Summary of Conference Call Notes Industry Overview - The focus is on the **China Software** industry, particularly companies involved in software development and AI applications. Key Companies Discussed - **Kingsoft Office** - **Meitu** - **Sensetime** Core Insights and Arguments Valuation Methodology - The valuation approach for the China Software sector has been reset to **Discounted Cash Flow (DCF)** to better reflect free cash flow (FCF) generation and long-term growth prospects in the Gen-AI era [1][2] - Seven stocks were reassessed, including Kingsoft Office, Sensetime, and Meitu, transitioning from near-term P/E to DCF valuation [1] Kingsoft Office (688111.SS) - **Product Launches**: Introduced AI agent Lingxi (WPS AI 3.0) and upgraded WPS 365 for enterprise users, enhancing user adoption through features like real-time collaboration and smart document systems [3] - **Valuation**: Target price set at **Rmb346**, down from **Rmb365**, with a projected 2026 P/S of **21x** and revenue growth of **29% YoY** in 2027-28E [4][8] - **Financial Projections**: - Revenue expected to grow from **Rmb4,556 million** in 2023 to **Rmb12,321 million** by 2028, reflecting a **26% YoY** growth rate [9] - Operating income projected to reach **Rmb4,332 million** by 2028, with a net income of **Rmb4,630 million** [9] Meitu (1357.HK) - **Growth Drivers**: Strong revenue growth in core business areas (photo/video/design) and expansion into overseas markets, with a projected **60%-66% YoY** growth in adjusted net income for 2025 [19] - **Valuation**: Target price remains at **HK$16.0**, with a projected 2026 P/S of **12x** and revenue growth of **31% YoY** in 2027-28E [20][22] - **Financial Projections**: - Revenue expected to grow from **Rmb2,696 million** in 2023 to **Rmb9,050 million** by 2028, with a **31% YoY** growth rate [22] Sensetime (0020.HK) - **Product Offerings**: Launched multiple Generative AI products, including AI Drama generation platform and AI Office assistant, with subscription fees ranging from **Rmb29.9 to Rmb1,599/month** [27] - **Valuation**: Target price set at **HK$3.52**, with a projected 2026 P/S of **18x** and revenue growth of **21% YoY** in 2027-28E [28] Additional Important Insights - The report emphasizes the importance of companies with **strong revenue visibility** and **recurring revenues**, particularly those benefiting from the Gen-AI trend [2] - Scenario analyses for both Kingsoft Office and Meitu were conducted, indicating potential revenue impacts based on changes in Average Revenue Per User (ARPU) [16][24] - The overall sentiment remains positive for software suppliers with accumulated data and industry know-how, despite the early-stage monetization of native-AI applications [1][2] This summary encapsulates the key points from the conference call, focusing on the valuation methodologies, financial projections, and growth strategies of the discussed companies within the China Software industry.

Summary of China Software Industry Conference Call Industry Overview - The China software industry experienced a revenue growth of **11.7% YoY** in December 2025, a decline from **14.6% in November 2025**. The month-over-month (MoM) growth was **3%** [1][4]. - The aggregate revenue for the software sector in December reached **Rmb1.5 trillion (US$209 billion)**, contributing to a total revenue growth of **13.2% YoY** for 2025 [15][1]. - The industry is expected to face a **quarter-over-quarter (QoQ) decline in 1Q26** due to weak seasonality and the Chinese New Year (CNY), but sequential growth is anticipated thereafter [1][4]. Key Drivers and Trends - The rollout of **Generative AI (Gen-AI) models** is accelerating, enhancing capabilities in text, image, and video applications, which is expected to support the expansion of AI applications [1][4]. - The **IT services segment** remains the largest contributor to revenue, accounting for **69%** of total software revenues in 2025, followed by software products at **21%** [15][24]. Performance Indicators - The **Small and Medium Business (SMB) Purchasing Managers' Index (PMI)** decreased to **47.4 in January 2026**, down from **48.6 in December 2025**, indicating weakened economic momentum [4][5]. - The **net margin** for the software industry improved to **12.6% in December 2025**, up from **8.4% in November 2025**, reflecting a gradual recovery post higher employee compensation impacts [9][22]. Segment Performance - **IT services** saw a **16% YoY growth** in December, with revenues reaching **Rmb1 trillion (US$143 billion)**, while the **security software** segment grew by **5% YoY** [26][17]. - The **service outsourcing contract value** declined significantly, down **56% YoY** to **Rmb275 billion** in December 2025, attributed to weak demand in software R&D and industrial design services [26][27]. Investment Recommendations - Companies recommended for investment include **Sensetime, Meitu, Kingdee, Hundsun, TUYA, and Empyrean** [3]. Additional Insights - The **overseas revenue exposure** for Chinese software companies remained stable at **2.8%** [15]. - The software industry is expected to continue evolving with advancements in foundational AI models, which will drive the application ecosystem [4][1]. This summary encapsulates the key points from the conference call regarding the current state and future outlook of the China software industry, highlighting growth metrics, challenges, and investment opportunities.