Structural oversold opportunities emerge after the correction in Chinese software stocks
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Structural oversold opportunities emerge after the correction in Chinese software stocks
Morgan Stanley believes artificial intelligence productization, revenue acceleration, and valuation pullbacks together create stock-picking opportunities, with Kingdee, upgraded to Overweight, as the top pick, while continuing to favor Meitu and Beisen.
- Artificial intelligence coding agents help software companies improve R&D efficiency, but may erode labor-intensive information technology services businesses.
- Kingdee's revenue growth is approaching the mid-teens, with expected 2027 EV/FCF of about 15x, and its valuation appeal has improved after a significant correction.
- Kingsoft Office's earnings forecasts were raised, but expected 2027 EV/FCF of 36x and P/E of 43x remain difficult to fully justify with mid-teens growth.
- Yonyou's revenue and profit forecasts were sharply cut, with macro sensitivity, share losses, and the pace of profit recovery still weighing on the company.
- The launch of high-performance, low-cost open-source large models such as DeepSeek V4 Flash is positive for application-layer software companies.
Report interpretation
Overview
The report evaluates investment opportunities in China's information technology services and software industry after first-half 2026 earnings disclosures. Morgan Stanley believes the market remains highly concerned about artificial intelligence disruption, macro weakness, and uncertainty over long-term value, but some leaders have achieved revenue acceleration through AI-enabled products, R&D efficiency gains, and cloud business growth. After substantial year-to-date share price corrections, companies capable of delivering profits are beginning to show a valuation margin of safety.
Core views
The industry investment thesis has shifted from simply chasing artificial intelligence themes to validating sustained revenue growth, profit delivery, and reasonable valuations. Traditional software vendors may become near-term entry points for enterprises and consumers adopting artificial intelligence, and Kingsoft Office, Kingdee, and Beisen, which are actively integrating artificial intelligence, have shown revenue acceleration; meanwhile, artificial intelligence coding agents may compress demand for low-end, labor-intensive information technology services. The report is most positive on Kingdee, Meitu, and Beisen, while remaining cautious on Kingsoft Office, whose valuation is relatively high, and Yonyou, whose fundamentals remain under pressure.
Analysis framework
The report revises revenue, EBIT, and normalized EPS forecasts based on preliminary first-half 2026 results, and compares companies horizontally using global software peers' expected 2027 P/E, EV/FCF, and EV/Sales. Individual stock target prices mainly use a 10-year discounted cash flow model; for Kingsoft Corp, which has a diversified business structure, a sum-of-the-parts valuation method is used, with bull, base, and bear scenarios applied to test key operating assumptions and valuation risks.
Methodology notes
Adjust revenue, EBIT, and normalized EPS based on the latest preliminary results
By comparing forecast changes across companies from 2026 to 2029, the report identifies differences in revenue momentum, cost control, profit elasticity, and earnings delivery.
Measure valuation using expected 2027 P/E, EV/FCF, and EV/Sales
The report believes industry dynamics among computing hardware, artificial intelligence models, and the application layer are converging globally, so global software peer valuations have high reference value; SaaS companies are prioritized using EV/FCF to mitigate the impact of mismatches between revenue recognition and marketing expense recognition.
Derive target prices based on long-term cash flows, weighted average cost of capital, and perpetual growth rates
Kingdee's base case uses a weighted average cost of capital of 13.9% and a perpetual growth rate of 2.5%; Yonyou and Kingsoft Office use a weighted average cost of capital of 9.8% and a perpetual growth rate of 3%.
Value games, WPS, and Kingsoft Cloud equity separately and then add them together
Kingsoft Corp's valuation uses around 10x expected 2026 P/E for online games, a discounted cash flow valuation for WPS, around 5.5x expected 2026 EV/EBITDA for Kingsoft Cloud, and factors in a 32.9% stake, a 50% holding company discount, and a USD/RMB exchange rate of 6.8.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Kingdee International Software Group (0268.HK)Top oversold pick, upgraded from Equal-weight to Overweight, with target price of HK$11.30.
- Strengths
- Leading product and execution capabilities, relatively fast growth in subscription and cloud businesses, revenue growth approaching the mid-teens, and cash flow and margins expected to continue improving.
- Weaknesses
- Still needs to complete a new round of artificial intelligence and cloud transformation, and recent normalized EPS forecasts were not raised across the board.
- Comparison
- At around 15x expected 2027 EV/FCF, it has a relatively high valuation margin of safety compared with global software peers and its growth prospects.
- Risks
- Further slowdown in China's economy, cloud transformation execution falling short of expectations, intensified competition in the mid-sized enterprise market, and long-term artificial intelligence substitution of SaaS.
- MeituMaintained at Overweight, one of the revenue acceleration names favored by the report.
- Strengths
- Recent performance has been recognized, and it has a beneficiary logic at the artificial intelligence application layer.
- Weaknesses
- Share price and liquidity are relatively volatile, and the report summary does not provide complete earnings forecasts or valuation parameters.
- Comparison
- Listed together with Kingdee and Beisen as preferred software names after the correction.
- Risks
- Tighter liquidity, artificial intelligence commercialization falling short of expectations, and valuation volatility.
- Beisen Holding Limited (9669.HK)Maintained at Overweight, with target price lowered from HK$11.30 to HK$7.80.
- Strengths
- Actively integrating artificial intelligence and showing revenue acceleration, with 2028 to 2029 EBIT and normalized EPS forecasts raised.
- Weaknesses
- 2027 EBIT forecast was cut, and the tight liquidity environment increases valuation volatility.
- Comparison
- After the recent sharp correction, there is still significant potential upside relative to the target price.
- Risks
- Insufficient liquidity, slower-than-expected profit delivery, and weak enterprise software demand.
- Yonyou Network Technology Co Ltd (600588.SS)Maintained at Underweight, with target price lowered from Rmb6.90 to Rmb5.40.
- Strengths
- Long-term cloud services penetration and industry structural growth logic remain intact.
- Weaknesses
- Revenue growth continues to deteriorate, market share is being lost, profit forecasts have been sharply cut, and the company is highly sensitive to the macro environment.
- Comparison
- Current valuation is ahead of fundamentals, and its risk-reward is weaker than revenue acceleration names such as Kingdee.
- Risks
- Further economic slowdown, prolonged cloud transformation cycle, execution risks in layoffs, intensified competition, and profit recovery falling short of expectations.
- Beijing Kingsoft Office Software Inc (688111.SS)Maintained at Underweight, with target price raised from Rmb172.00 to Rmb205.00.
- Strengths
- The consumer business recovery has sustainability, and overseas expansion plus WPS 365 collaboration and artificial intelligence features are expected to drive high growth.
- Weaknesses
- Valuation is significantly higher than global SaaS peers and does not match its mid-teens growth profile.
- Comparison
- Expected 2027 EV/FCF of 36x and P/E of 43x are clearly high among global software peers.
- Risks
- Artificial intelligence penetration slower than expected, intensified online collaboration competition, constrained software localization budgets, and paid conversion rate improvement falling short of expectations.
- Kingsoft Corp Ltd (3888.HK)Maintained at Equal-weight, with target price raised from HK$28.00 to HK$30.00.
- Strengths
- Holds stakes in Kingsoft Office and Kingsoft Cloud, while software localization and improvement in the games business can provide upside optionality.
- Weaknesses
- WPS and games fundamentals may lack highlights, new game performance is uncertain, and the company bears a relatively high holding company discount.
- Comparison
- Uses a sum-of-the-parts valuation, with the base case factoring in a 50% holding company discount.
- Risks
- Poor new game performance, slower-than-expected software localization progress, valuation pullbacks in investee companies, and widening discounts.
- Sangfor Technologies Inc (300454.SZ)Target price raised from Rmb108.00 to Rmb110.00, with the valuation point rolled forward to June 2027.
- Strengths
- Rolling the valuation period forward can reflect medium-term cash flow and business recovery potential.
- Weaknesses
- The report summary does not disclose a clear rating change or detailed operating catalysts.
- Comparison
- Mainly uses a 10-year discounted cash flow model to assess long-term value.
- Risks
- Weak enterprise information technology spending, intensified competition, and cash flow delivery falling short of expectations.
Key data
- Kingdee rating and target priceOverweight; HK$11.30Rating upgraded from Equal-weight, with target price slightly lowered from HK$11.50.
- Kingdee revenue forecast revisions2026 +1.2%; 2027 +1.9%; 2028 +2.2%Normalized EPS for 2026 was cut by 6.7%, but 2028 was raised by 1.4%.
- Kingdee base-case operating metricsSubscription ARR growth of 21%, 19%, and 17%Corresponding to 2026 to 2028, respectively; gross margins for the same period are expected to be 67.7%, 68.2%, and 68.8%.
- Kingdee valuationAround 15x expected 2027 EV/FCFThe report believes the valuation after the sharp correction now provides a relatively high margin of safety against the risk of artificial intelligence disruption.
- Yonyou revenue forecast revisions2026 -2.6%; 2027 -4.0%; 2028 -6.9%Adjusted EBIT forecasts for the same period were cut by 72.8%, 54.8%, and 27.4%, respectively, with fundamentals still under pressure.
- Kingsoft Office revenue forecast revisions2026 +2.9%; 2027 +5.7%; 2028 +9.4%Adjusted EBIT forecasts for the same period were raised by 6.9%, 9.1%, and 11.2%, respectively.
- Kingsoft Office valuation36x expected 2027 EV/FCF; 43x expected 2027 P/EThe report believes this valuation is clearly high among global SaaS peers and does not match mid-teens growth.
- Kingsoft Corp target priceHK$30.00Raised from HK$28.00, using a sum-of-the-parts valuation method.
- Beisen target priceHK$7.80Lowered from HK$11.30, but the report still maintains an Overweight view.
- Sangfor target priceRmb110.00Raised from Rmb108.00, with the valuation point rolled forward to June 2027.
Impact & implications
The sector's overall valuation center remains constrained by artificial intelligence disruption and uncertainty over terminal value, and the sustainability of relying solely on sector rotation is limited. Investors are more likely to reward companies that can consistently deliver revenue growth, convert artificial intelligence into paid products, and improve cash flow. Low-cost open-source large models will lower the threshold for application development, benefiting application-layer software, but may also blur the boundaries of collaboration software, intensify competition, and accelerate the automation-driven replacement of low-end information technology services businesses.
Risks
- China's macro economy slows further, with enterprise and government software budgets remaining under pressure.
- The pace at which artificial intelligence replaces traditional SaaS or labor-intensive information technology services over the long term exceeds expectations.
- Artificial intelligence product penetration, paid conversion rates, and commercialization revenue fall short of expectations.
- Cloud transformation, product upgrades, and organizational cost reduction execution fall short of expectations.
- Competition intensifies in online collaboration and enterprise artificial intelligence entry points, leading to declines in market share and pricing power.
- The market lacks confidence in software companies' terminal value, and valuation multiples may continue to contract.
- The research institution may have business relationships with covered companies, and investors should use this report as only one factor in decision-making.
What to watch
- Whether Kingdee, Kingsoft Office, and Beisen can continue to deliver revenue acceleration in the second half of 2026.
- The actual impact of artificial intelligence coding agents on R&D efficiency, R&D expense ratios, and information technology services revenue.
- Kingdee's subscription ARR growth, gross margin, free cash flow, and growth in large enterprise customers.
- Yonyou's market share, cloud services growth, headcount reduction, and progress toward breakeven.
- WPS 365 revenue growth, consumer paid conversion rate, ARPU, and overseas expansion performance.
- Whether low-cost open-source models such as DeepSeek V4 Flash can drive application-layer product innovation and commercialization.
- Changes in global software peer valuations and the relative valuation margin of safety for Chinese software stocks.