Leading SAAS growth stock trading at 30 cents on a dollar!
This stock might surprise you as it is one of the leading software companies that target Small to micro companies in China. It is the leading ERP (Enterprise resource planning) software company that brings extreme efficiency in finance, accounting, inventory management, etc. No.1 company in China is Yonyou and Chanjet is the key subsidiary company of Yonyou. Yonyou owns 72% of the company. I was surprised by two things initially 1) Yonyou more than doubled its stake in 2H10 upto 72% of total stake in the company 2) Company has Net cash and other securities worth of HKD 1,641M which is 85% of the market cap. Company's cloud SAAS business is 35% of the total revenue while 65% is on premise software.
Why should you buy?
1) The company has cloud business which has compounded 200% in 2019 and +81% YoY in 1Q20 and IR expected continued strong growth in FY20 and beyond. According to market forecasts such as one from CLSA, SAAS industry growth is to top over 40% CAGR in 2019~21. So, what we are seeing is very strong outlook going forward on the cloud business. The company has no.2 position & with a close first being Kingdee software. I looked up some reviews stating that customers like Chanjet more given higher adaptability and better customer support. Now, not everything is sunshine and rainbows as the company's on-premise business is declining quickly. However, we must note that this is actually good in the Long run as SAAS customers have a much higher retention rate > 80% versus on premise customers so revenue streams are likely to be much more recurring in the future.
2) The company benefits from increasing Customer life time value (this is essentially the present value of future cash flow streams from recurring customers) continues to grow (as customers add value-added products) and reached RMB2,954 in 1Q20 (+23%YoY) versus customer acquisition cost continue to go down and reached RMB2,008 (-15% YoY) which means that the value accretion to the company continues to increase. So, what we need to focus is not the near term earnings but rather the long term value accretion. Company is committed to further improve the retention rate and ARPU to increase customer LTV. The CAC should continue to go down as company could leverage the marketing channels that Yonyou already has (no.1 ERP player in China).
3) Company pours in significant R&D as its ratio to sales is very high at 30%.
4) Company recently signed strategic cooperation with JD.com, showcasing it's offering in JD.com's B2B site.
Valuation: Given that EBIT should improve significantly due to recurring customer base (so costs per customer should go down signficantly), we think it is likely that 2022 EBIT should top CNY150M. With 10% tax rate, NOPAT is CNY133M. Applying 20x multiple, and adding net cash, roughly upside is 3x from here. Now, peers are trading at above 40x EV/NOPAT multiple so, we are being conservative here. I think with a more blue sky scenario where cloud grows much faster at current rate for next three years, we will see around 9x upside from here. Downside is very well protected from here given cash is 85% of market cap. So let's do a coin flip. Heads I win, Tail I don't lose much or not lose at all over the long haul.
Why should you buy?
1) The company has cloud business which has compounded 200% in 2019 and +81% YoY in 1Q20 and IR expected continued strong growth in FY20 and beyond. According to market forecasts such as one from CLSA, SAAS industry growth is to top over 40% CAGR in 2019~21. So, what we are seeing is very strong outlook going forward on the cloud business. The company has no.2 position & with a close first being Kingdee software. I looked up some reviews stating that customers like Chanjet more given higher adaptability and better customer support. Now, not everything is sunshine and rainbows as the company's on-premise business is declining quickly. However, we must note that this is actually good in the Long run as SAAS customers have a much higher retention rate > 80% versus on premise customers so revenue streams are likely to be much more recurring in the future.
2) The company benefits from increasing Customer life time value (this is essentially the present value of future cash flow streams from recurring customers) continues to grow (as customers add value-added products) and reached RMB2,954 in 1Q20 (+23%YoY) versus customer acquisition cost continue to go down and reached RMB2,008 (-15% YoY) which means that the value accretion to the company continues to increase. So, what we need to focus is not the near term earnings but rather the long term value accretion. Company is committed to further improve the retention rate and ARPU to increase customer LTV. The CAC should continue to go down as company could leverage the marketing channels that Yonyou already has (no.1 ERP player in China).
3) Company pours in significant R&D as its ratio to sales is very high at 30%.
4) Company recently signed strategic cooperation with JD.com, showcasing it's offering in JD.com's B2B site.
Valuation: Given that EBIT should improve significantly due to recurring customer base (so costs per customer should go down signficantly), we think it is likely that 2022 EBIT should top CNY150M. With 10% tax rate, NOPAT is CNY133M. Applying 20x multiple, and adding net cash, roughly upside is 3x from here. Now, peers are trading at above 40x EV/NOPAT multiple so, we are being conservative here. I think with a more blue sky scenario where cloud grows much faster at current rate for next three years, we will see around 9x upside from here. Downside is very well protected from here given cash is 85% of market cap. So let's do a coin flip. Heads I win, Tail I don't lose much or not lose at all over the long haul.