Morgan Stanley Outlines a Research Framework for Greater China IT Services and Software

Overview

This is a framework-style report on the Greater China IT services and software industry, titled “Inside the Mind of an Analyst.” The report covers segments such as software applications, AI LLM, IT services, and infrastructure, and cites companies including Kingsoft Office, Kingdee, Yonyou, Beisen, Glodon, Hundsun, Longshine, Meitu, MiniMax, Chinasoft International, Sangfor, Tuya, and Wangsu. The focus is not on issuing new stock-level ratings, but on explaining how analysts build industry-tracking, data-verification, and valuation frameworks.

Core views

The core view is that China’s software industry has structural opportunities from long-term digitalization and AI-driven demand, but is difficult to analyze: products lack a unified physical unit for measurement, high direct-sales ratios make channel verification difficult, subscriptions, licensing, project-based revenue, and services are mixed, and many companies lack consistent disclosure of operating metrics. The report recommends a top-down plus bottom-up approach, cross-validating macro cycle, IT spending, industry databases, CIO surveys, company financials, client interviews, and third-party research.

Analysis framework

The report uses a three-layer tracking framework: the first layer is macro data, such as GDP, Morgan Stanley economic forecasts, and National Bureau of Statistics data, used to assess cyclicality and the corporate IT spending environment; the second layer is industry data, such as MIIT software industry data, IDC/Gartner, and AlphaWise/CIO surveys, used to observe software market size, segment growth, and budget allocation; the third layer is company data, including financial disclosures, investor days, industry conferences, expert interviews, and client/competitor interviews, used to validate company growth, earnings quality, and competitive landscape.

Methodology notes

• 行业跟踪Top Down Approach

  Top-down tracking of software spending

  It decomposes software demand from macroeconomic, industry spend, and company operating perspectives to avoid relying solely on a single company-level view.

• 数据源CIO Survey / AlphaWise Survey

  Enterprise IT budget research

  It observes expected changes in hardware, software, professional services, and overall external IT spending through CIO and client surveys.

• 估值EV/Sales or EV/ARR

  Valuation for high-growth software companies

  Applicable to companies with high revenue growth or ARR growth where front-loaded R&D and sales spending depresses reported profitability.

• 估值P/E or EV/FCF

  Valuation for mature software companies

  Suitable for companies at a more stable operating stage; for subscription-based companies where free cash flow is stronger than accounting profit, EV/FCF may be prioritized.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Greater China software industry

  Core research focus

  Strengths

  Digitalization, cloud adoption, AI LLM, and enterprise software spending provide support for long-term growth.

  Weaknesses

  Metric disclosure is not standardized, business models differ substantially, and some companies have relatively short operating histories.

  Comparison

  Compared with traditional manufacturing or hardware sectors, software lacks a clear P x Q measurement framework, requiring greater reliance on budget surveys, industry data, and company-level verification.

  Risks

  Macroeconomic slowdown, downward revisions to corporate IT budgets, pace of government and B2G projects, intensifying competition, and valuation multiple compression.

• AI LLM-related companies and platforms

  Potential sources of growth and valuation resilience

  Strengths

  The AI platform segment shows relatively high growth and may alter IT investment priorities.

  Weaknesses

  Commercialization paths, profitability models, and long-term competitive moats still need to be validated.

  Comparison

  More suitable for ARR/revenue multiple comparison against global leading technology or product companies than for focusing only on short-term profits.

  Risks

  Rapid technology iteration, front-loaded R&D spending, and uncertainty around regulation and compute costs.

• Mature software and IT services companies

  Objects for monitoring cash-flow and earnings stability

  Strengths

  Some companies have moved into a stable operating phase, allowing valuation with P/E or EV/FCF.

  Weaknesses

  Growth elasticity may be lower than that of AI or high-ARR companies.

  Comparison

  Compared with high-growth software firms, mature companies rely more on profit quality, cash flow, and client renewal stability.

  Risks

  Project-based revenue volatility, delayed client budget decisions, industry competition, and gross margin pressure.

Key data

• China software market sizeabout 266 billion USD in 2019 and about 870 billion USD in 2028EAccording to IDC and Morgan Stanley Research charts, in 2019 the total of the three software categories was approximately 8.9 + 4.1 + 13.6 = 266 billion USD, and the 2028E total was approximately 18.7 + 32.5 + 35.8 = 870 billion USD.
• Expected 2H25 software IT spending change13.1%Morgan Stanley CIO Survey charts indicate that in the 2H25 survey, expected software spending change was above that of hardware, communication/network equipment, and professional services.
• Expected 2H25 total external IT spending change12.6%In the same survey, total expected external IT spending change was 12.6%.
• AI platform segment growth31%In an IDC/Morgan Stanley Research chart, Artificial Intelligence Platforms shows 31% within the application development and deployment category.
• Example covered companiesKingsoft Office, Kingdee, Yonyou, Beisen, Glodon, Hundsun, Longshine, Meitu, MiniMax, Chinasoft International, Sangfor, Tuya, WangsuThe report lists these companies as part of its Greater China software and IT services coverage universe.

Impact & implications

For investment research, this implies that software should not be evaluated only by revenue growth or short-term margin trends; one should consider business model, ARR/subscription quality, stage of R&D and sales investment, industry budget cycles, AI-driven shifts in IT priorities, and the quality of company disclosures. For stock selection, high-growth and frontier-technology companies are more suitable for comparing revenue or ARR multiples with global peers, while mature companies require greater scrutiny of cash flow, profit stability, and valuation discipline.

Risks

• The software industry lacks a unified physical sales unit, and the traditional P x Q framework is weakly applicable.
• Direct sales ratios are relatively high, making third-party channel verification challenging.
• Business and pricing models differ significantly; mixing subscriptions, licensing, services, and project-based models affects comparability.
• Some companies do not consistently disclose operating metrics, making it difficult to compare growth quality and renewal quality horizontally.
• Some companies have high exposure to B2G businesses, which may be affected by fiscal policy, project approval, and receivables cycles.
• AI and underlying technology change rapidly, potentially causing disruptive competition and valuation volatility.
• Morgan Stanley has disclosed investment banking, shareholding, or service relationships with multiple covered companies; investors should be aware of potential conflicts of interest.

What to watch

• Software budget and external IT spending changes in the Morgan Stanley CIO Survey.
• Updates to MIIT software industry data and IDC/Gartner market size figures.
• The impact of AI LLM on enterprise IT investment priorities and software procurement budgets.
• Key company metrics such as ARR, subscription share, free cash flow, and the efficiency of R&D and sales spending.
• Validation of demand conditions through company filings, investor days, industry conferences, client interviews, and expert interviews.
• Subsequent Morgan Stanley stock-level ratings, target price updates, or industry outlook revisions.