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.

Investment Rating - The report maintains a "Recommended" rating for the company, indicating a potential upside of over 15% relative to the benchmark index [6]. Core Insights - The company has achieved significant improvement in profitability, driven by AI and hybrid cloud initiatives, with a revenue of 5.125 billion yuan for the first three quarters of 2025, representing a year-on-year growth of 10.62% [1]. - The company has successfully reduced costs, leading to a substantial improvement in cash flow, with a net cash flow from operating activities of 0.13 billion yuan for the first three quarters of 2025 [1]. - The focus on key production lines and cloud computing has led to a strategic shift towards cloud services and product service integration, enhancing the company's competitive edge in the market [2]. - The company is actively integrating AI capabilities into its traditional business, with a strong emphasis on an "AI First" strategy, resulting in innovative products and services [3]. - The projected revenue for the company is expected to grow significantly, with estimates of 8.774 billion yuan in 2025, 10.578 billion yuan in 2026, and 12.790 billion yuan in 2027, alongside a corresponding increase in earnings per share [4][5]. Summary by Sections Financial Performance - For Q3 2025, the company reported a revenue of 2.116 billion yuan, a year-on-year increase of 9.86%, and a net profit of 0.147 billion yuan, reflecting a remarkable growth of 1097.40% [1]. - The company has effectively optimized its expense ratios, with sales, management, and R&D expense ratios decreasing compared to the previous year [1]. Strategic Focus - The company is concentrating on enhancing its core security capabilities through cloud services and product service integration, ensuring stability in its domestic market coverage [2]. - The ongoing trend of domestic industry leaders and international markets becoming key revenue sources is becoming increasingly clear [2]. AI Integration - The company is committed to an "AI First" approach, integrating AI technologies into its product offerings, which has led to significant advancements in security applications [3]. Future Projections - Revenue forecasts indicate a growth trajectory with expected revenues of 8.774 billion yuan in 2025, 10.578 billion yuan in 2026, and 12.790 billion yuan in 2027, with corresponding EPS estimates of 0.74, 1.00, and 1.24 yuan [4][5].

Investment Rating - The report maintains a "Strong Buy" rating for the company with a target price of 157 yuan [2][7]. Core Insights - The company reported a revenue of 5.125 billion yuan for the first three quarters of 2025, representing a year-on-year growth of 10.62%. The net profit attributable to shareholders was a loss of 81 million yuan, significantly improved from a loss of 580 million yuan in the same period last year [2][7]. - The gross margin for the first three quarters of 2025 was 60.94%, a slight increase of 0.34 percentage points year-on-year, although the gross margin for Q3 alone was 59.89%, down 0.29 percentage points year-on-year. This decline is attributed to structural adjustments [2][7]. - The company continues to invest in AI innovation, with a new AI Coding platform set to be launched on October 30, 2025, aimed at enhancing AI development capabilities [2][7]. - The revenue forecasts for 2025-2027 are adjusted to 8.424 billion yuan, 9.467 billion yuan, and 10.699 billion yuan, with corresponding growth rates of 12.0%, 12.4%, and 13.0%. The net profit forecasts are 586 million yuan, 829 million yuan, and 1.045 billion yuan, reflecting significant year-on-year growth [2][7]. Financial Summary - The company’s total revenue for 2024 is projected at 7.520 billion yuan, with a year-on-year decline of 1.9%. The net profit for 2024 is expected to be 197 million yuan, with a slight decline of 0.5% [2][8]. - The earnings per share (EPS) for 2025 is estimated at 1.39 yuan, with a price-to-earnings (P/E) ratio of 81 times [2][8]. - The company’s total assets are projected to reach 15.222 billion yuan in 2024, with a debt-to-equity ratio of 22.6% [2][8].

Core Viewpoint - The report from Dongfang Securities indicates that Deepin Technology achieved a significant improvement in net profit for the first three quarters, with a net profit of -0.81 billion (+86.10%), and a remarkable net profit of 1.47 billion in Q3 (+1097.40%), attributed to effective cost control [1] Group 1: Financial Performance - Deepin Technology's net profit for the first three quarters was -0.81 billion, reflecting an increase of 86.10% [1] - In Q3 alone, the company reported a net profit of 1.47 billion, marking a staggering increase of 1097.40% [1] Group 2: Strategic Focus - The company's overall R&D strategy is shifting towards AI intelligence, with the integration of AI-related technologies and capabilities across various products, including security GPT, AICP, AIPaaS, SAVE3.0, and AIOps [1] - The introduction of the "HCI + AICP next-generation super copy selection second transfer data fusion" solution allows users to quickly deploy and support enterprise-level large models like DeepSeek by adding just one GPU node to their existing cluster [1] Group 3: Market Position and Valuation - The company is expected to benefit significantly from the growing demand for localized deployment of large models due to its strong product innovation capabilities and comprehensive channel advantages [1] - Based on the comparable company's 25-year PS level, the company maintains a target price of 119.00 yuan, corresponding to a 25-year PS of 6.10 times, and retains a "buy" rating [1]

Investment Rating - The report maintains a "Buy" rating for the company with a target price of 119.00 CNY based on a 6.10x PS multiple for 2025 [3][5]. Core Insights - The company has shown continuous profit improvement, with AI presenting new growth opportunities [2]. - The company’s revenue for the first three quarters of 2025 reached 5.125 billion CNY, reflecting a year-on-year growth of 10.62%, while the net profit attributable to the parent company was -0.081 billion CNY, up 86.10% [8]. - The company is implementing an "AI FIRST" R&D strategy, enhancing product differentiation and competitiveness through AI technologies [8]. Financial Performance Summary - Revenue projections for 2025-2027 are 82.34 billion CNY, 91.66 billion CNY, and 103.40 billion CNY respectively, with expected growth rates of 9.5%, 11.3%, and 12.8% [3][4]. - The company’s gross margin is projected to stabilize around 61.2% to 61.6% from 2025 to 2027, while net profit margins are expected to improve from 4.0% in 2025 to 5.9% in 2027 [4][11]. - The company’s operating profit is forecasted to grow significantly, with an increase from 357 million CNY in 2025 to 650 million CNY in 2027, representing a growth rate of 68.8% in 2025 [4][11]. Market Position and Strategy - The company is well-positioned to benefit from the rising demand for localized AI deployment solutions, having launched innovative products that integrate AI capabilities [8]. - The report highlights the company's strong product innovation capabilities and its comprehensive channel advantages, which are expected to drive growth in the localized deployment market [8].

Summary of Key Points from the Equity Research Report on China Software Equities Industry Overview - The report focuses on the **China Software Industry**, particularly in the context of **AI monetization** and competition dynamics within the sector [2][3]. Core Insights 1. **AI Monetization Stage**: - AI monetization is still in its early stages, with significant policy support leading SOEs to prioritize AI projects, particularly in finance, healthcare, and education [3][4]. - SMEs in the manufacturing sector show strong demand for cost control, benefiting software companies like Yonyou and Nancal, which are experiencing good order momentum [3][4]. - Consumer-oriented software companies are currently focused on user acquisition and loyalty rather than immediate monetization of AI functionalities [3][4]. 2. **Competition Landscape**: - Simpler AI applications face intense competition, leading to a decline in Average Selling Price (ASP) [4]. - Complicated software, such as ERP systems, is less likely to be replaced by AI due to the necessity of industry-specific knowledge, which AI cannot easily replicate [4]. 3. **Stock Recommendations**: - **Sangfor (Buy)**: Expected to benefit from AI-driven IT infrastructure upgrades, with a target price of RMB143.00, implying a 30% upside from the current price [5][13]. - **Yonyou (Buy)**: Notable for its rapid AI order ramp-up, with 1H25 AI orders reaching RMB320 million, approximately 9% of total revenue. Target price set at RMB22.00, indicating a 54% upside [5][13]. - **ThunderSoft (Buy)**: Positioned to benefit from strong software upgrade demand from AI IoT suppliers, with a target price of RMB90.00, suggesting a 25% upside [5][13]. - **Kingsoft Office (Buy)**: Unique position as the only office software vendor in China with a closed-loop system for AI, targeting a price of RMB353.00, reflecting a 20% upside [5][13]. Financial Metrics - **Yonyou**: 1H25 AI orders at RMB320 million, with expectations for further growth in 2H25 [5][9]. - **Sangfor**: Revenue CAGR of 15% from 2018-2024, with a projected revenue of RMB9.1 billion by 2026 [13]. - **Kingsoft Office**: Historical average PS multiple of 33x, with a projected revenue CAGR of 15% for 2024-2026 [13]. Additional Insights - The report highlights the importance of **on-device AI** products, such as AI glasses and toys, which are seeing robust demand [3]. - Companies like Arcsoft and ThunderSoft are noted for their strong order momentum in the AI hardware space [3][5]. - The report emphasizes the potential for AI to enhance existing software capabilities rather than completely replace them, particularly in complex applications [4]. Risks and Challenges - Key risks include fierce competition, weaker-than-expected business expansion due to macroeconomic challenges, and potential chip shortages impacting production [13]. This summary encapsulates the critical insights and financial metrics from the report, providing a comprehensive overview of the current state and future outlook of the China software industry, particularly in relation to AI monetization and competitive dynamics.