Glodon FY20 results missed our estimates on slower Construction business growth and higher opex although SaaS transition is in good shape (revenue +71% YoY). FY21E SaaS growth outlook is likely to remain strong given +68% YoY increase in unearned revenue in FY20. However, we believe further re-rating is difficult without solid opex control plan to realize operating leverage with SaaS. Maintain BUY but lower target price to RMB89.19 (prior RMB107.26).
- FY4Q20 missed on higher opex with faster SaaS transition. Glodon FY4Q20 achieved top line growth of +9% YoY to RMB1,417mn and net profit growth of +32% YoY to RMB101m. FY4Q20 results missed our estimates on 1) faster-than-expected SaaS transition in costing business (license revenue -38% YoY vs. CMBI prior forecast of -16% YoY) and 2) higher sales & marketing expense (+12% YoY).
- SaaS in good shape while Construction business growth resumed. Glodon delivered robust FY4Q20 costing SaaS revenue growth of +71% YoY to RMB515mn. Newly signed SaaS contract was at RMB663mn (+50% YoY) and unearned revenue was at RMB422mn (+68% YoY), all suggesting strong SaaS revenue ahead. Construction segment growth also resumed in FY4Q20 at +25% YoY (vs. mere +1% YoY in 9M20 given COVID-19 and more stringent account receivables management). Glodon targets 30% revenue CAGR for its construction business in the coming three years.
- Cash flow improved but operating leverage unclear. Glodon’s FY20 operating cash flow improved significantly to RMB1,876mn (vs. RMB641mn in FY19) as SaaS contribution increased. However, operating leverage is not clear yet with operating margin of 10.2% in FY20 (only up +0.6 pct pts YoY) given increasing investment in sales channel and R&D on new products.
- Maintain BUY. We cut FY21-22E net profit by 2-9% to reflect 1) lower Construction business growth (FY20 missed prior guidance by 17%) and 2) higher-than-expected opex. We maintain our view that Glodon is the best software company in China that undergoes SaaS transition but clearer opex control plan is needed to drive further re-rating. Retain BUY but cut target price to RMB89.19, based on 18x FY22E EV/sales (prior 20x) given dimmer profitability outlook.
