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 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.