Greater China IT Services and Software_ MIIT Industrial IT Localization Policy and Xinchuang Rally

Summary of Key Points from the Conference Call Industry Overview - Industry: Greater China IT Services and Software - Current View: Cautious outlook on the A-share software and IT sector, influenced by IT localization themes [2][3] Core Insights - MIIT Policy: The Ministry of Industry and Information Technology (MIIT) has mandated the replacement of 2 million sets of industrial software licenses and 800,000 industrial operating systems by 2027. This is part of a broader initiative to enhance supply chain resiliency and security [3][5] - Recent Market Activity: The China Securities Xinchuang Index (CSI931247) increased by 4% from September 18-20, compared to a 1% rise in the CSI300. This surge is attributed to geopolitical events and speculation regarding local government funding for IT localization [4][5] - Investment Recommendations: - Avoid investments in the Xinchuang theme until financial contributions become clearer due to a poor track record [2][5] - Preference for Baosight (EW) over ZWsoft (UW) for industrial software, and Kingsoft Corp (OW) over Kingsoft Office (UW) for localization [5] Financial Performance and Risks - Bottlenecks: Key challenges for IT localization include budget constraints for local governments and performance issues with domestic industrial software. Previous MIIT targets, such as those for cybersecurity growth, have been missed [5] - Market Sentiment: The current market environment resembles that of September 2022, where the software sector rallied on localization policies without subsequent financial benefits [5] Company-Specific Insights - Kingsoft Corp Ltd (3888.HK): - Valuation based on a sum of parts approach, with online games valued at 10x 2024e P/E and WPS using DCF with a 9.0% WACC [7] - Risks include slower game revenue growth and competition in cloud services [8][9] - Shanghai Baosight Software Co Ltd (600845.SS): - Valuation derived from a 10-year DCF model with a WACC of 10.5% [10] - Upside risks include faster customer utilization and potential M&A activity [11] - ZWSOFT Guangzhou Co Ltd (688083.SS): - Valuation based on a 10-year DCF with a WACC of 10.8% [13] - Upside risks include stronger IP protection and technology evolution [14] - Beijing Kingsoft Office Software Inc (688111.SS): - Valuation methodology aligns with other Chinese SaaS companies, applying a 10.2% WACC [16] - Risks include slower AI penetration and intensified competition [18] Additional Considerations - Market Dynamics: The software sector is experiencing high valuations despite being one of the worst-performing segments over the past two years, indicating a potential market correction if demand does not materialize [5] - Investment Banking Relationships: Morgan Stanley has disclosed its investment banking relationships with several companies mentioned, which may influence research objectivity [6][19] This summary encapsulates the critical insights and recommendations from the conference call, providing a comprehensive overview of the current state and outlook of the Greater China IT Services and Software industry.