Software growth cools, AI spending becomes key to second-half recovery

Overview

The report tracks revenue, margins, subsegments, overseas revenue, and SME sentiment in China's software industry. Industry revenue growth slowed significantly in June, and the SME Purchasing Managers' Index declined further in July, reflecting continued pressure on corporate software budgets; meanwhile, industry margins improved month-on-month, and AI-related projects and application ecosystems continued to expand. Goldman Sachs expects sequential industry growth to strengthen in the second half of 2026, supported by seasonal improvement, but the strength of the recovery will depend on AI product commercialization and a rebound in corporate IT budgets.

Core views

First, China's software industry revenue grew 6.4% YoY in June, continuing to slow from 8.5% in May, and first-half cumulative growth was also lower than the same period last year. Second, the SME Purchasing Managers' Index fell to 47.4 in July, indicating that corporate IT spending remains weak in the near term. Third, customer budgets are shifting toward AI foundation models, customized models, agents, and multimodal applications, and the commercialization of AI agents in scenarios such as knowledge accumulation, productivity improvement, and personal assistants is worth monitoring. Fourth, IT services, semiconductor design software, and cloud computing and big data performed relatively well in June, with IT services still contributing the vast majority of industry revenue. Fifth, margin improvement provides some buffer for the industry, but is not yet sufficient to offset demand concerns caused by the slowdown in revenue growth.

Analysis framework

Based on industry data from the Ministry of Industry and Information Technology and the Ministry of Commerce, the report conducts monthly tracking of revenue growth, net profit margin, subsegment structure, overseas revenue, and service outsourcing activity, and combines the SME Purchasing Managers' Index to assess customer budgets and software spending trends; it also monitors AI product progress, corporate hiring, profitability, and product iteration to evaluate the industry's recovery path.

Methodology notes

• Industry fundamentals trackingSoftware industry monthly indicators framework

  Assess changes in industry conditions through revenue, margins, subsegments, and overseas revenue.

  The report mainly uses aggregated data on registered Chinese software companies disclosed by the Ministry of Industry and Information Technology, and compares monthly, cumulative, and year-on-year changes.

• Leading demand indicatorSME Purchasing Managers' Index tracking

  Observe potential changes in the software market and customer budgets through SME business sentiment.

  The July index fell to 47.4, remaining in contraction territory, suggesting that the recovery in corporate IT spending still faces pressure.

• Product and spending trackingAI product momentum monitoring

  Track product iteration and commercialization of AI foundation models, customized models, agents, and multimodal applications.

  Expansion of AI application scenarios may improve corporate productivity, accumulate internal knowledge, and drive a new round of software and IT infrastructure spending.

Asset mapping & comparison

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

• SenseTime

  Buy recommendation in the AI software segment

  Strengths

  Has exposure to AI foundation models and application ecosystems, and may benefit from model capability improvements and increased spending on AI projects.

  Weaknesses

  There is still uncertainty around commercialization progress and realization of customer budgets.

  Comparison

  Compared with traditional software companies, it is more sensitive to expansion in AI models and application ecosystems.

  Risks

  AI project implementation slower than expected, intensified competition, and persistently weak corporate IT budgets.

• Meitu

  Buy recommendation in consumer-facing AI software

  Strengths

  Growth in demand for multimodal content generation and personal AI tools is favorable for product adoption and monetization.

  Weaknesses

  User payment and the ability to continuously monetize AI features still need to be validated.

  Comparison

  Compared with enterprise software companies, it benefits more directly from consumer demand for multimodal content generation.

  Risks

  User growth or paid conversion below expectations, and intensified product competition.

• Hundsun

  Buy recommendation in financial software

  Strengths

  Software demand from financial institutions and AI customization projects may create product upgrade opportunities.

  Weaknesses

  Customer spending cycles may be affected by macroeconomic conditions and budget constraints.

  Comparison

  Compared with general software companies, its business is more focused on financial industry customers and vertical solutions.

  Risks

  IT budget recovery at financial institutions slower than expected, and extended project delivery and payment collection cycles.

• TUYA

  Buy recommendation in IoT software

  Strengths

  Integration of IoT platforms and AI capabilities may expand smart device and automation application scenarios.

  Weaknesses

  Changes in industry demand and overseas markets may cause revenue volatility.

  Comparison

  Compared with traditional enterprise software companies, it has higher exposure to IoT terminals and platform ecosystems.

  Risks

  Weak terminal demand, overseas business volatility, and AI feature commercialization below expectations.

Key data

• Software industry revenue growth in June 2026YoY +6.4%Below YoY +8.5% in May 2026 and also below YoY +15.1% in June 2025.
• Industry revenue in June 2026RMB 1.5 trillionEquivalent to approximately USD 205 billion.
• Revenue growth in the first half of 2026Approximately YoY +9.5% to +9.6%Different sections of the report use 9.5% and 9.6% respectively; both are below 11.9% in the first half of 2025.
• SME Purchasing Managers' Index in July 202647.4Below 48.2 in June and 48.5 in May.
• Industry net margin in June 202612.4%Above 11.9% in May; first-half net margin was 11.7%.
• Industry net profit in June 2026RMB 182.6 billionEquivalent to approximately USD 25.4 billion.
• Overseas revenue in June 2026USD 6.1 billionThe share of overseas revenue fell from 3.2% in May to 3.0%.
• Revenue structure in the first half of 2026IT services 69%, software products 22%, embedded system software 8%, security software and services 2%Sub-items may sum to more than 100% after rounding.
• Security software revenue in June 2026RMB 32.3 billion, YoY +6%First-half revenue was RMB 143.0 billion.
• IT services revenue in June 2026RMB 1.0 trillion, YoY +7%First-half revenue was RMB 5.3 trillion.
• Executed value of service outsourcing in June 2026RMB 152.0 billion, YoY +29%Growth was driven by an increase in AI-related projects.

Impact & implications

In the short term, slowing revenue growth and weakening SME sentiment imply that traditional corporate software budgets will remain under pressure, and the industry recovery may be gradual. In the medium term, better seasonality in the second half, margin improvement, and budget concentration toward AI projects are expected to support sequential growth. Beneficiaries are more likely to be companies with mature AI products, clear commercialization scenarios, strong customer reach, and cloud computing and big data infrastructure capabilities, while companies relying on general corporate IT spending may recover more slowly.

Risks

• Recovery in Chinese corporate software and IT budgets is slower than expected.
• The SME Purchasing Managers' Index remains in contraction territory.
• Commercialization progress of AI foundation models, customized models, or agent projects falls short of expectations.
• Industry revenue growth continues to decline, and margin improvement cannot be sustained.
• Service outsourcing contracts and overseas revenue perform weakly.
• Competition in AI products intensifies, with increased R&D investment but insufficient monetization.

What to watch

• Sequential growth and the extent of seasonal improvement in the software industry in the second half of 2026.
• Whether the SME Purchasing Managers' Index can return to expansion territory.
• The pace of recovery in corporate software and IT budgets, and the extent of budget tilt toward AI projects.
• Iteration and commercialization of AI foundation models, customized models, agents, and multimodal products.
• Changes in software company hiring, profitability, and net margins.
• Relative growth rates of IT services, cloud computing, big data, and semiconductor design software.
• Changes in service outsourcing contract value, executed value, and the share of overseas revenue.