Summary of China Software 3Q25 Result Review Industry Overview - The report focuses on the **China Software** industry, specifically analyzing the performance of various software companies in the third quarter of 2025 (3Q25) and updating estimates based on recent trends. Key Points Overall Performance - Average revenue growth for the covered companies was **4% YoY** in 3Q25, a decline from **9% in 1H25** [1] - Average net margin improved to **3% in 3Q25**, compared to **-3% in 1H25**, indicating enhanced efficiency and profitability among software companies [1] Company-Specific Highlights - **Kingsoft Office**, **Thundersoft**, and **Arcsoft** showed strong revenue growth driven by increased demand for AI products, despite overall soft IT spending [1] - **iFlytek**, **Sangfor**, and **Glodon** experienced net income recovery in 3Q25 due to productivity improvements [1] Management Insights - Management teams expressed optimism regarding enterprise and government spending on AI applications, AI agents, and AI models to enhance productivity and creativity [1] - Despite positive sentiments, the report maintains a **Sell rating** on **ZWSOFT**, **Glodon**, **Thundersoft**, and **Sangfor**, primarily due to valuation concerns [1] Valuation Metrics - The average P/E ratio for China software companies is around **55x-60x**, compared to a five-year average of **59x** [2] - The average EV/Sales ratio remains at **8x-9x**, lower than the 2020-21 average of **12x-18x** [2] Individual Company Performance - **Glodon**: Revenue increased by **4% YoY** to **Rmb1.5 billion**, driven by construction management and design software growth. However, the company faces weak momentum in new construction projects [11] - **ZWSOFT**: Revenue remained flat YoY at **Rmb204 million**, attributed to weak end demand in the China market. Management expects slight recovery in 4Q25 [22] - **Thundersoft**: Revenue grew **43% YoY** to **Rmb1.848 billion**, driven by IoT software and automotive software growth. The company is focusing on next-generation automotive OS and AI edge solutions [30] - **Sangfor**: Revenue growth of **10% YoY** to **Rmb2.116 billion**, attributed to strong demand for cloud computing solutions. The company launched new AI platforms to enhance efficiency [37] Earnings Revisions - **Glodon**: Net income estimates revised down by **6%** for 2025-28E due to lower construction-cost software revenues and higher operating expenses [16] - **ZWSOFT**: Net income estimates revised down by **18%** for 2025-27E due to lower revenues and gross margins [26] - **Thundersoft**: Earnings revised down by **15%** for 2025-27E, mainly due to lower revenue in smartphone software [33] - **Sangfor**: Earnings revised up by **1%** for 2025-27E, reflecting better-than-expected cost management [40] Future Outlook - Management of **Glodon** expects the new code of bills in the construction market to support revenue growth, while **ZWSOFT** anticipates recovery driven by overseas business growth and new client penetration [20][22] - **Thundersoft** is optimistic about opportunities from AI edge devices and the next generation of automotive OS [30] Conclusion - The China Software industry is experiencing mixed performance, with some companies benefiting from AI-related demand while others face challenges. Valuation concerns persist, leading to cautious outlooks for several firms despite positive management sentiments regarding future growth opportunities.

Summary of China Software Industry Conference Call Industry Overview - The China software industry experienced a growth of **15.1% YoY** in August 2025, an increase from **14.9%** in July and **14.0%** in June 2025, indicating a positive trend in the sector [1][10] - Cumulative revenues for the first eight months of 2025 (8M25) grew by **12.6% YoY**, compared to **11.2% YoY** in the same period of 2024 [1][18] Key Insights - The growth in the software market is supported by increased spending on AI tools by consumer clients and successful project wins in the business sector, particularly in enterprise and government [1][10] - The **Small and Medium Business (SMB) Purchasing Managers' Index (PMI)** improved to **48.2** in September 2025 from **46.6** in August, although it remains below the **49.3** level seen in May 2025, suggesting a gradual recovery in client IT spending [10][17] - The integration of AI capabilities into software applications is expected to drive sequential growth in the coming months [1][10] Segment Performance - In August, segments such as **semi design**, **cloud computing**, and **basic software** outperformed others [2] - The **AI software products** segment showed strong performance, with notable increases in Monthly Active Users (MAU) for productivity tools and video/image generation tools [2][5] Financial Metrics - The aggregate revenue of software companies in China reached **Rmb1.3 trillion (US$183 billion)** in August 2025, with a net margin of **17.4%**, slightly down from **18.2%** in July [18][19] - The net income for the software sector in August was **Rmb230 billion (US$32 billion)**, contributing to an 8M25 net margin of **13.7%**, which is an improvement from **13.1%** in 7M25 [19][26] Market Dynamics - The IT services segment remains the largest contributor to revenue, accounting for **68%** of total revenues, followed by software products at **22%** and embedded system software at **8%** [25][29] - The revenue from non-China markets increased to **US$6.5 billion**, representing an overseas exposure of **3.5%**, up from **3.2%** in July 2025 [25][30] Investment Recommendations - Companies highlighted for potential investment include **Sensetime** (AI), **Kingsoft Office** (Office Software), **Kingdee** (ERP), **Hundsun** (Finance), **TUYA** (IoT software), and **Empyrean** (EDA software) [3] Conclusion - The China software industry is on a positive trajectory with strong growth in AI spending and improving SMB sentiment, indicating a favorable environment for investment and expansion in the sector [1][10][18]

Summary of China Software Industry Conference Call Industry Overview - **Industry**: China Software Industry - **Growth Metrics**: - July 2025 revenue growth was 14.0% YoY, maintaining similar growth from the previous month, with aggregate revenues for the first seven months of 2025 (7M25) increasing by 12.3% YoY compared to 11.2% YoY in 7M24 [1][15] - The net margin for the software industry improved to 18.2% in July 2025 from 12.6% in June 2025, leading to a 7M25 net margin of 13.1% [10][15][22] Key Insights - **AI and Productivity Tools**: - AI productivity tools have shown strong performance, with significant user engagement and early signs of monetization for both business (ToB) and consumer (ToC) segments [2][9] - Companies are prioritizing investments in software that enhances productivity and content generation, particularly those with early AI monetization and high recurring revenue [1][2] - **Market Dynamics**: - The Small and Medium Business (SMB) Purchasing Managers' Index (PMI) showed a slight recovery to 46.6 in August 2025, indicating improving economic momentum, although still below the May 2025 level of 49.3 [9][10] - The software industry is expected to see improved client IT spending and better seasonality in the second half of 2025, driven by policies encouraging spending on "New quality productive forces" including AI applications [1][9] Financial Performance - **Revenue Breakdown**: - In July 2025, the total revenue for software companies registered in China was RMB 1.3 trillion (approximately US$176 billion), with IT services contributing 69% of total revenues, followed by software products at 22% [15][27] - The revenue from non-China markets increased to US$5.7 billion, representing an overseas exposure of 3.2% [15][29] - **Profitability Trends**: - The net income for the software industry reached RMB 231 billion (US$32 billion) in July 2025, reflecting the impact of headcount optimization and efficiency improvements initiated since the second half of 2024 [10][15][22] Notable Companies and Recommendations - **Investment Recommendations**: - Companies highlighted for potential investment include: - AI: Sensetime - Office Software: Kingsoft Office - ERP: Kingdee - Finance: Hundsun - IoT Software: TUYA - EDA Software: Empyrean [3] Additional Observations - **Seasonality Effects**: - There was a month-over-month decline in certain software segments due to seasonal factors, particularly in security software, which saw a revenue decrease of 8% YoY in July [17][24] - **Service Outsourcing**: - The contract value for service outsourcing dropped by 29% YoY in July 2025, indicating weak demand in software R&D and industrial design services [29] This summary encapsulates the key points from the conference call regarding the current state and outlook of the China software industry, highlighting growth metrics, financial performance, and investment opportunities.

Summary of Key Points from the Conference Call Industry Overview - The conference focused on the advancements in the AI industry, particularly highlighted during the World Artificial Intelligence Conference (WAIC) 2025, emphasizing the evolution of AI infrastructure and model capabilities [1][7]. Core Insights - **AI Supply Chain Enhancements**: The AI supply chain is increasingly centered on improved AI infrastructure, with notable examples like Huawei's SuperPod achieving 300 PFLOPs performance [1]. - **AI Model Upgrades**: New AI models are being developed with enhanced multi-modal, agentic, and reasoning capabilities, aimed at improving efficiency and reducing costs associated with AI training and inferencing [1][7]. - **Product Launches**: Several new AI products were launched at WAIC, including: - **AI Models**: Companies like Sensetime and Zhipu introduced models with significant upgrades, such as Sensetime's SenseNova V6.5, which boasts a 5x increase in inferencing efficiency [6][7]. - **AI Agents**: New AI agents were introduced by companies like Kingsoft Office and Midu, focusing on complex context understanding and task execution [1][10]. - **Industry-Specific AI Solutions**: Partnerships between AI model/app suppliers and industry vendors are being formed to create customized AI solutions for sectors like automotive and healthcare [1]. Notable Product Highlights - **SenseNova V6.5**: Offers multi-modal capabilities and 5x higher inferencing efficiency compared to its predecessor [6]. - **iFlytek X1**: Enhanced capabilities in mathematics and translation [6][14]. - **Zhipu GLM 4.5**: An open-source model designed for AI agents, featuring improved coding and inferencing capabilities [6][9]. - **Midu V Assistant 2.0**: A full-flow public opinion analysis tool [6][10]. - **Datagrand AI Agents**: Four new AI agents for auditing, Q&A, form filling, and data summarization [10]. Additional Insights - **Cost Efficiency**: A significant focus remains on lowering the costs associated with AI training and inferencing, which is crucial for vendors to maintain competitive pricing [7]. - **Market Trends**: The trend of more software suppliers entering the AI agent space indicates a growing market for AI-driven solutions that enhance business operations [10]. Conclusion - The advancements in AI technology showcased at WAIC 2025 reflect a robust growth trajectory in the industry, with significant innovations aimed at improving efficiency and reducing costs. The collaboration between AI model developers and industry-specific vendors is likely to drive further growth and customization in AI applications across various sectors [1][10].

Investment Rating - The report assigns a "Buy" rating to Kingsoft Office, Kingdee, and Empyrean [5][31]. Core Insights - The momentum of AI-native applications and software with AI features remains strong, particularly in the areas of agentic AI and multi-modal AI models [1][4]. - AI agents are expected to become the new user interface for enterprises, enhancing productivity through proactive responses to environmental changes [4][12]. - The release of upgraded multi-modal AI models focuses on generating and editing various content types with improved quality and lower costs [4][13]. - There is a solid project pipeline for enterprise application wins, particularly in AI model deployment, indicating a larger scale of AI projects compared to traditional ERP or system upgrades [21][4]. Summary by Sections AI Agents and Applications - AI agents are being adopted by enterprises to complete tasks independently, with companies like Manus launching general AI agents and Kingdee introducing multiple specialized AI agents [4][12]. - The report highlights the potential of AI agents to improve user experiences in various sectors, including finance and travel [4][12]. Multi-modal AI Models - Recent upgrades in multi-modal AI models have been made by vendors, focusing on high-quality content generation across different media types [4][13]. - Companies like Stepfun and Wondershare are developing advanced tools for image and video editing, enhancing user capabilities [4][13]. Software Project Wins - The report reviews enterprise application project wins, noting a solid momentum in AI model deployments from late April to the present [21][4]. - The scale of AI projects is generally larger due to the inclusion of integrated solutions, which often require higher computing hardware costs [21][4]. EDA and IP Software Expansion - Local EDA suppliers are accelerating product launches to capture localization opportunities, with new tools being introduced for mixed-signal SoC and digital simulation [4][21].

Investment Rating - The report does not explicitly state an investment rating for the industry or specific companies Core Insights - The report highlights the ongoing monetization of AI applications, with software vendors beginning to charge for AI software while balancing commercialization and user expansion [2][6] - The monthly active users (MAU) of single ToC AI applications have surpassed 10 million, with a paying ratio ranging from 3% to 13% [6][13] - AI pricing strategies vary, with ToC AI tools priced between US$20 and US$200 per user annually, while ToB applications range from US$80 to US$1,000 per user per year [7][28] - The emergence of multiple AI models in China has reduced training and inferencing costs, making AI more accessible to users [2][17] Summary by Sections Monetization Progress - AI software vendors are starting to charge for their products, with the revenue contribution from AI software still low, ranging from single digits to high teens [6][19] - The number of enterprise clients for single AI software is targeted to exceed 1,000 units this year [16] Pricing Strategy - ToC AI tools are generally priced between US$20 and US$200 per user annually, while ToB applications charge between US$3,000 and US$20,000 per enterprise per year [7][28] - Vendors often provide trial periods of 7 to 30 days to attract users [7] User Cases - The report categorizes AI applications into four segments: AI creation, AI productivity, AI industry tools, and AI enterprise services [10][34] - Key user cases include AI search, video creativity, productivity tools for consumers, and enterprise applications in finance, HR, and procurement [2][10] Competitive Landscape - Companies like Kingsoft Office, Meitu, Wondershare, and iFlytek are identified as early beneficiaries of AI monetization [3][6] - The competition is intensifying as platform vendors offer general AI assistants with multiple features, challenging specialized AI application vendors [19] Future Outlook - The report suggests that software vendors view AI as a key growth driver in the coming years, with expectations for further reductions in API token fees and increased user adoption [6][19] - The focus for ToB vendors is on generating higher ROI through AI tools that can perform complex tasks independently [18]

Investment Ratings - Maintain Buy on Empyrean, Kingdee, and Kingsoft Office; Neutral on Yonyou and Glodon; Sell on ZWSOFT, Thundersoft, Primarius, and Sangfor [1] Core Insights - The average revenue growth for the software sector in 1Q25 was 6% YoY, while the average net margin was -3% due to weak seasonality [4][10] - Companies are focusing on high-quality products with better margins, new product upgrades, and AI features to drive growth in 2H25 [1] - Profitability improvement is a key focus, with companies implementing headcount optimization and cost control measures [1] Company Summaries Glodon - 1Q25 revenues decreased by 5% YoY to Rmb1.2 billion, attributed to muted demand from the property market and headcount optimization [6] - The company is enhancing its AI capabilities and focusing on cost management and product mix improvement [7] - Earnings estimates for 2025-27E have been revised down by 18%/16%/14% mainly due to lower revenue from construction management software [11] Thundersoft - 1Q25 revenue grew by 25% YoY, supported by IoT software and smartphone software recovery [16] - Gross margin improved to 36.3%, but Opex ratio increased to 32.6% due to higher spending on AI edge solution development [16] - Earnings estimates for 2025-27E have been revised down by 2% across the board, reflecting higher Opex spending [20] Empyrean - 1Q25 revenues increased by 10% YoY to Rmb234 million, with expectations for sequential growth due to new product ramp-up [25] - The company plans to expand its digital EDA tools and has announced an acquisition plan for Xpeedic [25][26] - Earnings estimates for 2025-27E have been revised down by 42%/27%/20% mainly due to lower revenues from panel EDA tools [29] Yonyou - 1Q25 revenue decreased by 21% YoY to Rmb1.4 billion, missing estimates due to a slowdown in new project wins and migration to a subscription model [33] - The company reported a net loss of Rmb736 million, attributed to lower gross margin and higher Opex spending [33]

Summary of Kingsoft Office (688111 CH) Research Report Company Overview - **Company**: Kingsoft Office - **Ticker**: 688111 CH - **Sector**: Software - **Market Cap**: CNY 164,664 million (USD 22,603 million) [7][15] Key Financial Highlights - **4Q24 Preliminary Results**: - Revenue: CNY 1,494 million, up 16% year-over-year (y-o-y) [19] - Net Profit: CNY 605 million, up 43% y-o-y [19] - **Earnings Estimates**: - 2025 Revenue: CNY 6,071 million (up 3% from previous estimates) [4][21] - 2025 Net Profit: CNY 2,156 million (up 10% from previous estimates) [4][21] - **Target Price**: Raised to RMB 388.00 from RMB 318.00, implying a 9% upside [5][29] Core Insights - **AI Monetisation**: - Enhanced AI capabilities through DeepSeek-R1 are expected to accelerate monetisation efforts [2][3] - Strong demand for AI functions in enterprise software is anticipated to support revenue growth [3][11] - **SaaS Transition**: - A smoother transition to standard Software as a Service (SaaS) is expected, driven by improved WPS AI functions [2][5] - **Localisation Demand**: - Increased orders for office software localisation from local government entities are projected, with completion expected by 2027 [3][21] Revenue and Profit Growth - **Revenue Growth**: - Expected CAGR of 18.4% from 2024 to 2026 [28] - 2026 Revenue Estimate: CNY 7.2 billion [29] - **Net Profit Growth**: - 2025-26 net profit estimates are 14-15% higher than Wind consensus [2][4] Risks and Challenges - **Budget Constraints**: - Potential lower-than-expected budgets for office software localisation from government entities could impact demand [36] - **Competition**: - Increased competition from both internet giants and traditional office software manufacturers may pressure pricing and sales [36] - **User Conversion**: - Slower-than-expected conversion of individual subscription users could hinder revenue growth [36] Valuation Metrics - **Price-to-Sales (PS) Ratio**: - Target PS raised to 25x from 21x based on improved revenue growth expectations [5][28] - **Earnings Per Share (EPS)**: - 2025 EPS estimate: CNY 4.67, reflecting a 9.5% increase from previous estimates [8][12] Conclusion - **Investment Recommendation**: Maintain Buy rating due to expected solid earnings growth and a positive outlook on AI monetisation and software localisation demand [5][11]