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Date: 12/10/2018 1.00 CNY:1.20 HKD Kingdee International Group Company Limited Ticker: 0268.HK Sector: Software and Service Industry: Utility Software-ERP Stock Exchange: HKEx

Current Price: 8.95 HKD (21/9/2018) Target Price: 8.99 HKD (0.45% upside) Recommendation: HOLD Summary Kingdee International Software Group Company Limited is the leading provider of enterprise management software and services in China. Kingdee is mainly composed of 5 affiliated companies, (Appx.2) and its main business is concentrated in China. Revenue of the company mainly comes from two parts: one is the software license sales and subsequent implementation, maintenance fee of the traditional ERP business, and the other is the annual fee of cloud service business. Highlights We issue a HOLD rating on Kingdee with a target price of 8.99 HKD after 12months, representing 0.45% upside from its September 21st, 2018 closing price of 8.95 HKD. Our valuation is based on a 50/50 mix of relative valuation and absolute valuation methods. We give our recommendation Source: Company Data & Team Analysis based on the following key points: Revenue Divided by Areas Changes in Market Environment Will Erode the Competitiveness of Kingdee's Main Products (EAS) Cloud service products gradually penetrate in the high-end ERP market. EAS contributed 45% of total revenue in 2017. The high sales growth rate of EAS will remain in the short term but will gradually decrease with the continuous improvement of SaaS products and policy-oriented growth. Although the Cloud Business Is Growing at a High Speed, It Faces Increased Competition. CR5 only represents 45% in cloud ERP market. Kingdee’s R&D investment has no superiority over its competitors, making its leading position unstable. Especially the development of high-end cloud ERP market is the key to determine the final competitive landscape of the industry. Second-Generation Cloud Product Is Difficult to Have Explosive Growth in the Short Term. High- end cloud ERP products are relatively leading, but the product functions can’t completely replace traditional ERP products. Referring to SAP’s similar product development history, second- Source: Company Data generation cloud products can’t raise explosively in 2018 and 2019. Valuation Cloud Products Can’t Gain Profit in the Short Term, Traditional ERP Business’s Growth Rate Is FCFF Target Price (50%) 8.01 HKD Stable. We predict that the cloud service business can’t turn losses into profits until 2021. The Multiples Target Price (50%) 9.97 HKD growth rate of ERP business will decrease moderately in next few years from 2019. Investment in Facishare. Kingdee invested in Facishare strategically, but cloud products cooperated Target Price (12 months) 8.99 HKD by the two companies has not been produced. Current Price 8.95 HKD Investment Risks. It comprises market, finance, business and operational and other risks. We Target change 0.44% estimated possibility and influence of those risks separately presenting in risk matrix. Besides, we Source: Team Analysis use Monte Carlo simulations to characterize the possible effects of changes in the model’s key Key Financials 2017 2018F 2019F 2020F variables and perform sensitivity analysis. Revenue Growth 23.7% 24.2% 23.2% 24.9% Valuation method. We adopted two methods. One was to choose free cash flow of the Group to Net Profit (millions CNY) 310.0 340.3 379.7 545.9 calculate Discounted Cash Flow (DCF). Another was to adjust the value according to the market EBITDA Margin 33.84% 31.63% 27.34% 26.66% valuation multiples by relative valuation method P/E and P/S to value traditional ERP and cloud ERP EPS (CNY) 0.11 0.10 0.12 0.17 business respectively. We attributed the same weight (50%) to two methods above, and finally OCFPS 0.28 0.30 0.36 0.40 obtained a target price of 8.99 HKD. Source: Company Data & Team Analysis

Business Description

Figure 1: Revenue Structure 2017 Kingdee International Software Group Company Limited (0268.HK), established in 1993 and listed in in July 2005 (Stock Code: 0268), is China's leading provider of enterprise management software and cloud services. It commenced reforming and designed cloud business in 2011. Its current business is comprised of three portions: (1) ERP business including permission, implement and maintenance, virtually opens up the whole ERP industry chain, (2) cloud services and (3) new business. The rapid growth of cloud service, which is believed to be Kingdee’s future, mainly includes Kingdee Cloud (KDC), Jingdou Cloud (JDC) and Guanyi Cloud (GYC) (Figure1&Figure2). 1. ERP Business (ERP On-Premise/Traditional ERP) It provides enterprise users with management software license, and follow-up implementation and maintenance make up 75.3% of the revenues in 2017. The sales of EAS directly affect 62.3% of income in ERP business (18H1). Sales of Software License: mostly referred KIS, K/3, and EAS, sold by indirect and direct selling (Figure3). Source: Company Data KIS is an administration software designed for small and micro enterprises, containing 12 optional Figure 2: Business Structure modules, and unit price of each module is around 3750 CNY. KIS is merchandised by distribution, and the wholesale price of the distributor is 2255 CNY per module. Differently, K/3 is a kind of management software with eight modules, designed for the growing large and medium enterprises of which revenue is less than 50m CNY. And the price of each user mostly is between 0.2 to 0.5m CNY. K/3 is mainly sold by the distributors who purchase the bulk products with the wholesale price from the company which is 40% off from the retail price. EAS is designed to provide the comprehensive group management plan for the large group enterprises with more than 1.5b CNY annual revenue of which main fields focus on the finance shared service, digital marketing and smart manufacturing. EAS adopts direct selling mode. The Source: Company Data average sales price is around 1m CNY. Implementation: K/3 and EAS need the procedure of deployment. The distributors need six months Figure 3: Sales of Software to one year to deploy K/3, while EAS is deployed by the company by one to two years. The company License Model only gains income by selling the permissions from K/3. The EAS contributes most of revenue of deployment of software to the company due to the direct selling mode. Maintenance: K/3 and EAS need maintenance. They are maintained by distributors and Kingdee respectively. The customers of K/3 are charged for the fee of maintenance on the first year which is 5-10% of the price of permission. The major income from the maintenance of the company is contributed by the EAS. 2. Cloud Service Business. (SaaS Service/Cloud ERP) The cloud service is comprised by the KDC, JDC and GYC which will be introduced below. The charging mode has been converted to the mode that the customers are charged in advance by their accounts, service models and duration of usage. Cloud revenue accounts for 24.7% of the total. The Kingdee Cloud contributes 70% of cloud revenue. Moreover, the company announced Kingdee Cloud Cosmos (KDC II), the second-generation product of Kingdee Cloud, in August 2018. Source: Company Data Kingdee Cloud: The first generation of Kingdee Cloud named Kingdee Cloud Galaxy (KDC I) which Figure 4: The Distribution of KDC is benchmarked to K/3 converts the offline traditional ERP software to cloud service. The average annual fee is around 50-100k CNY which is completely attributed to the direct selling income of the company. The sales commission of the new customer in the first two years is 30% and 8% of the annual fee respectively, which becomes zero from the third year. (Figure 4&Appx.26) KDC II: KDC II benchmarking EAS provides SaaS and PaaS service to the large and medium enterprises of which unit price is 300-500k CNY annually. Jingdou Cloud: It is a one-stop cloud service platform designed for the cloud service of financial and accounting of the small and micro enterprises. The annual fee is 500 CNY. The renewal rate is more than 70%. Guanyi Cloud: It provides the whole process of digital marketing on SaaS ERP including order organization and warehouse management to the small and medium-sized e-commerce companies. Source: Company Data & Team Analysis The annual fee is 10k CNY. 3. Innovation Business Cargeer provides the "ERP+Cloud Service" solutions for the car dealers. Figure 5: Equity Structure Kingdee has released the first cloud-based supply chain financial product named as “Kingdee Credit Payment” to solve the financing issues of the small and macro-sized enterprises which are the downstream business of the core clients of the Kingdee. Kingdee Tianyan offers digital infrastructure solutions and operational service to the users. It has provided software infrastructure and services to more than 10k government and industry customers and 1k partners. Corporate Governance Equity Structure 100% of the shares of Kingdee International (KDI) are tradable shares. As of June 2018, Chairman Xu Shao Chun holds a 23.92% stake in Kingdee International by the wholly-owned Oriental Gold Limited, Billion Ocean Limited and individual shares. The remaining directors and senior executives Source: Wind held 0.22% of the company's shares. Also, an international investment giant FMR LLC and Kingdee's strategic partner Jingdong Group respectively holds 6.37% and 8.78% of Kingdee's shares respectively (Figure 5). Figure 6: China IT Expenditure Corporate Governance KDI's board of directors consists of 4 members, and the board has set up four specialized committees, namely the audit, remuneration, nomination, and corporate governance and strategy committee. Besides, three independent directors are hired to supervise the operation. The shares of the company are coequal. Directors may not vote on matters of significant interest alone. The company has set up a long-term share award scheme for directors and executives. It also disclosed the compensation policies and the benefits for the management team. (Appx.30)

Source: Wind & Team Analysis Company Management Mr. Xu Shao Chun, the chairman of the board of directors and chief executive officer, contributes Figure 7: 2017—2022China ERP to the stable and healthy development of the company by his long office term. The company has Market Share and Forecasting formed a cooperative cloud business development framework by optimization and adjustment strategy organization, which guarantees the healthy and sustainable development of business operations. To reduce the marketing risk of the new business, the Company has established a significant marketing review procedure. Company Strategy Adhering to the core values of "Acting in all Conscience, with Integrity and Righteousness", the company is committed to serving enterprises and strives to provide them with the most reliable Source: IDC Semiannual Public Cloud Services Tracker services platform. In addition to making relentless efforts to drive the development of the cloud business, the Group will persistently enhance the ecosystem of its enterprise cloud services. Social Responsibility Figure 8: China ERP Market-Scale KDI established the Kingdee Aid Foundation to support the improvement of primary education and announced that it would donate 0.1% of the revenue from Kingdee Cloud in the coming two years to help the charitable project “Teach for China”. KID established CFO for a Conscientious institution to advance the innovation and development of China's financial management. Industry Overview & Competitive Position Industry Overview

Source: IDC Semiannual Public Cloud Services Tracker ERP market can be divided into two sub-markets: traditional ERP software market and cloud ERP market. China's IT expenditure (Appx.18) has steadily increased (Figure 6), which increases the demands for ERP software and rebounds the market growth of ERP business in the short run. Figure 9: Market Size of China However, the growth rate will gradually slow down due to the competition from the cloud service Public Cloud SaaS business in the long term. The proportion of cloud service business in the entire ERP industry market will increase progressively with the maturity of the downstream technology, the gradual improvement of its products and policy support (Figure 7&Appx.19). 1. ERP Industry Market Size The growth rate of the market scale was 11.8% in 2017, and the CAGR of 11.5% is predicted in the next five years (Figure 8&Appx.17). Source: IDC Semiannual Public Cloud Services Tracker Cloud ERP: Cloud ERP market, whose market size increased by 76.5% in 2017[1]. The domestic public cloud SaaS market has maintained a growth rate of more than 30% in the past three years. According to the IDC report, the domestic SaaS market will reach 5.817b USD in 2022(Figure 9), and Figure 10: Proportion of ERP the CAGR will reach 26% in the next five years. The future of the market is very promising. (Appx.16) Market Share in 2017 Domestic On-Premise ERP Market Size On-Premise ERP industry growth rate has rebounded significantly since 2016 with the increase in the number of Chinese companies and the steady increase in IT investment, though not as fast as cloud service business, making the scale of On-Premise ERP industry increase steadily (Figure 8). It is expected that the On-Premise ERP market will reach 18.21b USD in 2022. 2. ERP Market Development Environment The competitive advantage of cloud ERP to the traditional ERP is not obvious in the short term due to the high cost of transfer from the traditional ERP to the cloud ERP. The cloud EPR, however, shows significant attraction to the new users. Both ERP markets have same demand side, Source: Wind enterprises, while the difference come from the upper stream. The software developers are the upper stream for the traditional ERP market. Besides the developers, cloud ERP requires cloud Figure 11: Growth Rate of computation developer and IaaS supplier as the upper stream. Chinese GDP Downstream (Demand Side): It is mainly divided into small and micro enterprise, SME and large enterprise (Figure 10&Appx.24). Due to the decelerated growth of Chinese economy (Figure 11) and continuously rising labor cost (Figure 12), the CAGR of labor cost of Chinese enterprises has reached 10% in the past five years, which increases the impulsion of enterprises to save cost and improve efficiency. [2] With the promotion of development and the "Made in China 2025", enterprise managers pay more attention to using IT technology including ERP products to improve management efficiency in recent years. (Appx.20) The five-year expenditure of cloud ERP products Source: National Bureau of Statistics is only 30% of that of traditional ERP, which makes it more competitive in the cost for companies. Figure 12: Cost of Chinese The promising market cap of ERP is analyzed as below. Human Resource  Owing to the Rapid Growth of SME and Lower Deployment Ratio of ERP Products in SMEs, Cloud ERP Products Have a Huge Market Space. China’s CAGR of companies in the last five years was over 20% (Figure 13), and there were more than 30m Chinese companies by the end of 2017. Small and micro enterprises accounted for about 82.5% of the total companies, while the proportion of SMEs was even nearly 97%. "Analysis Report on the Status and Development Trend of SME Information Industry in 2017" reports that only about 30% of SMEs in China have implemented ERP or CRM solutions. Source: National Bureau of Statistics Those cloud ERP products aimed at small and medium sized enterprises (SMEs) now have the similar functions as the traditional ERP products with years of development. Moreover, they are Figure 13: Number of Chinese Companies even cheaper and more flexible (Figure 14&Appx.20). Cloud ERP is more competitive in SMEs and rapidly developing new business sectors of large enterprises.  In the Short Term, Traditional ERP Will Still Dominate the Large Enterprises, But High-End Cloud ERP Market of Large-Scale Enterprise Contributes Excellent Potential. There are four difficulties to replace traditional ERP. (Appx.25) Firstly, the demands for management software in large enterprises are complicated and diversified. However, cloud services are mainly standardized products by now, which lack the customized development. The relatively fixed format of product makes it challenging to meet the diversified demands of large enterprises for ERP Source: State Administration for Market Regulation products. Secondly, nearly 90%[3] of large enterprises have implemented their own customized On- Figure 14: On-Premise vs. SaaS Premise ERP. Due to the relatively stable structure of these enterprises, the comprehensive migration from the traditional EPR to the cloud one in those enterprises is assumed to be costly. Thirdly, based on international development experience, large enterprises are more inclined to apply the SaaS services of hybrid cloud [4] since the hybrid cloud can meet the requirements for data security and cost savings of the enterprise. (Appendix) The usage rate of SaaS services of hybrid cloud in their Chinese counterparts, however, is only 7.2%.(Appx.22) Finally, SaaS products of the public cloud are still being developed, which fails to benchmark the whole functions of the traditional ERP. [5] However, the cloud service market of large enterprises is potential owing to the urgent desire of enterprises to reduce costs, continuous improvement of SaaS service products and the background of national policy support. Even facing to those challenges, we are still confident to the deployment Source: Wind & Team Analysis of SaaS service in the large enterprises due to the urgent demand to reduce operating expense, the fast development of the SaaS product and the policy bonus from the government. Upstream (Supply Side): Figure 15: R&D Investment of  Talent: The R&D investment of China's ERP industry continues to increase, which contributes TOP5 in ERP Industry to the sustainable accumulation of R&D teams. The TOP companies of the ERP industry have invested in R&D for more than 67b CNY in 2017 (Figure 15).  The Infrastructure of the Cloud Services Are Being Improved, and the Price of IaaS Products Keep Decreasing. The cost of SaaS service supplier has been reduced by the development of the underlaying IaaS technologies like auto Scaling, virtualization technology, distributed architecture and Multi-tenant and the cheap upstream product. By the first half of 2018, global IaaS market has been monopolized by , , , and Ali, which leads to the continuously decreasing price by the

Source: Wind & Team Analysis scale effect, [6] for instance, AWS has cut the prices by 65 times in the last ten years. (Appx.23). It reduces the cost of SaaS software vendors and improves their profit margin. Figure 16: CR5 Market Share 3. Policy Environment The government released “National Informatization Development Strategy Outline” in 2016 to promote the localization of the ERP software, and “Guidelines for Promoting Enterprise Cloud Implementation (2018-2020)” in 2018 is formulated to encourage 1m enterprises to apply the cloud service nationwide by 2020. Besides, the provincial governments have successively formulated the policies to encourage the application of cloud service. Those supports from the policy makers will significantly promote the rapid development of the ERP industry, especially the cloud ERP industry. (Appx.21) Competitive Position Source: Wind & Team Analysis As of 2017, the domestic cloud ERP market share is so dispersed that the CR5 only accounts for 45% of the market size [7], demonstrating that the domestic cloud ERP market is in the growing period. Figure 17: Porter 5 Forces In the meanwhile, CR5 in the On-Premise ERP industry has been gradually stabilized in the past 3 years, which occupies 87% of the total as of 2017(Figure 16), indicating that the market has entered a maturity period. The main cloud service of Kingdee is dominated by the SaaS standard development service while there is only a small part of the customized service in the company. And it does not go deeply into the upstream of the industrial chain. Kingdee has covered the whole industrial chain of the ERP business from the development of the software to the deployment of the serves and finally to the maintenance. Since the marker of the traditional ERP has entered the maturity period, it is difficult

Source: Team Analysis for Kingdee to expand its market size. As the leader of the industry, Kingdee is facing relatively gentle pressure from its peers. Though it is still the TOP 1 in the market share, Kingdee’s SaaS business is being challenged by other competitors (Figure 17&Appx.13). Figure 18: Sales Growth Rate of EAS Investment Summary

1. Changes in Market Environment Weaken the Competitiveness of Kingdee's Main Products (EAS) Kingdee has ranked TOP 3 in the Chinese ERP market share for many years, and its market share is still growing steadily. The sales of major product, EAS, has achieved 10% CAGR in the past five years, which is the main income of the implement and maintenance of the company and contributes 45% of total revenue in 2017. The development and the government support for the localization of Source: Company Data & Team Analysis enterprise management accelerated the growth of EAS sales to 27% in 2018H1. The launching of KDC II and the similar products based on the cloud service from the competitors, such as SAP S4 HANA Cloud, may not impact the sales of EAS in the short time due to the complexity and diversity Figure 19: R&D/Revenue of the demands of the large enterprises. However, the threats from the high-end cloud products will be increased since it is developing fast and enjoying the policy support. Therefore, we estimate that the sales rate of EAS will keep a high growth in the next two years and gradually decrease from 29% in 18H1 to 8% in 2022 (Figure 18). 2. The Cloud Business Is Growing at High Speed, But Facing to the Increasing Competition For cloud services, Kingdee mainly competes with these company: YonYou, Inspur, SAP, Oracle, etc. Though revenue of cloud business of Kingdee snowballs with 43.8% CAGR in the recent three years, other competitors also report comparable growth rate. However, Kingdee's R&D investment is much lower than those of YonYou and well-known foreign companies, and its ratio of R&D in Source: Wind & Team Analysis revenue is also lower than that of YonYou (Figure 19). The high demand to the technical accumulation in the software development and cloud service decides that the leading role of Kingdee is unstable. Cloud service product for SMEs can meet the requirements of the customers Figure 20: Surveys on worries to now. But the competition to the profitable cloud market of the large enterprises has not started SaaS yet. The lucrative market of the high-end cloud service with high user viscosity determines the final winner of this game. The competition will be fierce with the intense releases of the high-end cloud services from the competitors.

Source: Gartner Figure 21: SAP Product

Source: Team Analysis 3. The Second-Generation Cloud Products Need to Strengthen its Competitive Power, Then an Explosive Growth is not Expected in the Short Time.

Source: SAP China & Team Analysis KDC II supports hybrid cloud and targets at the high-end market. Currently, the high-end cloud ERP products for large group enterprises only are KDC II and S/4HANA Cloud from SAP. SAP estimates Figure 22: Progress of SAP Cloud Product that 75% of customers need at least 6 months to migrate to S/4HANA Cloud, and numerous highly customized developments will extend the duration. The cases of application of the cloud service in the standard working flowsheet also requires the long-term tracking development and the solutions from ISV on its PaaS platform [8] (Figure 20). In the early releasing versions of SAP’s products for the large enterprises and high-end market, the private cloud part can cover around 80% of functions of On-Premise ERP while the public cloud part can only meet about 20% (Figure 21). KDC II are updated every 2 months [9]. Based on the experiences of the SAP (Figure 22), we estimate that Kingdee also needs several versions. We also predict that the main jobs of Kingdee in the recent 2 years are the development of public cloud solution and the market promotion. The Source: SAP China explosive growth will happen in 2020. Figure 23: Key Indicators of 4. Cloud Products Can’t Profit in the Short Term, Traditional ERP Business’s Growth Rate Is Stable. Kingdee Cloud Products KDC is the core product of cloud service products, which accounts for more than 70% of the revenue from the company’s cloud business. Renewal rate of KDC has kept above 80% in the past three years, and the CAGR of customer number was 55%. The LTV/CAC of KDC was 3.24 in 2017(Figure 23), which comply with the industry’s guiding standards (3) [10]. (Appx.11). Comparing to NetSuite, (Appx.12) in US (Where the SaaS industry developed earlier than that in China by 4 years),(Appx.15) in the same developing period, the growth rate of users’ number of KDC is higher while its renewal rate and LTV/CAC is lower (Figure 24). With the second-generation cloud product Source: Company Data & Team Analysis stepping further in the market for large enterprises and taking Workday during the same Profit of Kingdee Cloud progression stage into account, we predict that Kingdee’s LTV will start to increase greatly in 2020. Besides, the cloud service business is expected to turn losses into profits in 2021. (Appx.3) Stable growth of ERP business brings steady cash flow to the company helpful to the colud transition. The CAGR of ERP business’ revenue was 7.5% in the past three years. We predict that the traditional ERP business will develop at med-low speed, which can supply stable cash flow to Kingdee. 5. The Strategic Investment to Facishare In early 2018, Kingdee implemented strategic investment to Facishare, which can strengthen the layout of the company's Cloud Strategy in the CRM market. By the end of 2016, there were 500,000

Source: Company Data & Team Analysis corporate users and 10,000 paid users in Facishare [11]. The integration of Kingdee cloud products and Facishare CRM products will significantly enhance the breadth and competitiveness of Kingdee Figure 24: KDC vs. NetSuite cloud services business. Valuation Kingdee’s income comprises of two parts, the ERP business and the cloud service business. Since company's operating cash flow was hard to segment, we used the Discounted Cash Flow method and the multiple relative valuations of the segment with equal weights, then gave the target price as 8.99 HKD. Meanwhile, we used the Monte Carlo simulation to predict the possible impacts of Source: Company Data & Team Analysis changes for critical variables. Figure 25: WACC Calculation Discounted Cash Flow Valuation（DCF） WACC Computation We first evaluated the whole management benefits for Kingdee to predict the free cash flow and Risk free rate 2.38% discount to the present. We divided the model into two stages, the first one to 2022 with a 5-year- detailed prediction and the second one in which we presupposed a sustained growth rate of 4.5%. Beta 1.06 Discounting the two phases and summing up, we got a discounted free cash flow of 36996.6m CNY, Market risk premium 5.89% which gave the target price as 8.01 HKD (Figure 27&Appx.8). Cost of equity 8.62% Weighted Average Cost of Capital (WACC): The risk-free rate (2.38%) was based on the current Cost of debt 3.57% yield of 10-year government bonds. The beta of 1.06 was obtained by regression analysis between Effective tax rate 14.09% the company's historical return rate and Hang Sheng Index (HIS). We then compared it with a 5- Weight of equity 60% year beta of the same industry as a reference for the adjustment (Figure 26). The market risk Weight of debt 40% premium of 5.89% was based on the sum of the HIS’s 10-year expected rate of return and Hong Kong’s 10-year average dividend yield. Applying CAPM to the components above resulted in a cost WACC 6.40% of equity of 8.62%. After-tax debt cost was 3.57% by setting the average tax rate for the past five Source: Team Assessment years as a composite tax rate and comparing the average interest expense of the past 5 years to Figure 26: Beta Calculation the average debt of the past 5 years. Finally, we derived the WACC of 6.4% (Figure 25&Appx.9). Beta Analysis Capital Structure: After predicting the 2018 and 2019 asset-liability ratios in the financial analysis, Beta (Days) 1.22 Beta (Weeks) 1.26 we estimated that the debt-asset ratio would be 40% without a large number of leveraged buyouts R-squared 0.44 R-squared 0.46 in 12 months' time. Standard error 0.06 Standard error 0.12 Sustainable Growth Rate: After the completion of Kingdee’s strategic transformation, the long- Beta (Company) 1.24 Industry Reference term growth of cash flow will depend more on the cloud service. Since the cloud service brought Beta (Days,5-years) 0.88 stable and sustainable cash flow, the forecasting sustainable growth rate would be 4.5% with the Beta (Industry) 0.88 expected inflation of 2.3% [12]. Beta (Average) 1.06 Relative Valuation Method Source: Team Assessment Since Kingdee’s traditional software business which brought stable profit is in a mature stage, and Figure 27: DCF Valuation unprofitable cloud business was in a growth period, we used P/E method to predict the price of DCF Valuation Assumption On-Premise marketing and P/S method to evaluate cloud business with the foreign valuation for PV of the first stage（millions） 3090.9 CNY SaaS companies as a reference [13]. The price of 9.97 HKD was the sum of two portions of the PV of the second stage（millions） 33905.7 CNY valuation result (Figure 28). The total PV（millions） 36996.6 CNY P/E: We identified the seven most appropriate listed companies which had similar market value Predicted stock price： 8.01 HKD and enterprise value as Kingdee, then we got the average market P/E through the comparable Source: Team Assessment company’s P/E. To make the valuation more reliable, we adjusted the index. We divided the seven companies into three categories according to market. Circuits in H-share, to which KDI belongs, has Figure 28: Relative Valuation a stronger reference. The multiples were influenced by their growth and financial index, which was

P/E Valuation P/S Valuation the crucial point. The Comparable company's P/E contained P/E of the new business, which would Cloud overrate the P/E. We derived the results of P/E 18.5x from the above reasons and finally calculated EPS 0.22 HKD 0.41HKD Revenue/Shares the price as 4.07 HKD. P/E 18.5x P/S 14.4x P/S: Since A-share and H-share have been no pure SaaS companies listed on, five US-based SaaS Predicted Price 4.07 HKD Predicted Price 5.90 HKD companies with similar market value and corpora value were selected. We calculated the average Predicted stock price: 9.97 HKD value of the PS of the five companies in the last 3 years as the market average. Referring to the P/E Source: Team Assessment method to make appropriate adjustments to the indicators, we obtained the adjusted P/S as 14.4x, and the price as 5.90 HKD. (Appx.10) Figure 29: Monte Carlo Risk to Target Price Simulation Summary Monte Carlo Simulation Simulation Statistics We executed a Monte Carlo Simulation to analyze the company’s share price after changing the Median 9.13 relevant variables affecting the future growth of Kingdee. (Appx.27) Thus, we tested variables SD 1.32 including growth rate of revenue from Kingdee’s cloud service business and ERP business, tax rate, 25th Percentlie 8.58 and growth rate of OCF. Besides, changes of risk-free rate and GDP’s growth rate were considered. Mean 9.13 Finally, after running the simulation for 2000 times, we observed that the probability for the share 75th Percentile 9.67 price in the range of 10% above and below its current price (8.95 HKD) is 71% (Figure 29 & Figure Source: Team Assessment 30). Sensitivity Analysis The result of Monte Carlo Simulation has shown that the growth rate of cloud service business and ERP business, as well as tax rate have significant impact on share price of Kingdee. When the revenue growth of cloud service business exceeds 44% and the CAGR of ERP business keeps 9% as predicted, we can raise investment rating of Kingdee, which also apply to the situation in which tax rate falls to 15%. Conversely, if revenue growth of cloud service business is below 34%, the stock rating should be degraded (Figure 31&Appx.28). Figure 31: Sensitivity Analysis Figure 30: Monte Carlo Simulation

Source: Source: Team Assessment Source: Source: Team Assessment

Financial Analysis Revenue Grows Consistently: Though affected by the deterioration of the macroeconomy and its own transformation, income of Kingdee had no significant change in 2013-2015. Kingdee's revenue Figure 32: Revenue and Growth grew consistently in 2016 and 2017 with the overgrowing cloud serve and the rebound of the traditional ERP service. In the latest 3 years, the CAGR has been 13.2% (Figure 32). The company divides its sales into the two business segments: ERP (75% of total sales in FY2017) and cloud service (25%). In the future, the cloud service business will contribute more and more to the company and its revenue is expected to account for 56% of total revenue in 2022. Since 2013, Kingdee's cloud business has improved rapidly, the CAGR in its revenue was 58% in recent five years and its revenue growth was 67% in 2017. The primary downstream market of cloud business is large and medium-sized enterprises and SMEs. The KDC II was launched by the Source: Company Data & Team Assessment company in August 2018 ahead of the similar products from the other domestic competitors, which represented that Kingdee officially began to expand the high-end cloud business market of large Figure 33: Revenue and Growth enterprises. Taking and Workday as references, we can find that the speed of of Two Main Business improvement of cloud business slowed down in the first two years when the enterprise expanded high-end cloud business market of large enterprises. Besides, the competition in cloud market will intense. Thus, the growth rate of revenue from cloud service business is expected to decrease to 40% in 2018 and then raise faster. Since the ERP business has stepped into a mature stage, the CAGR in revenue has been 7.5% in the latest three years. Kingdee is at the second-echelon in On-Premise ERP market, leading to the limitation of developing space. So, we forecast that the CAGR of ERP business will be 9.5% in the Source: Company Data & Team Assessment next five years (Figure 33 & Figure 34). Above all, we predict that Kingdee's CAGR in revenue will reach 21% in the next five years. Figure 34: China ERP Market Multiple Analysis The Cost/Income Ratio First Increases and Then Falls: Kingdee's operating expenses mainly consist of sales expenses, administrative expenses and R&D expenses. The three expenses in 2017 accounted for 53.7%, 15.0%, and 13.9% in revenue respectively. In the past 5 years, Kingdee's sales expenses have been maintained at more than 50%, mainly due to the company's promotion activities and advertising expenditures as well as high sales commissions during the cloud transformation process. Currently, there is still an ample space for Kingdee’s cloud business in the market. And with the release of KDC II, the development will continue to be maintained in the future. With the brand effect of cloud business gradually forming, sales expenses are expected to drop to 47.2% in 2022. The R&D expenses must be invested to update the current version after Source: Wind & Team Assessment transformation to the cloud business. Combining the data of the mid-year report and the company's strategy, we predict that R&D expenses will be over 400m CNY in 2018. R&D investment is believed to be maintained at a high level due to the necessity of updating cloud products, building Figure 35: Operating Expenses PaaS+SaaS cloud ecosystem, and the track of the rapid progress of technology. So, the proportion of R&D expenses in revenue is expected to raise at the rate of 0.3%. Administrative expenses accounted for 14% of revenue in 2017. Kingdee has no plan for large-scale expansion of the administrative staff. We predict that administrative expenses will account for 14% of revenue in 2018, and the proportion will decrease gradually in the next few years. Therefore, we predict that Kingdee's operating expenses will increase to around 85% in 2018 and 2019 due to the increase in sales expense ratio. After that, with sales expenses down, operating expenses are predicted to drop to 77% in 2022 gradually (Figure 35). Source: Company Data & Team Assessment Strong Profitability: Kingdee's last five years average EBITDAR Margin has been the second higher among its peers and higher than the industry average, 33.81% Kingdee vs. 22.28% Industry (Figure 36). Kingdee's profitability is optimistic and relatively advantageous. According to Kingdee's pre-tax Figure 36: 5yrs. Average EBITDA profit, depreciation and amortization, EBITDA Margin is expected to be above 30% in 2018. The Margin gross profit margin has remained at a high level of over 80% since 2014. Light asset operating model has shown good business results. In the next 5 years, the ERP market is supposed to improve Figure 41: Risk Matrix consistently, and cloud business will proliferate. Then this indicator will remain above 80% (Figure 37). The scale of cloud business continues to expand, and Kingdee is now in a period of high growth of cloud business. Revenue grows faster than the asset, so asset turnover rate increases. With the increase in net profit, ROE will grow steadily in the next few years, and the number is expected to reach 11.89% in 2020. (Appx.7) The Cash Flow Improves, and The Net Interest Rate Is Steadily Increasing: Because of the growth Source: Wind & Team Assessment of revenue (operating income), we foresee the growth rate of net profit is 9.8% in 2018, higher than 7.6% in 2017. The CAGR of Kingdee’s FCF in the past three years has reached 21%, mainly due to Figure 37: Gross Margin the decrease in capital expenditure and the increase in net profit. We predict that FCF will grow at a rate of 10% every year with the growth of net profit and OCF (Figure 38). The Rapid Growth of Cloud Business’ Revenue Has Made Receivables Smaller: Cloud business uses first-paid and service-providing model which can bring more cash flow and improvement of the quality of profit as well as revenue to Kingdee. A receivable turnover ratio of Kingdee has been maintained at 10 to 13.7 (larger than the ERP industry average level, 5.72). When it began prepaid system，this ratio quickly rose to 15.7 (larger than the industry average, 5.79, in the same period) in 2017. In the future, with the assumption that Cloud ERP business is continuously updated to Source: Wind & Team Assessment meet customer demand and the market environment is getting better, we predict that receivable turnover ratio will increase by more than 10% (Figure 39). Figure 38: OCF and FCF Capital Structure is Gradually Optimized: Since 2015, Kingdee's asset-liability ratio has been lower than the industry average. In 2017, the asset-liability ratio was 40.6% (lower than the industry average, 44.7%) (Figure 40). The reasons are the profit Kingdee's cloud business brought after the transformation in recent years and the company's emphasis on its control of financial leverage. According to historical data and recent plans, we predict that the asset-liability ratio of Kingdee will decline in the next few years, and the asset-liability ratio in 2018 is expected to be 36.3%. However, the development of Salesforce and Workday is accompanied with the large-scale acquisitions and strategic investments. If Kingdee also conducts acquisitions and strategic investments in the future, Source: Wind & Team Assessment it will cause the increase of its asset-liability ratio. Due to the unpredictability, this part of the debt increase is not reflected in the forecast balance sheet. Figure 39: Receivables Turnover Investment Risks Ratio Market Risks M1: SaaS Market does not Grow as The Expectations (Huge Effect and Low Possibility) According to the regression, the growth rate of Kingdee’s cloud business has a positive correlation with that of China's SaaS market. The support from policy [14] (Figure 41&Appx.21) and demand for cooperates to reduce management and labor costs will ensure rapid growth of the SaaS market.  Solution: Increase customer stickiness and value-added services. M2：Cloud ERP Market Competition Intensified (Huge Effect and High Possibility) Source: Wind & Team Assessment The Chinese cloud ERP market is still in its infancy with 45% as CR5. Industry standards are still in progress. The intensification of competition will inevitably lead to price wars. Then enterprises with advanced capital, such as SAP, Oracle, and YonYou, will cut their sales price to gain market share， Figure 40: Assets-Liability Ratio which definitely will increases Kingdee’s operating pressure and deficit.  Valuation: Assume sales of Kingdee cloud products in a CAGR below the rate of the last five years.  Solution: Focus on the high-end products and the enterprises with high requirements for the final product but low sensitivity to the price like financial, telecommunications, aviation and other industries [15]. M3: Usage Price of IaaS Raises (Moderate Effect and Little Possibility) The increased price of IaaS products will directly raise the operating cost and reduce the

Source: Wind & Team Assessment profitability of Kingdee’s cloud services. Though the current SaaS service providers continue to reduce usage fees, the tendency of the IaaS market to be monopolized can strengthen operators' bargaining power, which may significantly increase the cost of IaaS products.  Solution: Kingdee tries to become the highest-level cooperative partner of AWS. Financial Risks F1：Trade War Intensify (moderate effect and possibility) Most of Kingdee's business is in mainland China. However, the underlying IaaS provider of KDC is Figure 41: Policy Supports US AWS. If Washington prohibits AWS from offering SaaS products to China, Kingdee will face the risk of massive data migration.  Solution: Prepare the alternate supply that can be used when AWS cloud services are not available. Moreover, the new product should support API interfaces for multiple IaaS vendors. F2: Tax Risk (Huge Effect and Little Possibility) If the tax preferences to Kingdee’s subsidiaries are canceled, tax fee of the company will increase. However, according to China's tax cuts and the transition of the cloud computing business of Kingdee, it is less likely for Kingdee to lose preferential tax rates. F3：Rising Debt Costs (Moderate Effect and Possibility) In the context of credit contraction and deleveraging policy, finance cost will increase. In the control Source: Team Assessment & Company Data of financial leverage, Kingdee’s financial leverage ratio decrease year by year. In the future, Kingdee’s debt financing demands are relatively small with its sufficient cash flow. Business and Operational Risks B1：Renewal Rate of Users Drops (Colossal Effect and Moderate Possibility) Figure 42: Risks Matrix Users’ stable renewal income constitutes a significant portion of revenue. A decline of renewal rate will reduce lots of revenue and increase sales expenses to attract more users.  Valuation: Refer to the renewal rate of Salesforce and Workday, we predict the rate of Kingde will be between 79% and 81%. B2：Core Developers or Executives Leave (Huge Effect and Moderate Possibility) The leave of developers for core products may result in the delay or stagnation of updating and iteration for products, which will impact Kingdee's industry competitive position significantly. In 2008 and 2012, Kingdee has the executive resignation. The executive and technical talent team are generally stable. Kingdee’s employee turnover rate was 9.3%, a relatively low rate in 2017 [16].  Solution: Implement a talent training system and equity incentives for core technical teams

Source: Team Assessment and senior executives. B3：Cloud Business Payback Period Extended(Moderate Effect and High Possibility) Kingdee cloud business lost 136m CNY in 2017. Continued losses may affect the confidence of company shareholders and lead management to make some short-sighted decisions. As our prediction, cloud service business can achieve break-even in 2021. Solution: The management should insist on the strategy of developing cloud services and make up Figure 43: Risks and Strategies for the loss of cloud service business by the cash flow from the traditional ERP business. Risk Stragtegies B4:Data Security Issues (Huge Effect and Moderate Possibility) Market Risk Data security issues, which may impact Kingdee’s reputation and renewal of cloud products, SaaS market not Improve value-added include subjective data breaches by internal staff and data loss issues in data centers. In the event meeting services of data security issues, Kingdee’s cost of rebuilding the reputation system will be enormous. expectations  Solution: Improve security agreements with customers and downstream IaaS providers, and Market competition Step further into the strengthen data security R&D expenditures intensifies large and high-end market Other Risks Cost of IaaS raises Enhance cooperation O1：Downtime of Cloud Service Server (Moderate Effect and Possibility) with IaaS company The downtime of cloud server may affect operation by making SaaS service unavailable. Frequent Financial Risk downtime will take a negative reputation to Kingdee. AWS experienced a five-hour downtime in Trade war Support API to 2015, and the same situation appeared in for one hour. However, with the intensifies different IaaS vendors continuous improvement of hardware and IaaS technology, the possibility of downtime will be Business and Operational Risk Core developers or Equity incentives minimized. executives leave O2：Technology Iteration Speeds up (Moderate Effect and High Possibility) Data security issues Strengthen data Acceleration of technology iteration requires more R&D investment to keep updating products, security and increase which leads to increasing expenses and falling profits. Besides, this acceleration will bring more R&D expenditures alternative products, which is a threaten to previous products of Kingdee. According to the report Technology Increase R&D [17], cloud computing technology updates every five years. iteration speeds up expenses  Source: Team Assessment Valuation: The ratio of R&D expenses to Kingdee’s total revenue is supposed to be increased by 0.5% per year. Appendix 1: Glossary Industry Metrics  ERP: Enterprise resource planning (ERP) is business management software—usually a suite of integrated applications—that a company can use to store and manage data from every stage of business.  CRM: Customer relationship management (CRM) is a model for managing a company’s interactions with current and future customers.  SaaS: Software is a software delivery model in which software and associated data are centrally hosted on the cloud. SaaS is typically accessed by users using a thin client via a web browser.  IaaS: In the most basic cloud-service model, providers of IaaS, infrastructure as a service, offer computers-physical or virtual machines—and other resources. IaaS clouds often offer additional resources such as a virtual—machine disk image library, raw (block) and file-based storage, firewalls and so on.  PaaS: (PaaS) is a category of cloud computing services that provides a computing platform and a solution stack as a service. Along with SaaS and IaaS, it is a service model of cloud computing. Abbreviations  LTV: Lifetime value (LTV), means cumulative value of $1 annual fee over expected life (LTV=$1/attrition)  CAC: Customer Acquisition Cost (CAC), represents cost to acquire $1 annuity  ARPU: the average amount of money that a company makes during a period from an individual customer or product. Average revenue per user is a calculation used especially by mobile phone and television companies.  CAGR: Compound annual growth rate (CAGR) is the rate at which an economy, investment, company, etc. grows over a period of years, based on growth over the previous year  SME: SME is an abbreviation for small and medium enterprise: a company, or companies considered as a group, that are neither very small nor very large Appendix 2: Structure of The Group

Appendix 3: Profit of ERP and Cloud Service Business

ERP Business Profit Cloud Service Business

Source: Company Data & Team Assessment Source: Company Data & Team Assessment

Appendix 4: Income Statement

In CNY Millions 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F Revenue 1602.1 1546.5 1586.2 1862.2 2303.5 2860.2 3522.9 4398.7 5640.3 7408.0 Cloud Service 56.8 106.0 191.0 340.0 568.0 793.5 1115.2 1689.6 2648.0 4155.1 Kingdee Cloud 18.1 41.7 110.1 209.3 393.4 601.9 902.9 1399.4 2239.1 3582.5 Jingdou Cloud 12.0 19.1 21.0 35.7 61.9 86.0 99.0 168.4 277.8 430.6 Guanyi Cloud 26.7 45.2 59.9 70.8 98.0 90.2 97.4 105.2 113.6 122.7 Others 24.2 14.7 15.4 15.9 16.7 17.5 19.3 ERP on Premise 1545.3 1440.5 1395.0 1521.0 1735.0 2066.6 2407.8 2709.1 2992.3 3253.0 EAS 197.5 205.0 230.4 267.5 312.9 391.2 477.2 548.8 620.1 682.2 K/3 249.4 247.1 198.5 192.1 191.7 210.9 217.2 219.4 217.2 215.0 KIS 204.9 246.0 253.9 270.5 327.3 392.8 437.9 481.7 520.3 561.9 Implement 431.2 326.3 321.3 346.7 405.7 486.8 584.2 671.8 772.5 865.2 Operation and Maintenance 333.3 321.6 326.9 378.5 427.7 513.2 615.9 708.2 779.1 841.4 Others 129.0 94.5 64.1 65.7 69.7 71.8 75.4 79.2 83.1 87.3 Operating cost (396.2) (270.7) (294.1) (348.0) (427.0) (512.8) (655.4) (817.1) (1048.5) (1377.1) Gross profit 1205.9 1275.8 1292.1 1514.3 1876.5 2347.4 2867.6 3581.6 4591.9 6031.0 Selling expenses (827.9) (784.5) (854.6) (1002.4) (1235.9) (1585.0) (1933.0) (2320.4) (2819.7) (3495.9) Administrative expenses (205.0) (202.2) (257.8) (277.7) (320.2) (406.1) (493.2) (607.0) (767.1) (992.7) Research and development costs (232.9) (223.5) (234.8) (283.6) (345.3) (437.6) (549.6) (699.4) (913.7) (1222.3) Fair value gains on investment 1.1 4.5 17.6 33.9 96.4 103.3 71.6 74.5 78.8 82.0 properties Other income and gains-net 297.5 229.7 266.3 264.4 349.3 406.2 474.9 563.7 685.2 853.4 Operating profit 238.6 299.9 228.8 248.9 420.8 428.0 438.4 592.9 855.4 1255.5 Finance costs-net (101.9) (73.5) (64.3) (22.0) (27.1) (31.9) 3.6 42.5 55.9 70.5 Share of losses of associates (0.1) (0.6) (2.2) (17.6) (15.2) Profit before income tax 136.6 225.8 162.3 209.3 378.4 396.1 441.9 635.4 911.2 1326.0 Income tax (17.2) (25.5) (56.8) 6.0 (54.8) (55.8) (62.3) (89.5) (128.4) (186.8) Profit for the year from continuing 119.4 200.4 105.5 215.2 323.6 340.3 379.7 545.9 782.8 1139.2 operations Profit for the year from 73.7 discontinued operations Minus：Non-controlling interests (7.0) 3.3 (0.3) 0.7 13.6 Net profit 126.4 197.1 105.8 288.2 310.0 340.3 379.7 545.9 782.8 1139.2 Source: Company Data & Team Analysis

In CNY Millions 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F ERP business 1545.3 1440.5 1395.0 1521.0 1735.0 2066.6 2407.8 2709.1 2992.3 3253.0 Direct sale 303.4 205.5 211.0 221.6 257.8 317.1 380.5 430.0 473.0 520.3 Indirect sale 446.7 546.6 516.0 552.8 620.3 713.3 770.4 832.0 898.6 952.5 Service 764.5 647.8 648.2 725.2 833.5 1000.2 1200.2 1380.3 1552.0 1707.1 Operation 431.2 326.3 321.2 346.7 406.5 487.8 585.4 673.2 774.2 867.1 Maintenance 333.3 321.6 326.9 378.5 427.0 512.4 614.8 707.1 777.8 840.0 Others 30.7 40.5 19.8 21.4 23.4 36.0 56.6 66.8 68.8 73.1 Cloud service business 56.8 106.0 191.0 340.0 568.0 793.5 2457.1 2827.3 3172.7 3487.2 The total 1602.1 1546.5 1586.2 1862.2 2303.5 2860.2 3522.9 4398.7 5640.3 7408.0 Source: Company Data & Team Analysis

In % 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cloud Service 3.55% 6.85% 12.04% 18.26% 24.66% 27.74% 31.66% 38.41% 46.95% 56.09% Kingdee Cloud 1.13% 2.70% 6.94% 11.24% 17.08% 21.04% 25.63% 31.81% 39.70% 48.36% Jingdou Cloud 0.75% 1.24% 1.32% 1.92% 2.69% 3.01% 2.81% 3.83% 4.93% 5.81% Guanyi Cloud 1.67% 2.92% 3.78% 3.80% 4.25% 3.15% 2.76% 2.39% 2.01% 1.66% Others 1.30% 0.64% 0.54% 0.45% 0.38% 0.31% 0.26% ERP on Premise 96.45% 93.15% 87.95% 81.68% 75.32% 72.25% 68.35% 61.59% 53.05% 43.91% EAS 12.33% 13.26% 14.53% 14.36% 13.58% 13.68% 13.55% 12.48% 10.99% 9.21% K/3 15.57% 15.98% 12.51% 10.32% 8.32% 7.37% 6.17% 4.99% 3.85% 2.90% KIS 12.79% 15.91% 16.01% 14.53% 14.21% 13.73% 12.43% 10.95% 9.22% 7.59% Implement 26.91% 21.10% 20.26% 18.62% 17.61% 17.02% 16.58% 15.27% 13.70% 11.68% Operation and 20.80% 20.80% 20.61% 20.33% 18.57% 17.94% 17.48% 16.10% 13.81% 11.36% Maintenance Others 8.05% 6.11% 4.04% 3.53% 3.03% 2.51% 2.14% 1.80% 1.47% 1.18% Operating cost -24.73% -17.50% -18.54% -18.69% -18.54% -17.93% -18.60% -18.58% -18.59% -18.59% Gross profit 75.27% 82.50% 81.46% 81.32% 81.46% 81.43% 81.40% 81.42% 81.41% 81.41% Selling expenses -51.68% -50.73% -53.88% -53.83% -53.65% -55.42% -54.87% -52.75% -49.99% -47.19% Administrative expenses -12.80% -13.07% -16.25% -14.91% -13.90% -14.20% -14.00% -13.80% -13.60% -13.40% Research and development -14.54% -14.45% -14.80% -15.23% -14.99% -15.30% -15.60% -15.90% -16.20% -16.50% costs Fair value gains on 0.07% 0.29% 1.11% 1.82% 4.18% 3.61% 2.03% 1.69% 1.40% 1.11% investment properties Other income and gains-net 18.57% 14.85% 16.79% 14.20% 15.16% 14.20% 13.48% 12.82% 12.15% 11.52% Operating profit 14.89% 19.39% 14.42% 13.37% 18.27% 14.96% 12.44% 13.48% 15.17% 16.95% Finance costs-net -6.36% -4.75% -4.05% -1.18% -1.18% -1.12% 0.10% 0.97% 0.99% 0.95%

Share of losses of associates -0.01% -0.04% -0.14% -0.95% -0.66% Profit before income tax 8.53% 14.60% 10.23% 11.24% 16.43% 13.85% 12.54% 14.45% 16.16% 17.90% Income tax -1.07% -1.65% -3.58% 0.32% -2.38% -1.95% -1.77% -2.03% -2.28% -2.52% Profit for the year from 7.45% 12.96% 6.65% 11.56% 14.05% 11.90% 10.78% 12.41% 13.88% 15.38% continuing operations Profit for the year from 3.96% discontinued operations Minus：Non-controlling -0.44% 0.21% -0.02% 0.04% 0.59% interests Net profit 7.89% 12.74% 6.67% 15.48% 13.46% 11.90% 10.78% 12.41% 13.88% 15.38% Source: Company Data & Team Analysis

Appendix 5: Balance Sheet

In CNY Millions 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F Assets 3927.8 4393.2 5484.2 5977.3 6802.1 7888.4 8639.3 9558.5 10590.1 11707.5 Current assets 1580.0 2103.1 3074.0 2956.7 3533.6 3677.6 4328.0 5125.8 5998.8 6927.1 Cash and cash equivalents 858.5 1261.6 1527.6 1464.8 1056.7 1488.2 1658.0 1901.2 2179.3 2430.5 Financial assets at fair value 1.3 12.9 through profit or loss Other short-term 140.5 284.9 769.1 758.6 1708.2 1268.9 1565.9 1942.3 2409.3 2961.9 investments Receivables 137.4 116.5 141.4 147.0 150.7 187.7 200.5 200.6 207.9 222.4 Other receivables 435.4 429.0 527.7 564.0 601.7 725.0 893.7 1068.8 1185.9 1291.6 Inventories 3.9 3.9 4.1 6.3 14.1 7.8 9.9 12.9 16.5 20.7 Other current assets 4.4 7.0 102.8 3.3 2.3 Non-current assets 2347.8 2290.1 2410.2 3020.6 3268.5 4210.8 4311.4 4432.7 4591.3 4780.4 Fixed assets 760.2 728.2 731.8 796.3 510.2 528.9 561.8 607.9 672.5 758.6 Investments in associates 2.1 1.5 24.2 25.8 31.4 32.4 33.3 34.3 35.4 36.4 Available-for-sale financial 150.2 50.1 assets Other long-term 852.4 851.2 924.2 1101.1 1790.1 2207.2 2260.4 2315.2 2371.7 2429.8 investments Intangible assets 597.5 577.1 601.2 775.2 817.3 840.2 867.7 901.2 951.7 1009.6 Land use rights 135.5 132.1 128.8 125.4 69.4 602.1 588.0 574.0 560.0 546.0 Other non-current assets 46.6 0.1 Liabilities 2172.9 2395.0 2237.5 2441.2 2759.0 2861.2 2412.8 1911.2 1942.9 2117.6 Current liabilities 951.9 1029.4 918.7 922.7 1404.9 1571.1 1735.5 1232.6 1237.6 1351.8 payables 43.9 34.3 22.3 19.4 18.5 31.0 34.4 42.0 56.8 72.6 Tax payables 57.8 66.0 72.1 86.8 104.3 128.7 158.5 197.9 253.8 333.4 Short-term 420.2 545.6 243.5 80.7 155.0 596.8 650.0 47.9 43.1 38.8 borrowings Other current liabilities 430.0 383.5 580.8 735.9 1127.0 814.6 892.5 944.7 883.9 907.0 Non-current liabilities 1221.0 1365.6 1318.8 1518.4 1354.1 1290.1 677.4 678.7 705.3 765.8 Long-term borrowings 1155.0 1291.4 1213.0 1415.6 1193.5 1129.4 479.4 431.4 388.3 349.5 Other non-current liabilities 66.0 74.2 105.7 102.8 160.6 160.7 198.0 247.2 317.0 416.3 Equity 1754.9 1998.2 3246.7 3536.2 4043.1 5623.0 6224.6 7644.4 8643.3 9584.9 Share capital 64.4 65.2 72.0 72.6 71.6 79.3 79.9 80.2 80.4 80.6 Share premium 482.0 537.9 1682.8 1765.3 1681.3 2807.2 2839.9 2884.2 2922.9 2945.3 Other reserves 1116.1 512.1 512.8 400.2 694.7 228.3 1015.7 1858.2 2049.4 1848.6 Retained earnings 87.9 873.8 949.6 1237.8 1547.8 1866.4 2239.7 2776.4 3546.0 4666.0 Non-controlling interests 4.5 9.3 29.7 60.4 47.7 5027.2 6226.5 7647.3 8647.2 9589.9 Total equity and liabilities 3927.8 4393.2 5484.2 5977.3 6802.1 7888.4 8639.3 9558.5 10590.1 11707.5 Source: Company Data & Team Analysis Note: In September 2018, Kingdee has purchased land use rights in Qingdao, which leads to a liability increase of 532.6m CNY.

Appendix 6: Cash Flow Statement

In CNY Millions 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F Net profit 126.4 197.1 105.8 288.2 310.0 340.3 379.7 545.9 782.8 1139.2 Depreciation and amortization 293.7 275.4 274.5 363.9 361.8 429.0 469.1 515.1 555.7 610.6 Working capital changes (7.7) 4.7 143.4 107.5 186.2 (39.3) 64.0 110.6 66.7 119.6 Other non-cash adjustments 2.8 29.6 32.8 (147.5) (34.3) 258.5 243.7 135.2 45.3 (288.3) Net cash flows from operating 415.1 506.7 556.4 612.1 823.7 988.4 1156.5 1306.8 1450.6 1581.1 activities Proceeds from disposal of current 16.3 7.3 1.9 8.9 2.1 5.1 4.0 3.0 2.0 1.0 assets Capital expenditure 338.8 277.3 302.4 476.2 378.9 458.9 514.5 579.6 656.6 739.5 Decrease in investment 4.2 901.9 25.8 0.4 604.2 2100.0 Increase in investment 131.3 1020.5 678.2 43.9 762.4 2227.5 100.0 150.0 200.0 250.0 Net cash flows from other (4.1) (2.0) 28.4 (50.2) (435.9) (690.5) (1030.2) (1258.5) (932.1) (673.1) investment activities Net cash flows from investing (453.8) (390.7) (924.5) (561.0) (970.9) (1271.8) (1640.6) (1985.2) (1786.7) (1661.6) activities Increase in debt 385.0 1156.6 450.0 272.8 106.5 106.5 Decrease in debt 402.3 883.1 896.6 310.1 80.3 155.0 130.0 5.3 4.8 4.3 Increased share capital 16.4 33.2 1108.4 23.8 18.2 71.3 33.3 44.6 38.9 22.7 Decreased share capital 17.0 133.1 Pay dividends 30.0 43.0 Net cash flows from other (19.5) 12.0 (94.1) (40.8) 735.0 644.1 882.4 580.1 313.3 financing activities Net cash flows from financing (0.9) 287.2 643.8 (124.7) (236.0) 714.9 654.0 921.6 614.2 331.7 activities Effect of exchange rate changes on cash and (9.8) 10.8 (25.0) 4.4 cash equivalents Cash and cash equivalents at 898.0 858.5 1261.6 1527.6 1464.8 1056.7 1488.2 1658.0 1901.2 2179.3 beginning of the year Net increase in cash and cash (39.6) 403.2 266.0 (62.8) (408.1) 431.5 169.8 243.2 278.1 251.2 equivalents Cash and cash equivalents at end 858.5 1261.6 1527.6 1464.8 1056.7 1488.2 1658.0 1901.2 2179.3 2430.5 of year Source: Company Data & Team Analysis Appendix 7: Key Financial Ratios

2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F Profitability Gross margin 75.27% 82.50% 81.46% 81.32% 81.46% 81.43% 81.40% 81.42% 81.41% 81.41% Net interest rate 7.89% 12.74% 6.67% 15.48% 13.46% 11.90% 10.78% 12.41% 13.88% 15.38% ROE 7.59% 10.54% 4.06% 8.61% 8.30% 6.77% 6.10% 7.14% 9.05% 11.88% ROA 3.20% 4.74% 2.14% 5.03% 4.85% 4.31% 4.40% 5.71% 7.39% 9.73% EBIT Margin 15.01% 20.61% 14.85% 14.27% 18.59% 16.63% 14.02% 14.95% 16.51% 18.14% EBITDA Margin 32.88% 37.79% 31.43% 33.10% 33.84% 31.63% 27.34% 26.66% 26.36% 26.38% Liquidity Current ratio 1.66 2.04 3.35 3.20 2.52 2.34 2.49 4.16 4.85 5.12 Cash ratio 0.90 1.23 1.66 1.60 0.75 0.95 0.96 1.54 1.76 1.80 Solvency Assets-Liability Ratio 55.32% 54.52% 40.80% 40.84% 40.56% 36.27% 27.93% 20.00% 18.35% 18.09% Interest Coverage 2.18 3.05 2.81 3.99 6.85 5.98 9.49 29.75 46.81 75.08 Turnover ability Asset turnover 0.42 0.39 0.34 0.34 0.37 0.36 0.41 0.46 0.53 0.63 A/R turnover 10.90 12.18 12.30 12.91 15.48 16.90 18.15 21.93 27.61 34.43 Inventory turnover 100.67 68.86 73.77 67.57 42.05 46.93 74.23 71.85 71.43 74.01 Equity ratio EPS(CNY) 0.05 0.08 0.04 0.10 0.11 0.10 0.12 0.17 0.24 0.35 BPS(CNY) 0.69 0.78 1.11 1.20 1.39 1.55 1.91 2.35 2.66 2.95 OCFPS(CNY) 0.16 0.20 0.19 0.21 0.28 0.30 0.36 0.40 0.45 0.49

Appendix 8: DCF Valuation Analysis

The first stage In CNY Millions 2018F 2019F 2020F 2021F 2022F total Operating cash flow 988.4 1156.5 1306.8 1450.6 1581.1 Free cash flow 529.5 642.0 727.2 794.0 841.6 WACC 6.4% 6.4% 6.4% 6.4% 6.4% Discounted value 529.5 603.4 642.3 659.1 656.6 3090.9

In CNY Millions DCF Valuation Result

36996.6m CNY Sustainable growth rate 4.5% PV of the company FCF 879.5 Value of stock right 22197.9m CNY WACC 6.40% Total share capital 3287.05m Present value of the second stage 33905.7 Forecast stock price 8.01 HKD

A. Management Benefits Cloud Business: The proportion of income for which the public cloud accounted increased to 80% in 2018, and the compound growth rate of customers in three years was 76.5%. Since the launch of KDCⅡ will lead to the uncertainty of the retention to KDCⅠ，and the decrease of the renewal ratio for KDCⅠ, we predict the customer growth rate will drop to 70% and the customer unit price will increase to 61k gradually. In the recent five years, the income CAGR of Kingdee cloud is close to 85%, but its CAGR will almost slide to 50% with the prediction of fierce competition and increased user base in the next two years. With the improvement of Kingdee’s competitiveness in the high-end cloud business market of large-size enterprise, Kingdee’s income growth rate will reach 60%. Jingdou Cloud and the Guanyi Cloud: The CAGR in three years of JDC users is 31.4%, while GYC has a lower customer growth rate. We predict customer growth rate is 30%,20% respectively. The fully standardized ARPU varies little by 0.41k, 10k.and the renewal rate of JDC has been stable at an ideal 70%, and considering the CAGR of small and micro enterprises in the past five years (20%), and the support of the country's on-cloud policy, we predict the income growth rate is between 60% and 70% in the next five years. The LTV/CAC of GYC dropped from a relatively good 2.72 in 2016 to 1.08 in 2017, which contributed to the slowdown in the growth of the number of customers Traditional Software Business: The sales of KIS began to accelerate in 2016. We predict that it will continue to maintain a high growth rate of 20% in 2018. With the development of cloud business and the reduction of company's investment in KIS, its revenue growth in the next five years will decline to 8% of the space growth rate of the traditional ERP market. Sales of K/3 are relatively stable, and business growth is much affected by the replacement relationship of Kingdee Cloud products. We forecast a gradual decline in sales growth and begin to experience negative growth by 2020. The sales of EAS licenses are directly related to the revenue of implementation and maintenance. As Kingdee has gradually established itself in the large enterprise market and the short-term cloud products have little substitute for EAS, we predict the revenue growth rate of EAS license of 25 % and the implementation and maintenance revenue growth rate (20%). With the gradual improvement of high-end cloud products and the development of China's hybrid cloud market, high-end cloud products will also begin to erode the market space of EAS. Thus, we predicted that EAS's revenue growth would start to decline from 2019 and gradually decline to 10% in 2020. Correspondingly, the growth rate of revenue from implementation and maintenance will decrease.

B. Free Cash Flow

In CNY Millions 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F Operating cash flow 415 507 556 612 824 988.4 1156.5 1306.8 1450.6 1581.1 Net profit 126 197 106 288 310 340.3 379.7 545.9 782.8 1139.2 Depreciation and amortization 294 275 275 364 362 428.9 469.1 515.1 555.7 610.6 Working capital changes （8） 5 143 107 186 (39.3) 64.0 110.6 66.7 119.6 Capital expenditure 339 277 302 476 379 458.9 514.5 579.6 656.6 739.5 Free cash flow 76.4 229.4 254.0 135.9 444.8 529.5 642 727.2 794.0 841.6

1.Operating Expenses

In CNY Millions 2018F 2019F 2020F 2021F 2022F Prediction base

Operating expense (2428.7) (2975.8) (3626.8) (4500.5) (5710.9)

When a salesperson sells a product or service of cloud business, he or she will be awarded 30% of Selling expenses (1585.0) (1933.0) (2320.4) (2819.7) (3495.9) the sales, and 8% for the second year, and no commission will be paid for the subsequent years. Kingdee has no plan about large-scale expansion of the administrative staff. The proportion of Administrative expenses (406.1) (493.2) (607.0) (767.1) (992.7) administrative expenses in revenue will decrease gradually in the next few years. Kingdee's investment in research and development Research and (437.6) (549.6) (699.4) (913.7) (1222.3) will not decrease to ensure update of product, so development costs research and development expenses will increase.

2. Interest, Tax and Net Income

In CNY Millions 2018F 2019F 2020F 2021F 2022F Prediction base Operating profit 428.0 438.4 592.9 855.4 1255.5 Interest income and interest on borrowings that should Finance costs-net (31.9) 3.6 42.5 55.9 70.5 be returned. Some subsidiaries of Kingdee enjoy a preferential tax Income tax (55.8) (62.3) (89.5) (128.4) (186.8) rate of 10%, some 15%, and the rest 25%. The adjusted actual tax rate is 14.1%. Net profit 340.3 379.7 545.9 782.8 1139.2

3. Depreciation and amortization, Net working capital and Capital expenditure

In CNY Millions 2018F 2019F 2020F 2021F 2022F Prediction base The straight-line depreciation method is adopted in accordance with Depreciation international accounting standards. Building are depreciated for 25 and 428.9 469.1 515.1 555.7 610.6 years and the remaining fixed assets for 5. Land use rights are amortization amortized over 50 years, development costs over 3, and the remaining intangible assets over 5. Changes in working capital refer to the Kingdee Capital Management Working capital (39.28) 64.01 110.56 66.70 119.60 Measures that accumulate and exclude non-cash effects in asset changes liabilities. Expense that Kingdee spends on fixed assets such as buildings and Capital 458.9 514.5 579.6 656.6 739.5 equipment purchase, as well as intangible assets such as land use expenditure rights and self-use computer software and so on.

Appendix 9: WACC Analysis

Variable Value Prediction base Risk free rate 2.38% The current yield of 10-year government bonds Beta 1.06 regression analysis between the company's historical return rate and Hang Sheng Index (HIS) returns Market risk premium 5.89% The sum of the HIS’s 10-year expected rate of return and Hong Kong’s 10-year average dividend yield Cost of equity 8.62% Cost of debt 3.57% Comparing the average interest expense of the past five years to the average debt of the past five years Effective tax rate 14.09% Setting the average tax rate for the past five years as a composite tax rate Weight of equity 60% Weight of debt 40% WACC 6.40% Regressive analysis and beta value of Kingdee Beta (Days) 1.22 Beta (Weeks) 1.26 R-squared 0.44 R-squared 0.46 A. Risk free rate (2.38%) is based on the yield of 10-year government bonds of HK on 13rd, Sept, 2018. Standard error 0.06 Standard error 0.12 B. Beta—regression analysis between the company's historical return Beta (Company) 1.24 rate and Hang Sheng Index (HIS) returns comparing with a 5-year beta Industry reference of the same industry as reference. Beta (Days,5-years) 0.88 C. Market risk premium—The sum of the HIS’s 10-year expected rate of Beta (Industry) 0.88 return and Hong Kong’s 10-year average dividend yield Beta (Average) 1.06

Appendix 10: Relative Valuation Analysis

The major two businesses of Kingdee are in diffident industry cycle. The ERP business is during mature stage of the industry and revenue from it is stable, which leads the low probability of dividends distributing. Hence, we adopted P/E valuation method for this business. Meanwhile, the cloud service business is in developing stage, having a rapid growth but not achieving profitability. Therefore, we use P/S valuation method for it. In this method, we picked growth rate of revenue and market value of similar SaaS company to operate regression analysis and the result showed that the PS of Kingdee is positively correlated with its stock price.

Multiples Valuation Abstract P/E of ERP business P/S of cloud service business P/E adjusted 18.5x P/S adjusted 14.4x P/E valuated 4.07 HKD P/S valuated 5.90 HKD Share price predicted 9.97 HKD

A. Selection of peers Considering the two valuation methods are used for the different industry, we selected two groups of comparable companies. We used the P/E of seven peers and P/S of five and all these peers have similar market value and enterprise value as Kingdee. Because A-share and H-share have been no pure SaaS companies listed on, we picked comparable companies from US stock and referred to their P/S. B. Market Average

Market Company P/E(3 years) Market Company P/S(3 years) Kingdee 42.20 Kingdee 5.52 YonYou 112.75 A-share Salesforce 9.16 Hundsun Technologies Inc 56.78 Netsuites 19.07 Chanjet 10.40 US stock Servienow 20.86 H-share Inspur 29.05 Workday 23.86 China soft International 21.01 Zendesk 15.73 SAP 26.98 US stock Average 15.70 ORACLE 19.58 P/E P/S Average 42.74 Market Average 42.74 15.70

C. Adjustment of indicators Adjusted multiplier 18.5 14.4 The seven comparable companies we chose for the P/E method are from three different stock markets. We decided to use average financial indicators for past three years of these companies as reference for adjustment and draw on future financial changes of Kingdee. The reasons for this decision are as follows. Firstly, H-share’s value premium is lower than that of A-share and US stock, so the companies listed in H-share are more informative. Secondly, the seven companies’ PE are from not only traditional business but also innovation business. Finally, multiples of valuation are affected by growth. The five comparable companies picked for the P/S method are all listed in US stock market, however, value premium of H-share is lower than that of US stock. Thus, we used average financial indicators for past three years of these companies as reference for adjustment and draw on future financial changes of Kingdee.

1. P/E Adjustment EBITDA Revenue Net profit Net profit Asset-liability Dividend yield ROE Current ratio Margin growth growth margin ratio ratio

Kingdee(ERP Business) 6.99% 33.84% 6.65% 56.40% 20.10% 40.73% 3.02 0.20% China soft International 11.17% 11.15% 28.02% 41.93% 6.15% 41.80% 2.09 0.40% Hundsun Technologies Inc 11.91% 14.68% 25.52% 802.02% 11.34% 41.43% 1.31 0.60% Chanjet -0.81% 5.86% 13.92% 14.38% -2.83% 17.11% 6.56 0.00% Inspur 2.97% 14.83% 14.93% 88.45% 4.34% 33.05% 1.87 0.00% YonYou 5.33% 15.49% 13.50% 5.64% 7.08% 47.96% 1.27 0.50% SAP 14.25% 26.05% 10.28% 9.71% 16.15% 41.33% 1.20 1.02% ORACLE 14.84% 42.28% 1.44% -21.53% 19.78% 61.18% 3.59 1.54%

The Kingdee’s average P/E(ERP Business) in recent three years is 21.

Net Net Average financial ratio in the EBITDA Revenue ROE profit profit Asset-liability ratio Current ratio Dividend yield ratio next three years Margin growth growth margin Kingdee(ERP Business) 6.67% 29% 24.01% 21.71% 11.69% 28.10% 3.00 0%

2. P/S Adjustment

Revenue Revenue In CNY Millions Average financial ratio in the next three years Revenue Revenue growth （2017） growth （2020F） Kingdee(Cloud Servie Business) 75.10% 568 Kingdee（Cloud Servie Business） 43.92% 1689.65 Salesforce 24.95% 72094.1 Netsuites(2015) 33% 741.15 Servienow 38.82% 13297.67 Workday 39.56% 14742.47 Zendesk 50.58% 2961.44

D. Predicted Price

P/E Valuation P/S Valuation

EPS 0.22 HKD Cloud Revenue/Shares 0.41HKD P/E 18.5x P/S 14.4x Predicted Price 4.07 HKD Predicted Price 5.90 HKD Predicting stock price: 9.97 HKD

Appendix 11: Calculation of LTV and CAC of Kingdee Cloud Service The cloud service business consists of Kingdee Cloud, Jingdou Cloud and Guanyi Cloud. We calculate their LTV and CAC separately due to their different ARPU and renewal rate. Firstly, we split the marketing costs of Kingdee that didn’t be mentioned in annual report of KDI. We calculated the marketing expense ratio of management software business by averaging three-year average sales cost of ERP industry (26.6%, according to Wind) and that of Kingdee (51.9%). The KDC Mentioned below Represents KDC I Since There Is No Data for KDC II. Marketing Costs of ERP Business=Income of ERP Business*Marketing Expense Ratio of ERP Business Marketing Costs of Cloud Business=Total Marketing Cost-Marketing Cost of ERP business Customer Life Cycle =1/ Churn Rate (When calculating Kingdee Cloud, it should also be multiplied by the proportion of public clouds.) ARPU= Total product revenue/number of customers LTV=ARPU* Customer Life Cycle CAC=Marketing costs/ Number of New Customers According to reports and data from Wind, we found that the marketing costs of KDC accounted for over 70% of that of cloud business, and calculated the proportion of GYC (20%-25%, inferred from that of KDC and GDC (5%-10%)). In addition, the revenue of KDC is divided into 2 parts: public cloud and private cloud. The private cloud along with On-Premise is one-time fee, while the public cloud can bring continuous income for the company. Therefore, we removed cost of private cloud in the calculation of customer life cycle. In CNY Thousand Kingdee Cloud

Renewal Churn Rate Number of ARPU Proportion of Number of New Customer Life LTV CAC LTV/CAC Date customers public clouds Customers Cycle 2016 90% 10% 2500 38 40% 1600 4 220 177 1.3 2017 90% 10% 5500 55 70% 3250 7 385 119 3.2 In CNY Thousand Jingdou Cloud Renewal Churn Number of Customer Life ARRU Number of New Customers LTV CAC LTV/CAC Date Rate customers Cycle 2016 75% 25% 87200 0.41 37700 4 1.64 0.80 2.04 2017 70% 30% 150000 0.413 88960 3.3 1.3629 0.47 2.92 In CNY Thousand Guanyi Cloud

Renewal Churn number of Customer Life ARRU Number of New Customers LTV CAC LTV/CAC Date Rate customers Cycle 2016 90% 10% 5180 13.7 1805 10 137 50.44 2.72 2017 70% 30% 6200 15.8 2574 3.3 52.14 48.35 1.08 Notes:  The products of Jingdou Cloud are all standardized and unit price is between 598 and 1098 CNY. Previously, for promotion, the company gives 5% off from the price when the customers purchase two-year service while 20% off for five-year service. As predicted, with customer stickiness increasing, discount decreasing and the launch of value-added services, the ARPU of Jingdou Cloud will raise.  As mentioned before, the sales expenses of Jingdou Cloud accounted for 5%-10% of the cloud business, and we adopted 7.5%. Then, 22.5% of Guanyi Cloud was calculated.  With Kingdee Cloud's modules of public cloud improving and the issue of second-generation product, which has higher ARPU, the ARPU of Kingdee Cloud will increase.

Appendix 12: Comparison Between Kingdee and Foreign ERP SaaS SaaS industry in USA started earlier. According to the report, the development of American SaaS companies are ahead of companies in China. Therefore, we compare data from 2011 to 2015 of Kingdee to that of SaaS companies. The products from NetSuite (in US) are similar with KDCⅠproviding solutions to SMEs. And the products from Workday (in US) are similar with KDC II. KIngdee Cloud Workday 2016 2017 2018H1 2011 2012 2013 （CNY ） （USD） Customer volume Customer volume 2.5 5.5 7.5 0.259 0.400 0.600 (thousands) (thousands)

Renewal Rate 90% 90% 80% Renewal Rate 91% 91% 91% ARPU 38 55 —— ARPU 342.2 475.8 590.3 CAC 177 119 —— CAC 358.98 437.73 493.43 LTV 220 385 —— LTV 2843.8 4196.4 5277.2 LTV/CAC 1.3 3.2 —— LTV/CAC 7.92 9.59 10.70 Netsuite（USD） 2011 2012 2013 2014 2015 Customer volume (thousands) 12 16 20 24 30 Renewal Rate 91% 91% 91% 91% 91% ARPU 16.6 15.8 16.7 18.6 19.7 CAC 30 19.3 26.3 36.4 32.4 LTV 152.1 146.8 154.6 173 183.2 LTV/CAC 5.06 7.61 5.89 4.76 5.66

Appendix 13: Porter’s Five Forces 1. Threat of Substitutes-Very Low (1) The competition of ERP business market became less fierce with the maturity of the industry. The main substitute of traditional ERP is cloud ERP. Large and medium-sized enterprises commonly adopt custom local deployed ERP, while SMEs, especially small and micro enterprises, prefer Cloud ERP since it is more convenient and cost-saving. In the broad market of SMEs, cloud service business is widely accepted. Kingdee has promoted SaaS products on cloud and ranked 1st of market share in the domestic public cloud SaaS industry. So, we assumed that the company were able to control the risk. 2. Bargaining Power of Suppliers-Low (2) The bargaining power is represented in two aspects below. For one thing, the biggest cost of software enterprises is labor cost. Talents play a core part in the development of the software industry, so the preferential treatment and attraction of talents is a major part of bargaining power of suppliers. For another, the major supplier of SaaS industry is the underlying platform of IaaS, such as AWS, Ali Cloud and Kingsoft Cloud. As for treatments of talents, KDI has the advantage of equity incentive plans, but the salary of talents is far less than other IT enterprises. Kingdee adapts different suppliers for its different cloud products, and the core product KDC is based on AWS. KDC now becomes the carefully selected partner of HUAWEI Cloud and China’s top partner of AWS. However, Kingdee cannot develop IaaS by itself, and additionally, AWS is in a relatively monopolistic position in the underlying cloud computing industry, which makes the cost of changing underlying IaaS suppliers enormous. Based on the points above, we infer that there exists bargaining risk. 3. Rivalry within the Industry-High (4) The main cloud serve of Kingdee is dominated by the SaaS standard development service while there is only a small part of the customized service in the company. And it does not go deeply into the upstream of the industrial chain. Kingdee has covered the whole industrial chain of the ERP business from the development of the software to the deployment of the serves and finally to the maintenance. Since the marker of the traditional ERP has entered the maturity period, it is difficult for Kingdee to expand its market size. As the leader, ranked TOP1 in market share, of the industry, Kingdee is facing relatively gentle pressure from its peers.

4. Threat of New Entrants-Moderate (3) There are several industry barriers for ERP business below:  High cost of shifting suppliers. It is fixed cost of system migration for customers. For instance, if a company migrates its business from Kingdee ERP product to YonYou ERP, it must restart the work progress and re-import data, which leads to the loss of time, money and maybe the data. Besides, there is also the cost for the users and maintainers to be familiar to the new software.  High requirements for capital. The new entrants must obtain talents from incumbents by generously salary for the long-time and large-scale development cycle of management software. The finished software needs to gain corresponding qualification license and be qualified in performance test. It also should be equipped with perfect distribution and direct sales channels. Those above are associated closely with huge capital.  The benefit from large-scale of demand side. All the software is accompanied with bug. The more users will lead to the higher stability of the software with the identification of bugs. So customers prefer to products with higher market share to reduce risk.  The inequality of gaining distribution channel. The major channel providers have contracts with incumbents in the management software market, which means that new entrants will cost a lot to gain distribution channel. However, the industry barrier of SaaS is relatively easy to break. For the second-generation of KDC is open source product, it is easy for other enterprises to imitate the SaaS model of Kingdee, which threatens the dominate role in SaaS industry of Kingdee. Besides, the industry is growing up in a reshuffle stage that aggravates the threat of new entrants. In conclusion, we believe that new entrants will bring about great threat. 5. Bargaining Power of Customers-Moderate (3) The products of ERP business has entered a mature stage. Price sensitivity ranges among different industries, for example, those enterprises with high requirements for the final product and value chain like financial, IT, oil industry, the business of which depend on information system and produce lucrative profits, show less sensitive to price. ERP enterprises pay great attention to the competition for enterprises mentioned above. The major customs of Kingdee, with the background of building material, retail, IT and service industry, have strong bargaining power. For SaaS product KDC, there are less mature products in the industry, which lead to price instability. Main promotional objects of KDC are large and medium-sized enterprises with strong bargaining power. Kingdee’s other products for SMEs conduct less promotional activities with relatively stable price, facing less pressure from bargain of customers. We consider that Kingdee has moderate bargaining power.

Appendix 14: SWOT Analysis

Appendix 15: US SaaS Market Development vs. China SaaS Market

US SaaS service development history US vs. China (SaaS Market)

Global Market Distribution of Cloud Computing (2017) China vs. America (Public Cloud)

Source: IDC & Team Assessment Source: IDC & Team Assessment

Appendix 16: SaaS Market Growth Rate Comparison

Source: Wind & Team Assessment

Appendix 17: Global ERP Market vs. Chinese ERP Market

Source: IDC & Team Assessment Appendix 18: Global IT and Appendix 19: IT Expenses of Enterprise Software (ES) Expenses Enterprises

Source: Gartner & Team Assessment Source: IDC & Team Assessment

Appendix 20: Comparison between SaaS and Traditional On-Premise

SaaS On-Premise SaaS suppliers finish the deployment, and Users deploy the software locally with hardware and Deployment users access via the internet maintenance staff’s help Pay as needed (subscription fee or Charge for the software license, secondary development Charge mode valuable added service) and implementation Fast iteration (updated every 2or3 Product iteration Iteration frequency is low (updated more than a year) months) Controllability is not enough, and safety Safe and controllability Safer and more controllable of data exists risk Lower cost for users (30% of cost of On- The cost of usage Complicated structure of cost and high initial investment Premise) Short implementation cycle (commonly Long Implementation cycle (at least a few months and Implementation cycle within one month) sometimes can be more than one year) Can't meet the demand for personalized Customization Can meet the personalized need and complex business. Procurement risk low risk high risk customer relations Rental or long-term service relationship Sales relationship Source: Team Analysis Comparisons of On-Premise and SaaS Expenses

Source: Wind & Team Assessment

Appendix 21: Kingdee Cloud Supports Appendix 22: Number of Chinese Government Policies in Corporate Large Enterprises Adopted Cloud Cloud Migration (2017)

Source: Report from Ali Cloud & Team Analysis

Appendix 23: IaaS Products of Amazon AWS Added Functions and Services of AWS Price-Cuts Frequency of AWS

Source: Amazon & Team Analysis Source: Amazon & Team Analysis

Appendix 24: Enterprise's Consideration of ERP

SME Medium-Sized Large-Sized Business Complexity Low Median High Demand for Function Low Median High Organization Simple Median complex Demand for Customization Low Median High Worry About Safety Low Low High Requirement for System Stability High High High Demand for Business Expansion Median High Low Investment In IT Low Median High Source: Wind & Team Analysis

Appendix 25: Capability of Enterprises’ Transition to Cloud Service

Appendix 26: The Distribution of SaaS Market

The Distribution of KDC The Chinese hotspot Area of SaaS Market

Appendix 27: Monte Carlo min base max Industry Factories SaaS's Market Scale CAGR 35% 40% 50% Enterprises Management Software CAGR 6% 10% 14% Domestic Management Software Scale 4% 6% 8% CAGR IT Expenditure CAGR 3.0% 5% 8% Company Factories Traditional Business Revenue CAGR 4% 9.5% 13% Composite Tax Rate 10% 14% 18% Cloud Business Revenue CAGR 30% 40% 60% Valuation Factories GDP Growth Rate 5% 6.50% 8% Inter-Bank Market Rate 2% 2.28% 2.56% Chinese Average Wage CAGR 7% 10% 13% Corporate Profit CAGR 7% 13% 19% Source: Team Analysis

Appendix 28: Sensitivity Analysis

Source: Team Analysis

Appendix 29: Risk Matrix

Market Risk

M1 SaaS Market Unexpectations M2 Market Competition Intensifies M3 Usage Price of IaaS Raises

Financial Risk F1 Trade War Intensify F2 Tax Risk F3 Risk Debt Cost

Business and Operational Risk B1 Renewal Rate of Users Drops

B2 Core Developers or Executives Leave B3 Cloud Business Payback Period Extended B4 Data Security Issues Other Risk

O1 Downtime of Cloud Service Server O2 Technology Iteration Speeds up Source: Team Analysis

Source: Team Analysis

Appendix 30: Group Executive Committee and Board of Directors

Name Position Information Founder of the Group; Awarded the Government Special Expert Allowance by the State Chairman of the Board Shaochun Xu Council; and CEO Degrees in Computer Science, Accounting master and EMBA; Vice President of China Software Industry Association. Degree in Computer Science; Past General Manager of the Company in Fujian Province Region and CFO, Vice President Bo Lin Operation Management Department; and Executive Director Extensive experience in strategic planning, marketing management and financial management. A member of the Institute of Chartered Accountants of Scotland; Canlin Zhou Company Secretary A member of the Hong Kong Institute of Certified Public Accountants. President of Kingdee Degree in Scievce and Technology and MBA; Yanfei Sun China Past General Manager of Nanjing Branch and Southern District of China. Senior Vice President Past General Manager of Shanghai Branch and Eastern Region of China; Yong Zhang of Kingdee China Extensive experience in marketing, sales and team work management. President of Kingdee Mainly responsible for the Company’s cloud services for micro and Guangxue Li Deeking small-sized enterprises business. Outstanding scientist; Liangjie Zhang Chief Scientist With 40 invention patents and more than 140 scientific papers published. Master’s Degree of Business Administration; Non-executive Mingzhu Dong The chairman of the board of Gree Electric Appliances, Inc. of Zhuhai Director Co., Ltd. Master’s Degree in Computer Science; Non-executive The president of JD Cloud; Yuanqing Shen Director An independent director of Insigma Technology Co.; A non-executive director of Inspur International Limited. Degrees in MBA and PhD; Gary Clark Independent The Accounting Chair and PCCW Chair Professor at the University of Biddle non-executive Hong Kong; An independent non-executive director of Shui On Land Directors Limited. The director of Institute of Global Entrepreneurship & Innovation (Hong Kong); The management practice Professor of Guanghua School of Independent Management, Peking University; Jiayong Liu non-executive Ph.D. in International Entrepreneurship and Strategic Management and Directors Human Resource Management; Postdoctoral research in Department of Strategic Management. Master’s Degree of Business Administration; Source: Company Data Independent Previous general manager of Green and Associates; Yangfeng Cao non-executive Rich experience in Hi-Tech marketing, business strategy planning and Directors global corporation management.

Appendix 31: Endnotes (1) China Software Industry Association (2017). Chinese Cloud ERP Market Study Report. (2) Guan Weihua, (2016). Research on the Impact of ERP Implementation on the Performance of China's Listed Companies. Modern Trade Industry, 37(20), pp.124-125. (3) ERP Market Study Report (2017). iResearch. (4) Key Industry Applying Cloud Computing Study Report (2017). China Academy of Information and Communications Technology. (5) SAP. (2018). SAP S4 HANA Cloud Product Report. [online] Available at: https://www.sap.com/china/index.html?campaigncode=CRM-CN18-PPC-BRDBZFCBZP&source=PPC-CN- Baidu_BrandZone-BZ-Title. (6) IaaS Report (2017). Gartner (7) Behind the Innovations in SAP S/4HANA Finance Cloud (2016). Constellation Research. (8) IDC Semiannual Public Cloud Services Tracker (2017). IDC. (9) Kingdee Cloud Cosmic Solutions Book. [online] Available at: http://www.kingdee.com/products/firmament. (10) SaaS Metrics 2.0- A Guide to Measuring and Improving what Matters (2017). David Skok. (11) http://www.ebrun.com/20170818/243193.shtml (12) Everbright SaaS Securities Report (2016). Everbright Securities. (13) Zh.tradingeconomics.com. (2018). [online] Available at: https://zh.tradingeconomics.com/china/inflation-cpi. (14) Ministry of Industry and Information Technology of the People’s Republic of China (2018). Promote Enterprise Using Cloud Guide Implementation Guide (2018~2020). (15) Ji Xiao feng, (2009). Research on Differentiated Competitive Strategy of Oracle Software China. Fudan University. (16) Kingdee Governance Report 2017. [online] Available at: http://www.kingdee.com/company/ir/. (17) China Enterprise SaaS Industry Research Report (2017). iResearch.