Summary of Key Points from the Conference Call Industry Overview - **Industry**: China Software and IT Services - **Growth Forecast**: The sector is expected to achieve a revenue growth of **12% YoY in 2026E**, slightly down from **13% YoY in 2025E** due to macroeconomic factors and soft demand in various verticals [18][20]. Core Insights - **AI Monetization**: Accelerated AI monetization is anticipated to drive growth, alongside trends in software import substitution [18][20]. - **Employee Count**: A **5% YoY decline** in employee numbers was observed in 2025, with expectations for a **1% YoY increase** in 2026, leading to an average **4.6 percentage points (ppts)** improvement in operating profit margin (OPM) [2]. - **Valuation**: Current average trading at **5.4x 12-month forward P/S**, which is **1 standard deviation (SD) below historical averages**, indicating an undemanding sector valuation despite solid share price performance [13][14]. Company-Specific Insights - **Top Picks**: - **Kingdee**: Expected to benefit from resilient top-line growth and improved profitability [3][8]. - **Meitu**: Strong earnings growth anticipated due to rising subscription revenue and productivity tools expansion [3][8]. - **Kingsoft Office**: Upgraded to Buy due to better growth outlook driven by WPS 365 and import substitution trends [3][8]. - **Downgrades**: - **Kingsoft Corp** downgraded to Neutral due to weaker game business growth [3]. Financial Performance - **2025 Recap**: Share prices of covered software companies rose by **16% on average** in 2025, underperforming the MSCI China Index which rose by **23%** [11][12]. - **Revenue Estimates**: Revenue forecasts for 2025-2027 have been revised down by **2% on average** for 16 companies under coverage [10]. Sector Spending Breakdown - **Major Sectors**: Software spending is concentrated in manufacturing & natural resources (28%), financials (25%), government (14%), and communications/media/services (12%), collectively accounting for **75% of total software spending in 2026E** [20][21]. Risks and Cautions - **Cybersecurity and Property Software**: Cautious outlook on cybersecurity and property software due to muted demand and declining property sales [1][48]. - **SOE Revenue Growth**: SOE revenue growth was **1.0% YoY** in 11M25, indicating stable demand for software despite slight declines in growth rates [24][25]. Conclusion - The China software and IT services sector is poised for solid growth driven by AI and import substitution, but faces challenges from macroeconomic volatility and sector-specific demand issues. Key companies like Kingdee, Meitu, and Kingsoft Office are highlighted as strong investment opportunities, while caution is advised in areas like cybersecurity and property software.