAP and Oracle in the wave of information innovation substitution by central state-owned enterprises, and truly realize the full-stack domestic independent and controllable group ERP replacement.
In 2021, the company became a strategic partner of HUAWEI CLOUD. As the highest level of cooperation, HUAWEI CLOUD hopes to build a new ecosystem with a very small number of core partners based on a shared benefit distribution mechanism.
In 2023, the company was invited to attend the 2023 HUAWEI CLOUD Ecosystem Conference and was awarded the "HUAWEI CLOUD Excellent Cloud Solution Provider". Since becoming one of the first batch of HUAWEI CLOUD's leading solution partners in 2017, the company has closely followed HUAWEI CLOUD's strategy and developed synergistically, and was promoted to the first batch of HUAWEI CLOUD strategic partners in 2019. SO FAR, THE COMPANY HAS GATHERED 250+ ENTERPRISE USERS FOR HUAWEI CLOUD, HELPED 70+ LARGE ENTERPRISES INTEGRATE CORE BUSINESS SYSTEMS TO HUAWEI CLOUD, AND CONTINUOUSLY IMPLEMENTED HUAWEI ROMA &DAYU HIGH-END SERVICE SOLUTIONS.
As a core partner of Huawei Meta ERP, the company is expected to expand its customer base and enter the state-owned enterprises. Since 2023, the company has added the state-owned enterprise model, the industry corps model and the strategic customer system department model to the traditional regional model, further strengthening the allocation of program resources to the front-line theaters, so as to more agilely adapt to the demand for high-quality resources in different types of markets.
4.2 Marginal Catalysis 2: AI empowers the company's external business upgrades, and internal empowerment reduces costs and increases efficiency
AI empowers the company's external business upgrade. In July 2023, the company and HUAWEI CLOUD officially signed a cooperation agreement on the Pangu model. Based on the natural language model and visual model of the Pangu model, the company will work with HUAWEI CLOUD to jointly build the "Manufacturing Industry Model", which will provide "out-of-the-box" model services for manufacturing industry customers in subdivided scenarios such as AI automation of process engineering, AI quality inspection, and intelligent optimization of the supply chain.
AI empowers companies to reduce internal costs and increase efficiency:
In the short and medium term, the optimization of personnel, team and R&D efficiency will drive internal cost reduction. Companies will make full use of AI technology to create tools for scoring, screening, and communication with candidates.
We believe that in 2022, the company's average salary will be about 217,000 yuan, and the total number of employees will be 7,047, and if the personnel efficiency is increased by 15% in the context of AI empowerment (corresponding to 13% manpower release), it is expected to release about 200 million yuan in labor costs. In terms of improving R&D efficiency, the cooperation with Huawei Pangu may bring continuous improvement in internal efficiency.
In the long run, the ERP implementation cycle is shortened and the human efficiency is improved. AI is expected to optimize the discussion and interview of the customer's natural language communication during the ERP implementation planning process. If AIGC is embedded in the ERP implementation plan, it is expected to shorten the project implementation cycle, improve the project turnover rate of the implementation team, and then increase the per capita output.
4.3 Marginal catalysis 3: The market may gradually clear out in the context of low prosperity in the industry, driving the improvement of the competitive landscape
The company's MES market share ranks first in many domestic market segments. According to IDC statistics, in 2022, the company will have a market share of 15.6% in the high-tech electronics and computer communication MES market in mainland China, ranking first in the country, a market share of 16.7% in the MES solution market for home appliances in the mainland, a market share of 10.6% in the new energy MES solution market in the mainland, ranking second in the country, and a market share of 1.2% in the MES solution for food, beverage and tobacco in the mainland, ranking fifth in the country. In June 2023, the company was successfully shortlisted for the recommended list of MES vendors in the Asia-Pacific region released by IDC.
In the low prosperity environment of the industry, the market is cleared or the pattern is improved. According to IDC statistics, the company's market share in the MES industry in mainland China will be about 2.4% in 2022, and the MES industry is highly fragmented. After three years of the huge impact of the epidemic on the economy, the market has cleared or driven the improvement of the pattern in the low prosperity environment of the industry.
5. Earnings forecasts and valuations
5.1 Core Assumptions
1) In terms of business income:
(1) Software implementation and development services are the company's basic business, which is divided into ERP and intelligent manufacturing. In September 2023, the company acquired 100% of the equity of Sinob, and in recent years, it has successively acquired Jingtong Technology, Xinguang Intelligence, Gideon Technology, Yimeike and other targets, and after the integration of mergers and acquisitions, it is expected to achieve the effect of increasing revenue and profits for the long-term development of the company's ERP and intelligent manufacturing business. Among them, Sinobo achieved revenue of 50 million yuan and net profit of -16 million yuan from January to May 23, and revenue of 136 million yuan and net profit of 24 million yuan in 2022.
ERP business covers user-facing applications as front-end applications (business operation middle platform), and enterprise-oriented applications for internal management as back-end applications (core ERP). The increase in industry concentration brought about by the reduction of core ERP industry participants, as well as the continuous optimization of operational capabilities by the management team, are expected to maintain a medium-high level of performance. It is estimated that the revenue growth rate of ERP business in 2023~2025 will be 5.0%/20.0%/20.0% respectively, and the gross profit margin will be 31.0%/32.0%/32.0% respectively.
Thanks to the continuous improvement of product modularity, the standardization of industry kits, and the continuous optimization of related prototype implementation methodologies, the intelligent manufacturing business is expected to steadily increase the gross profit margin of the intelligent manufacturing segment, and the ability to contribute to the profitability of the company's main business is gradually reflected. It is estimated that in 2023~2025, the revenue growth rate of intelligent manufacturing business will be 15.0%/38.0%/28.0% respectively, and the gross profit margin will be 43.0%/43.5%/43.5% respectively. It is estimated that the revenue growth rate of software implementation and development services in 2023~2025 will be 9.0%/27.5%/23.6% respectively, and the gross profit margin will be 36.0%/37.2%/37.4% respectively.
(2) Software maintenance service refers to the professional maintenance service of ERP and intelligent manufacturing related products after deployment, including user support, system support and other services. This business is not the company's main business, and the revenue contribution is small. It is estimated that in 2023~2025, the revenue growth rate of software maintenance service business will be 25.0%/30.0%/20.0% respectively, and the gross profit margin will be 43.0%/43.5%/43.5% respectively.
(3) Software and hardware sales are derivative businesses of the company in the process of providing the above products and services, and the company sells other original basic software or hardware related supporting sales business to customers based on the customer's own wishes and combined with the customer's business characteristics. It is expected that the revenue growth rate of software and hardware sales business in 2023~2025 will be 5.0%/3.0%/3.0% respectively, and the gross profit margin will be 9.0%/9.0%/9.0% respectively.
2) Sales/management/R&D expenses:
The company's sales/administrative/R&D expenses are mainly composed of employee compensation, so the related expenses are correlated with the growth rate of the number of employees. In order to strengthen business development, the company still has a certain investment demand for sales and marketing personnel, which may drive a slight increase in sales expenses in the short term, and the scale effect of technology R&D and business management is expected to gradually and slightly improve the R&D/management rate. It is estimated that the sales expense ratio in 2023~2025 will be 7.1%/7.0%/7.2%, the management expense rate will be 6.2%/6.1%/6.0%, and the R&D expense rate will be 11.7%/11.3%/11.3% respectively.
5.2 Profit Forecast
We estimate that the company's operating income in 2023~2025 will be 24.9/31.4/3.85 billion yuan, the net profit attributable to the parent company will be 2.75/3.48/434 million yuan, and the EPS will be 0.67/0.85/1.06 yuan respectively.
5.3 Valuation
We use the price-earnings ratio method to value the company, select Hand Information, Dingjie Software, and ZKTeco, which are deeply engaged in production control industrial software, as comparable companies, and give the company a PE valuation of 35 times in 2024 according to the average PE of comparable companies, with a target price of 29.67 yuan per share.
6. Risk Warning
Fluctuation risk in IT spending by core customers
In 2022, the company's revenue from the top five customers accounted for 46.9% of the total revenue, and the revenue came from the IT expenditure of core customers.
The risk of increased competition in the industry
There are many players in the ERP and MES fields where the company is located, and the main competitors are demanding market development or squeezing the normal gross profit level of the business, and if the industry competition intensifies, it may have an impact on the company's operating quality.
The risk that the convertible bond conversion price is higher than the market price and cannot be converted into equity
The company issued convertible bonds in September 2020 to raise funds of 320 million yuan, the conversion price is 22.58 yuan, and the convertible period is from March 22, 2021 to September 15, 2026.
——————————————————
The report belongs to the original author, only for Xi! If there is any infringement, please delete it privately, thank you!