2026-01-13 11:56Summary 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.