Summary of Key Points from the Equity Research Report on China Software Sector Industry Overview - The report focuses on the China software industry, particularly highlighting the performance of 18 covered software companies in the third quarter of 2025 (3Q25) [3][11]. - There is a noted recovery in earnings, with total net profit rising by 92% year-on-year (y-o-y) for the covered companies [10][11]. Core Insights - **Earnings Recovery**: The significant recovery in earnings is attributed to limited downside from tighter IT budgets, as the base is low, and ongoing cost control measures are expected to continue driving earnings recovery [3][4]. - **Market Dynamics**: The competitive landscape is improving, with smaller players exiting the market, which may benefit larger firms [3]. - **Revenue Drivers**: AI and localization are identified as key revenue drivers, with specific companies like Yonyou and Kingdee expected to benefit from AI monetization [4][9]. Company-Specific Highlights - **Sangfor**: - Rated "Buy" with a target price of RMB 144.00, implying an 18% upside. The company is expected to benefit from improved demand for HCI and software-defined storage amid AI adoption [24]. - **Yonyou**: - Rated "Buy" with a target price of RMB 21.00, indicating a 43% upside. The company is projected to grow at a CAGR of 12% from 2025 to 2027 [24]. - **Kingdee**: - Rated "Buy" with a target price of HKD 18.20, suggesting a 24% upside. Expected revenue growth at a CAGR of 12.5% over 2024-2027 [24]. - **Kingsoft Office**: - Rated "Buy" with a target price of RMB 353.00, indicating a 7% upside. The company is well-positioned in software localization and AI function optimization [24]. - **ThunderSoft**: - Rated "Buy" with a target price of RMB 82.00, suggesting a 25% upside. The company is expected to see robust demand for on-device AI [24]. Investor Sentiment - Investors are showing strong interest in AI applications and their monetization potential, particularly in ERP systems [4][9]. - There is a focus on high-quality AI A-share software names seeking H-share listings, such as Yonyou and Intsig, due to their valuation discounts [4]. Risks and Challenges - **Sector Risks**: Potential risks include a weak macroeconomic environment leading to tighter IT budgets, intense competition, and policy support falling short of expectations [6][24]. - **Valuation Concerns**: Some investors express concerns regarding high valuations, particularly for companies like Kingsoft Office, although others believe the valuations are reasonable given the earnings visibility [5]. Conclusion - The China software sector is experiencing a notable recovery, driven by AI and localization trends. Key players are positioned to benefit from these trends, although risks related to macroeconomic conditions and competition remain pertinent. Investors are advised to consider these dynamics when evaluating opportunities in the sector.

Summary of Conference Call Notes Industry Overview - **Industry**: China Technology & Communications - **Key Focus**: Increasing interest in China tech from institutional investors in the US and EU, particularly in AI supply chain beneficiaries and related technologies Core Insights and Arguments 1. **Investor Interest in China Tech**: There is a growing interest among long-only (LO) investors in quality tech names listed on the H-share market, which is expected to attract more attention and fund flows [1][1][1] 2. **AI Supply Chain Expectations**: Investors are keen on understanding the pricing of AI expectations and preferred supply chains in HK/China stocks. Concerns were raised about an overly bullish view on the US$2.5 trillion capex outlook from OpenAI [1][1][1] 3. **Potential Upside in AI Capex**: Anticipated upside from CSP/AI capex hikes for 2026 and improved visibility for 2027 capex/supply chain demand is expected during the upcoming results season [1][1][1] 4. **Risks in AI Supply Chain**: Potential risks include delays in Rubin and ASIC system deliveries in 2H26, which could impact the expected growth in high-speed optics modules [1][1][1] 5. **PCB Supply Tightness**: PCB supply tightness is expected to continue into 2026, with aggressive players like VGT likely to capture additional demand from ASICs [1][1][1] Company-Specific Insights Alibaba (BABA) - **Capex Needs**: Investors are interested in Alibaba's required capex for a 10x capacity datacenter expansion and the availability of AI chips to support this growth [1][1][1] - **Competitive Position**: China is viewed as a strong competitor to the US in AI development, although challenges remain in AI chipsets [1][1][1] Apple - **Foldable iPhone**: Increased interest in the foldable iPhone due to better-than-expected iPhone 17 sales. The expected price for the foldable iPhone could exceed US$2500, with Lens Tech identified as a key beneficiary [4][4][4] Xiaomi - **Factory Status and Market Sentiment**: Investors are inquiring about the status of Xiaomi's Beijing factory phase 2 and its impact on smartphone memory prices. The stock is expected to trade in the HK$45-50 range in the near term [5][5][5] - **Catalysts for Growth**: Upcoming catalysts include ramping EV delivery and new product launches [5][5][5] Smart Glasses - **Market Interest**: There is increasing interest in smart glasses as AI edge devices, with Goertek and Sunny Optical identified as major beneficiaries [6][6][6] Semiconductor Localization - **Capacity and Demand**: The current 7nm-equivalent wafer capacity is expected to support local AI chip demand, which is likely to double by 2026. Memory expansion is anticipated to accelerate due to advancements in stacking etching tools [7][7][7] AI Monetization - **Challenges in ToC Segment**: Investors noted that the ToC segment is difficult to monetize for AI LLMs, while ToB is more focused on software products for SMEs [8][8][8] Other Important Insights - **Investor Sentiment**: There is a general consensus among investors regarding the fragmentation in China's software sectors, which may hinder concentration in AI monetization for the next 5-10 years [8][8][8] - **Disappointment in GDS/VNET**: Foreign investors viewed GDS and VNET as disappointing due to share price volatility and returns, despite potential benefits from China AI capex [1][1][1] Companies Mentioned - **Key Companies**: Alibaba Group Holding (BABA), Apple Inc. (AAPL), Xiaomi (1810.HK), Sunny Optical Technology Group (2382.HK), Goertek (002241.SZ), among others [9][9][9]

Summary of Conference Call Notes Industry Overview - **Industry**: China Technology & Communications - **Key Focus**: Increasing interest in China tech from institutional investors in the US and EU, particularly in AI supply chain beneficiaries and related technologies [1][1] Core Insights and Arguments 1. Investor Sentiment - There is a growing interest among long-only (LO) investors in quality tech names listed on the H-share market, which is expected to attract more attention and fund flows [1][1] - Investors are cautious about the overly bullish market outlook on the US$2.5 trillion capex from OpenAI, indicating potential risks [1][1] 2. AI Supply Chain - Key discussion topics included: - Optical transceivers and their future scale-up potential - AI-PCB content upgrades and supply-demand dynamics - Foldable iPhone beneficiaries and potential volume impacts - Xiaomi's market entry and its recent effects - Visibility on China AI capex and AI chips support [1][1] 3. Stock Picks - The stock picks for the second half of 2025 remain unchanged, focusing on: - Optical transceivers (Innolight) - PCB with content upgrades (Victory Giant Tech) - ODM with rising demand in AI server/switch (FII) [1][1] 4. China AI Demand - Investors are interested in Alibaba's capex for a 10x capacity datacenter expansion and the availability of AI chips in China [1][1] - China is seen as a strong competitor to the US in AI development, although challenges remain in AI chipsets [1][1] 5. Company-Specific Insights - **GDS/VNET**: Viewed as disappointing by foreign investors due to share price volatility, despite potential benefits from China AI capex [1][1] - **Xiaomi**: Investors are concerned about the impact of smartphone memory prices and the company's ability to secure MP permits for its factories [5][5] - **Smart Glasses**: Increasing interest noted, with major beneficiaries being Goertek and Sunny Optical, as smart glasses are seen as key AI edge devices [6][6] 6. Semiconductor Localization - The 7nm-equivalent wafer capacity is expected to support local AI chip demand, but local lithography tools may only support up to 14nm [7][7] - Memory expansion is anticipated to accelerate in 2026 due to advancements in stacking etching tools [7][7] 7. AI Monetization - The monetization of AI in the consumer segment (ToC) is challenging, while the business segment (ToB) is more selective [8][8] - Kingdee remains a major interest for foreign investors, alongside cybersecurity and AI software companies like Iflytek and Sensetime [8][8] Additional Important Points - The potential for breakthroughs in AI chips in China remains uncertain, with existing capacities needing to be fully utilized first [1][1] - The foldable iPhone's BOM cost is projected to increase, with a potential retail price of over US$2500 [4][4] - Xiaomi's stock is expected to trade within the HK$45-50 range in the near term, with catalysts including increased EV delivery and new product launches [5][5] Companies Mentioned - **Alibaba Group Holding (BABA)** - **Apple, Inc.** - **Xiaomi Corp.** - **GDS Holdings** - **Sunny Optical Technology Group** - **Goertek** - **Iflytek** - **Innolight** - **Victory Giant Tech** - **Meta Platforms Inc.** - **NVIDIA Corp.** [10][10]

Summary of Kingsoft Office (688111 CH) Equity Research Report Company Overview - **Company**: Kingsoft Office - **Ticker**: 688111 CH - **Sector**: Software - **Market Cap**: CNY 141,524 million (USD 19,866 million) [8][17] Key Industry Insights - **Software Localisation**: The US software export ban on China is expected to accelerate the localisation of office software, benefiting Kingsoft Office from 2H25 onwards. The Chinese government is promoting Kingsoft's ".wps" format to replace Microsoft's ".doc" format [4][13]. - **AI Engagement**: Kingsoft Office's AI narrative remains strong, with positive user feedback on WPS AI 3.0 and plans for an AI PC version of WPS Office [5][13]. Financial Performance and Projections - **Earnings Growth**: Kingsoft Office's earnings growth is anticipated to improve due to accelerated localisation revenue growth and enhanced AI user engagement. The company expects to reverse the decline in WPS software revenue from 1H25 and achieve robust growth from 2H25 to 2027 [3][4]. - **Revenue Estimates**: The revenue estimates for Kingsoft Office are as follows: - 2024: CNY 5,121 million - 2025: CNY 5,972 million - 2026: CNY 6,809 million - 2027: CNY 7,708 million [14]. - **Earnings Per Share (EPS)**: Projected EPS for the upcoming years: - 2024: CNY 3.56 - 2025: CNY 4.26 - 2026: CNY 5.03 - 2027: CNY 5.95 [9][15]. Investment Thesis - **Rating**: Maintain Buy with a target price of CNY 353.00, implying a 16% upside from the current share price of CNY 305.55 [6][22]. - **Valuation Method**: The target price is based on a 24x price-to-sales (PS) multiple using a 2026 revenue estimate of CNY 6.8 billion [6][21]. Risks and Catalysts - **Potential Catalysts**: - Improved subscription revenue contribution could enhance earnings visibility [29]. - Growth in AI user numbers may boost market sentiment and valuation [29]. - Strong government support for software localisation could drive growth [29]. - **Key Risks**: - Budget constraints from government entities may weaken localisation demand [29]. - Increased competition in the collaborative office software market could pressure pricing and sales [29]. - Slower conversion rates of paid users could hinder subscription revenue growth [29]. Conclusion Kingsoft Office is positioned to benefit from the ongoing trends in software localisation and AI engagement, with a strong outlook for revenue and earnings growth. The investment thesis remains positive, supported by robust financial projections and strategic government backing.

Core Viewpoint - Kingsoft reported weak 1Q25 results, with revenue and net income missing estimates significantly, attributed to slowdowns in online gaming, office businesses, and unexpected declines in Kingsoft Cloud margins and profits, alongside high R&D expenses in AI and games [1][2]. Group 1: Financial Performance - 1Q25 revenue grew 9% YoY to RMB2.3 billion, missing BOCIe and consensus estimates by 9% and 6% respectively, primarily due to sluggish office business growth of 6% YoY [3]. - Gross profit margin (GPM) dipped 1.9 percentage points QoQ to 82.1%, also a miss, driven down by the games business which saw a GPM decline of 5.7 percentage points QoQ due to rising channel costs for new games [3]. - Operating profit margin (OPM) declined 13.9 percentage points QoQ, mainly due to increased R&D expenses, which rose by 9 percentage points QoQ [3]. - Net income remained flat YoY, missing BOCIe and consensus estimates by 36% and 31% respectively [3]. Group 2: Gaming Segment - Revenue from the gaming segment increased 14% YoY to RMB1,037 million but declined 20% QoQ, missing BOCIe estimates by 5% [4]. - The gaming business has been normalizing since the peak in 3Q24, attributed to lifecycle declines in older IP games and hit titles [4]. - Upcoming game Mecha BREAK is anticipated to be a potential catalyst, having peaked at 5th on Steam's global wishlist during testing, with a global release targeted for July 2025 [4]. Group 3: Office Segment and AI Monetization - Office revenue grew 6% YoY but declined 13% QoQ to RMB1,301 million, with WPS individual revenue rising 11% YoY to RMB857 million, driven by user base expansion [5]. - WPS 365 revenue surged 63% to RMB151 million, fueled by digitalization demand from private enterprises and local SOEs [5]. - The management is developing a foreign version of WPS for the overseas market, with updates expected in June 2025, but faces challenges in AI monetization due to the availability of free AI tools [5].

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]