Morgan Stanley seeks selective oversold opportunities after a significant pullback in Chinese software stocks

Overview

This report covers the Greater China IT services and software sector. The core question is which companies have achieved earnings visibility and valuation safety margins after AI disruption, macro headwinds, and valuation compression. Morgan Stanley believes investors should focus on names such as Kingdee, Meitu, and Beisen, which have accelerating revenue and significant share-price pullbacks amid sector rotation.

Core views

Software companies can still benefit in the near term from AI productization and improved R&D efficiency, while existing leaders may become entry points for enterprise and consumer AI adoption; however, whether AI will erode the terminal value of SaaS remains unresolved. Investors therefore demand stronger evidence of sustained earnings delivery and valuation safety margins. The report upgrades Kingdee to Overweight and maintains positive views on Meitu and Beisen; it remains cautious on Yonyou and Kingsoft Office, mainly because their fundamentals or valuations do not offer an attractive risk-reward balance.

Analysis framework

The report combines 1H26 earnings previews or interim results to revise 2026-2029 revenue, EBIT, and EPS forecasts, and uses 2027e P/E, EV/FCF, or EV/Sales multiples of global software peers as valuation references. EV/FCF and DCF are used more extensively for SaaS companies to reflect the mismatch between revenue and marketing expenses and their long-term growth potential; a sum-of-the-parts valuation is used for Kingsoft Corp.

Methodology notes

• Valuation methodsDCF

  10-year discounted cash flow model

  Used for companies including Kingdee, Yonyou, Kingsoft Office, Beisen, and Sangfor. Key assumptions include WACC, cost of equity, beta, cost of debt, debt-to-equity weighting, and terminal growth rate.

• Valuation methodsSOTP

  Sum-of-the-parts valuation

  Used for Kingsoft Corp, incorporating online games, Kingsoft Office, the value of the Kingsoft Cloud stake, and a 50% holding-company discount.

• peer_comparisonGlobal Software Comps

  Global software peer valuation comparison

  The report believes that cross-industry dynamics among computing hardware, AI models, and applications are converging globally, making 2027e valuation multiples of global software peers relevant references for Chinese software companies.

Asset mapping & comparison

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

• Kingdee International Software Group (0268.HK)

  Core oversold opportunity, upgraded to Overweight

  Strengths

  Leading products and execution, solid 1H26 operations, subscription ARR growth and margin improvement, with current valuation providing a safety margin against AI disruption risks.

  Weaknesses

  Still needs to prove its long-term position in the SaaS transition in the AI era; macro conditions remain weak.

  Comparison

  The report considers approximately 15x 2027e EV/FCF attractive after the significant decline.

  Risks

  Further deterioration in China's economy, cloud-transition execution risks, intensifying domestic competition, and loss of market share among mid-sized enterprises.

• Meitu

  Selective opportunity with Overweight view maintained

  Strengths

  Listed by the report as one of the software stocks with revenue acceleration momentum and attractive valuation.

  Weaknesses

  Visibility remains affected by uncertainty over AI's end state and market liquidity.

  Comparison

  Listed alongside Kingdee and Beisen as a preferred opportunity after recent significant pullbacks.

  Risks

  Tight liquidity, valuation volatility, and weaker-than-expected monetization of AI applications.

• Beisen Holding Limited (9669.HK)

  Overweight maintained, with substantial upside after the pullback

  Strengths

  Clear SaaS characteristics, benefiting from AI product integration and improving demand for enterprise software.

  Weaknesses

  Tight liquidity results in relatively high valuation volatility.

  Comparison

  The report sees significant upside to its target price following the recent substantial share-price pullback.

  Risks

  Macro pressure, slowing enterprise IT budgets, and rising volatility reflected in the higher beta.

• Yonyou Network Technology Co Ltd (600588.SS)

  Underweight maintained

  Strengths

  Cloud services continue to show structural growth, while long-term themes of software localization and enterprise digitalization remain intact.

  Weaknesses

  1Q26 revenue growth continued to deteriorate, market share was lost, earnings forecasts were substantially reduced, and the business is highly macro-sensitive.

  Comparison

  Compared with revenue-accelerating companies such as Kingdee, Yonyou has a weaker fundamental-valuation fit.

  Risks

  Further economic deceleration, a prolonged cloud-transition cycle, weak profitability, and intensifying competition in the high-end market.

• Beijing Kingsoft Office Software Inc (688111.SS)

  Underweight maintained

  Strengths

  2C recovery remains sustainable, overseas expansion contributes incremental growth, and WPS 365 is driven by collaboration features and AI.

  Weaknesses

  Valuation is significantly higher than global SaaS peers, and mid-teens growth is insufficient to support the high multiple.

  Comparison

  Approximately 36x 2027e EV/FCF and 43x P/E are viewed as exceptionally high valuations among global SaaS companies.

  Risks

  Slower-than-expected AI penetration, intensifying competition in online collaboration, and budget constraints on government software localization.

• Kingsoft Corp Ltd (3888.HK)

  Equal-weight maintained

  Strengths

  Valuation is supported by online games, WPS, and the Kingsoft Cloud stake; software localization and game improvement are potential upside factors.

  Weaknesses

  New-game performance has been disappointing, while WPS and game fundamentals remain lackluster.

  Comparison

  SOTP valuation is used, with a target price of HK$30.00, including a 50% holding-company discount.

  Risks

  New games underperforming expectations, slowing WPS growth, and slower-than-expected progress in software localization.

• Sangfor Technologies Inc (300454.SZ)

  Valuation window extended to June 2027

  Strengths

  Remains within the software and IT services coverage universe; target price was modestly adjusted to Rmb110.00.

  Weaknesses

  The report provides limited incremental discussion of the company.

  Comparison

  Compared with the core recommended names, Sangfor is not a primary oversold opportunity emphasized in this report.

  Risks

  Slowing enterprise IT spending, intensifying competition, and volatility in valuation assumptions.

Key data

• Kingdee rating changeUpgraded from Equal-weight to Overweight, target price HK$11.30The report believes revenue growth is approaching the mid-teens and that 2027e EV/FCF of approximately 15x is attractive after the pullback.
• Yonyou target priceRmb5.40Underweight maintained; 2026-2028 revenue, EBIT, and EPS forecasts were all lowered.
• Kingsoft Office target priceRmb205.00Underweight maintained, as approximately 36x 2027e EV/FCF and 43x P/E are considered expensive relative to mid-teens growth.
• Kingsoft Corp target priceHK$30.00Equal-weight maintained; valuation uses SOTP, including online games, WPS, and the Kingsoft Cloud stake.
• Kingdee 2026-2028 ARR growth21.0%, 19.0%, 17.0%Reflects continued growth in cloud subscriptions and ARR under the base-case scenario.
• Kingsoft Office WPS 365 revenue growth60%, 45%, 35% for 2026-2028E under the base-case scenarioWPS 365 is viewed as one of the primary revenue growth drivers.

Impact & implications

For portfolios, the report favors bottom-up selection within China's software sector rather than broad-based accumulation. Opportunities in the AI application layer are improving revenue visibility, but macroeconomic deceleration, uncertainty over AI's end state, and excessive valuations will continue to drive differentiation; companies whose valuations already reflect risks and whose earnings revisions are trending upward offer more attractive risk-reward profiles.

Risks

• AI may reshape the long-term profit pools of SaaS and IT services, and the ultimate winners remain unclear.
• Further slowing in China's macroeconomy may suppress demand for enterprise software, cloud services, and IT services.
• AI coding agents may cannibalize low-end, labor-intensive IT services businesses.
• Software localization and government budget constraints may affect the revenue cadence of companies such as Kingsoft Office.
• Tight liquidity will amplify valuation volatility in small- and mid-cap software stocks.
• Intensifying domestic competition may lead to pricing pressure and market share losses.

What to watch

• Whether revenue continues to accelerate in 1H26 and subsequent quarters, particularly for Kingdee, Meitu, and Beisen.
• Whether AI productization, AI coding agents, and improved R&D efficiency translate into margin improvement.
• Kingdee's subscription ARR growth, gross margin, and FCF delivery.
• Yonyou's cloud transition, workforce-efficiency targets, and market share changes.
• Kingsoft Office's WPS 365 growth, paid-user conversion, ARPU, and pace of AI penetration.
• Changes in Chinese corporate IT budgets, software localization budgets, and sector liquidity.