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.

Summary of Kingdee (0268.HK) Conference Call Company Overview - **Company**: Kingdee International Software Group Company Limited (0268.HK) - **Industry**: Cloud Computing and Enterprise Resource Planning (ERP) Key Financial Highlights - **1H25 Cloud Subscription Revenues**: Grew by 22% YoY to Rmb1.7 billion, contributing 53% of total revenues (up from 48% in 1H24) [1][1] - **Total Revenues**: Increased by 11% YoY to Rmb3.2 billion in 1H25 [9][9] - **Product/Implementation Revenues**: Muted growth at 1% YoY [1][1] - **Annual Recurring Revenue (ARR)**: Grew by 18% YoY to Rmb3.7 billion by the end of 1H25 [9][9] - **Net Loss**: Narrowed to Rmb98 million in 1H25 from Rmb218 million in the previous year [9][9] - **Gross Margin (GM)**: Improved to 65.6% in 1H25 from 63.2% in 1H24 [9][9] Growth Drivers - **Large-Scale Enterprise Cloud Solutions**: Identified as key growth drivers, with 304 new clients acquired in 1H25, including notable companies like Mengniu and Geely [1][1] - **AI Monetization**: AI contract value exceeded Rmb150 million, with expectations for AI to contribute 30% of total revenues by 2030E [8][8] - **Employee Productivity**: Reduction in employee count to 11,000 by the end of 1H25, expected to improve productivity and profitability [1][1] Future Projections - **2H25 Revenue Growth**: Expected to grow by 15% YoY to Rmb3.9 billion [1][1] - **Net Profit Turnaround**: Anticipated to turn positive in 2025E due to improved efficiency and a shift towards subscription-based revenue [1][1] Valuation and Price Target - **Target Price**: Revised up to HK$18.94, implying an attractive valuation at 8.8x/7.1x 2025E/2026E P/S [14][14] - **Valuation Methodology**: Based on a blend of DCF and P/S methodologies, with a WACC of 11.5% and terminal growth rate of 2% [19][19] Risks and Challenges - **Key Risks**: 1. Weaker-than-expected demand for ERP digitization [20][20] 2. Slower product development processes [20][20] 3. Increased talent and labor costs [20][20] Additional Insights - **NDR (Net Dollar Retention Rate)**: Improved to 108% for large-scale cloud solutions in 1H25, indicating strong customer retention [9][9] - **Employee Count**: Decrease in workforce is seen as a strategic move to enhance operational efficiency [1][1] This summary encapsulates the essential points from the conference call, highlighting Kingdee's financial performance, growth strategies, future outlook, and associated risks.