Global Software: Digital Revolution Fuels Growth
Global ERP industry registered decent growth despite economic headwinds. In the Global IT Outsourcing industry, growth of the Enterprise Resource Planning (ERP) segment correlates closely with enterp...
Chief Investment Office - Hong Kong25 Oct 2023
  • Global and Chinese ERP players registered decent revenue growth in the recent earnings season despite prevailing macro headwinds
  • Global ERP market projected to grow at 11% CAGR in the medium term; ERP is less susceptible to economic cycles and IT budget reductions given its importance to core company operations
  • China ERP market to enjoy stronger CAGR of 15% given low ERP penetration rate and localisation trend
  • Global ERP players are currently trading at 5-10x forward P/S (price-to-sales) and this is similar to historical average
  • Chinese ERP players are trading at 5x P/S, one standard deviation below their historical average; this reflects slower growth during city lockdowns as well as company restructuring
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Global ERP industry registered decent growth despite economic headwinds. In the Global IT Outsourcing industry, growth of the Enterprise Resource Planning (ERP) segment correlates closely with enterprise IT spending and the overall economic environment. Global ERP names reported y/y revenue growth ranging from 5% to 12% in their latest quarterly results, underpinned by c.20% growth in their cloud ERP business segments despite economic challenges.

Furthermore, these global ERP companies have recorded robust earnings growth ranging from 12% to 50%, thanks to improved operating efficiency. In the case of China, while one of the domestic leaders has recently undergone organisational restructuring, the other key leading player has managed to achieve impressive 17% y/y revenue growth, buoyed by 22% growth in its cloud ERP segment.

Looking ahead, global ERP companies are expected to sustain their business momentum and they are targeting to achieve full-year revenue growth like their recent quarterly numbers. For the Chinese players, while they do not offer specific guidance, we anticipate stronger business growth in 2H23, driven by favourable policies supporting enterprise digitalisation and localisation.

Expect sustainable growth amid resilient ERP demand. Growth of the ERP market is expected to be more resilient than other software applications and public cloud services. ERP tools are vital during and after the pandemic for core company operations, such as financial reporting and employee performance tracking. For instance, while public cloud demand has waned post-pandemic, the ERP space has remained resilient, rendering them less susceptible to economic cycles and IT budget reductions.

We expect sustainable growth for the ERP market as it rides on the global enterprise digitalisation trend given strong business reliance on ERP to enhance operational efficiency and make data-driven decisions. Grand View Research expects the market to register CAGR of 11% from 2023 to 2030.

China ERP market to enjoy faster growth amid low penetration and localisation trend. China accounts for c.4% of the global market and is poised to deliver 15% CAGR growth, surpassing the global average of 11%. ERP adoption in China stands at c.25%, lower than the 40%+ observed in mature markets like Europe and the United States. In recent years, the Chinese government has enacted policies to encourage enterprise ERP digitalisation (e.g. tax benefits) and to promote software localisation, which aim to bolster adoption of domestic software. Key domestic players, Kingdee and Yonyou, have been gaining market share from foreign ERP incumbents and this trend is expected to persist in the years ahead.

While China’s ERP sector enjoys faster growth, we are also expecting steady growth for global ERP companies given their diversified geographic reach. On balance, improvement in the global economy and by extension, global IT spending, will support re-rating for both global and Chinese ERP players.


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