Glodon FY1Q21 top line strongly beat with costing SaaS revenue growth of +80% YoY. Newly signed contract (+108% YoY) and unearned revenue (+72% YoY) suggested growth momentum to continue. Operating leverage is not obvious yet with increasing opex on new businesses (engineering construction, building decoration). We continue to like Glodon’s for its significant free cash flow improvement with SaaS transition. Maintain BUY.
- FY1Q21 revenue beat on SaaS. Glodon reported FY1Q21 revenue of RMB849mn (+50% YoY), beat our/consensus estimates by 33%/49% respectively. Net profit was at RMB77mn (+45% YoY), below our estimate by 13% mainly on higher-than-expected opex as 1) sales and marketing activities resumed after COVID-19 (S&M expense +45% YoY) and 2) higher R&D related to new business segment - public building decoration (R&D expense +57% YoY). And thus, operating margin squeezed by 3.9 pct pts YoY to 10.6%.
- Robust SaaS growth offset construction business weakness. Glodon costing SaaS revenue growth was impressive at +80% YoY to RMB549mn. Newly signed contract was at RMB330mn (+108% YoY) and unearned revenue was at RMB1,288mn (+72% YoY), which indicated strong SaaS growth momentum to continue. Engineering construction segment was disappointing as revenue declined 14% YoY to RMB83mn although mgmt. maintained construction business +30% YoY growth full-year target.
- Free cash flow improved but it takes more time for operating leverage. As Glodon continues to invest in new business (building decoration, 3D graphics platform etc.), operating leverage from increasing costing SaaS revenue contribution (65% of 1Q21 revenue vs. 54% in 1Q20) is not obvious. However, we are positive to see free cash flow improve significantly from a net outflow of RMB200m in 1Q (similar level for the past 5 years) to only RMB20mn in 1Q21.
- Maintain BUY. We raised FY21-23E revenue by 2-4% but cut FY21/22E net profit by 5% to 16% to reflect 1) strong SaaS revenue growth (+36% CAGR in FY20-22E) and 2) higher opex for new business development. We maintain BUY with new target price of RMB91.36, based on unchanged 18x FY22E EV/sales.
