Key Takeaways:
- Ming Yuan Cloud said its adjusted net profit last year dropped up to 27% from 2020
- The company is actively transitioning its ERP business and rapidly growing its more profitable SaaS, but investors remain unimpressed
By Ken Lo
China’s slumping real estate market is casting a shadow over Ming Yuan Cloud Group Holdings Ltd. (0909.HK)
The provider of software as a service (SaaS) products and enterprise resource planning (ERP) solutions to real estate companies issued a profit forecast on Monday disclosing it expects to post a loss of 310 million yuan ($49.8 million) to 360 million yuan for last year, narrowing by around half from its 704 million yuan loss for 2020.
But excluding non-operating factors such as around 803 million yuan worth of stock-based compensation in the past two years, the company’s adjusted profit last year fell by as much as 27% to between 280 million yuan and 330 million yuan from the 383 million yuan in 2020, the forecast said. The company said the adjusted amount better reflects its operating performance by discounting non-cash transactions. The company will release its annual financial report on March 28.
The results weren’t exactly welcomed by investors, who sold off Ming Yuan Cloud’s shares to the tune of a 16.6% decline on Tuesday to close at HK$10.24 – a new low since the company’s September 2020 listing. The comedown was all the more notable because the stock had reached a high of HK$60.80 just half a year after its IPO, nearly four times its offering price of HK$16.50. But after stumbling over the past year, the stock is now 83% below its all-time high and 28% lower than the IPO price.
A breakdown of the company’s results between the first and second halves of the year shows why investors are glum. Calculations using the new full-year forecast show the company expects to post an adjusted profit of just 87 million yuan to 137 million yuan in the latter half of the year, down sharply from a 194 million yuan adjusted profit in the first half of the year. That most likely reflects sluggishness in China’s real-estate market in last year’s fourth quarter, and the serious challenges continued weakness in the sector could pose to Ming Yuan Cloud due to its heavy reliance on the sector.
According to Chinese government data, economic output for China’s real-estate industry in last year’s fourth quarter totaled 1.97 trillion yuan, down 2.9% year-on-year. The construction industry’s output was 2.6 trillion yuan, down by a similar 2.1% from the year-ago period. The fourth quarter weakness contrasted with annual output gains of 5.2% and 2.1% for the two sectors, respectively. The fourth-quarter contraction reflected the deteriorating financial conditions for many of China’s leading real estate companies.
Ming Yuan Cloud earns its money by providing SaaS solutions to those real estate developers that are now hurting, many suffering under heavy debt and unable to borrow more money. By the end of June 2021, the company had partnership with 96 of the country’s top 100 real-estate developers and had a total of 5,200 developers as clients. According to third-party data cited by the company, Ming Yuan accounted for around 24.6% of the contract value of its industry in 2019.
High-tech comparisons
Two potential high-tech comparisons for Ming Yuan are the publicly listed Glodon Inc. (002410.SZ), an A-share company with a focus on construction; and Kingdee International (0268.HK), which is in the middle of making a similar transition as Ming Yuan for its ERP business. Ming Yuan Cloud has been impacted by both declines in the real estate industry and the softening of its ERP business.
By contrast, Glodon which offers digital construction platform services, released a positive profit forecast at the end of January. It said it expected to report an adjusted profit of around 622 million yuan to 672 million yuan for 2021, up 106% to 122% from 2020, marking a major improvement that left Ming Yuan Cloud in its shadow.
According to Cinda Securities, China’s smart construction market was worth 13.86 billion yuan in 2020 and expected to grow to 36 billion yuan by 2025, representing an annual compound growth rate of 21%. Glodon’s digital construction business reached a value of 943 million yuan in 2020. Even after growing at an annual compound rate of around 50% from 2014 to 2020, it still accounted for just 6.8% of its market.
Ming Yuan also looks weaker than Kingdee International due to its slower transition from ERP into the newer enterprise business capability (EBC) solutions. Instead of focusing on a company’s own internal activities, EBC has a broader scope that allows companies to consider factors involving their clients, partners and other stakeholders using internet of things (IoT) and smart analysis platforms.
Ming Yuan Cloud posted revenue of 974 million yuan in the first half of last year, up 45.2% year on year. Within that total SaaS revenue grew 65.5% to 552 million yuan, accounting for more than half of all revenue. ERP product revenue grew at a slower 25.1% to 422 million yuan. That shows the company’s is trying to use faster SaaS business growth to compensate for slowness in ERP sales during the transition to EBC.
While allowing Ming Yuan Cloud to maintain its business growth, its SaaS business is also more profitable with a net profit margin of about 30% or more, double the level of about 16% for traditional ERP services.
Ming Yuan Cloud’s management plans to focus more on the pace of its business transformation this year due to the uncertain industry outlook in the real estate sector, according to a JPMorgan report released last month. The bank expects the company’s revenue to grow by 13% to 20% in 2022, with SaaS growing 35% to 40%.
The bank pointed out that although Ming Yuan Cloud’s shares are down 70% in the past year, it currently trades at the bank’s forecast price-to-earnings (P/E) ratio of 90 times this year, and a predicted price-to-sales (P/S) ratio of 9 times, which are both relatively high. Accordingly, JPMorgan slashed its target price for Ming Yuan Cloud by 62% to just HK$19 from a previous HK$50.
Glodon’s shares have also fallen in the last year, though by a milder 26%. Using the adjusted profit figure from Ming Yuan’s latest forecast, the company had a P/E ratio last year of between 46 to 53 times. That was far lower than Glodon’s ratio of 81 to 88 times, showing Ming Yuan is clearly not in a sunny spot right now with investors.
