AI-native products are emerging as a new growth driver for China's ERP vendors, but IT spending pressure still weighs on earnings expectations
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AI-native products are emerging as a new growth driver for China's ERP vendors, but IT spending pressure still weighs on earnings expectations
Goldman Sachs believes Kingdee and Yonyou are using AI agents, AI-native features, and subscription upgrades to drive customer spending and internal efficiency, but it cuts both companies' 2026-2028 earnings forecasts and keeps Kingdee Neutral and Yonyou Sell.
- Kingdee's ARR grew 19% year over year to Rmb4.2bn as of end-March 2026, AI-native product contracts reached Rmb230m, and management guided 2026 subscription revenue to grow 20% year over year.
- Kingdee management expects 2026 Kingdee AI suite revenue to exceed Rmb1bn and plans for 70% of new code in 2026 to be generated by AI, up from 41% in 2025.
- Yonyou's 1Q26 revenue rose 6% year over year to Rmb1.5bn, cloud revenue increased 17% year over year, and gross margin improved 5.7 percentage points to 44.7%, but large-scale revenue contribution from AI-native products will take time to emerge.
- The report cuts Kingdee's 2026-2028E earnings by 7%/10%/11%; it lowers Yonyou's 2026E to a net loss of Rmb278m and cuts 2027/2028E earnings by 22%/18%.
- DCF target prices were cut to Kingdee HK$11.1 and Yonyou Rmb8.58, mainly reflecting changes in revenue, margin, and free cash flow assumptions.
Report interpretation
Overview
This report revisits the investment view on Chinese ERP vendors after their first-quarter results, focusing on higher adoption of AI-native features and AI agents, the shift toward subscriptions, and operating efficiency gains from AI integration. It argues that enterprise IT spending remains under pressure in the near term, but the AI transition can drive user spending, improve product mix, and lift revenue per employee.
Core views
The core view is that Kingdee benefits from a higher subscription revenue mix, expansion of its AI product suite, and globalization efforts, but weaker traditional on-premises ERP revenue leads to earnings forecast cuts. Yonyou is improving profitability through AI integration and product upgrades, but weak mid-market client spending and higher AI R&D investment are weighing on earnings. Goldman Sachs keeps Kingdee at Neutral and Yonyou at Sell.
Analysis framework
The report combines 1Q26 and prior earnings data, management's 2026 outlook, AI product contracts and customer adoption, subscription revenue mix, revenue per employee and margin changes, revises revenue, gross profit, operating profit, net profit and EPS forecasts, and uses a two-stage DCF valuation framework to derive 12-month target prices.
Methodology notes
Derive equity value by discounting explicit forecast-period free cash flow, second-stage free cash flow growth, terminal growth rate, and WACC.
Kingdee's target price is based on a 12.1% WACC and a 2% terminal growth rate; Yonyou's target price is based on a 10.8% WACC and a 2% terminal growth rate.
Compare individual stocks versus the market and peers across growth, financial returns, valuation multiples, and an aggregate score.
Growth factors are based on forward sales, EBITDA, and EPS growth; financial returns are based on ROE, ROCE, and CROCI; valuation multiples are based on P/E, P/B, EV/EBITDA, EV/FCF, and other metrics.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Kingdee (0268.HK)China ERP and cloud subscription provider, one of the companies covered in the report
- Strengths
- ARR growth, a higher subscription revenue mix, a clear AI suite revenue target, and AI-generated code should improve R&D efficiency.
- Weaknesses
- Traditional on-premises ERP solution revenue is weak, and 2026-2028E earnings forecasts were cut.
- Comparison
- Relative to Yonyou, the report keeps Kingdee at Neutral; the target price still implies upside, but the rating has moved from the prior Buy historical range to Neutral.
- Risks
- Faster-than-expected AI adoption, a weaker-than-expected macro backdrop, and lower-than-expected subscription revenue contribution.
- Yonyou (600588.SS)China ERP and cloud software provider, one of the companies covered in the report
- Strengths
- Cloud revenue growth, gross margin improvement, AI capabilities integrated into products such as BIP v5, and management focus on profitability and revenue per employee.
- Weaknesses
- Weak mid-market client spending, the time needed for AI products to make meaningful revenue contributions, and AI R&D spending weighing on profits.
- Comparison
- Relative to Kingdee, Yonyou is rated Sell, with the target price implying downside versus the current price.
- Risks
- Faster-than-expected AI ERP adoption, stronger-than-expected spending from large customers, and faster-than-expected client penetration could create upside risk.
Key data
- Kingdee ARRRmb4.2bn, up 19% year over year as of end-March 2026Subscription migration remains Kingdee's core growth driver.
- Kingdee AI-native product contractsRmb230mManagement expects Kingdee AI suite revenue to exceed Rmb1bn in 2026.
- Kingdee 2026 subscription revenue guidance20% year-over-year growthSubscription revenue accounted for 51% of total revenue in 2025, up from 47% in 2024.
- Kingdee 2026 AI-generated code target70% of new code generated by AI41% in 2025, reflecting the goal of improving internal R&D efficiency.
- Yonyou 1Q26 revenueRmb1.5bn, up 6% year over yearCloud revenue grew 17% year over year.
- Yonyou 1Q26 gross margin44.7%, up 5.7 percentage points year over yearProduct mix upgrade and operational efficiency improvement drove gross margin expansion.
- Kingdee target priceHK$11.1, prior HK$12.0Based on two-stage DCF; 2026-2028E earnings estimates cut 7%/10%/11%.
- Yonyou target priceRmb8.58, prior Rmb9.03Based on two-stage DCF; 2026E forecast revised to a net loss of Rmb278m.
Impact & implications
AI-native features and AI agents are becoming new revenue levers for Chinese ERP vendors and may improve margins through code generation, R&D automation, and product mix upgrades. But the report also emphasizes that weak enterprise IT spending will delay revenue realization, especially because Yonyou's mid-market client demand and higher AI R&D spending make the earnings recovery path more uncertain.
Risks
- Enterprise IT spending may remain under pressure in the near term, which could weigh on ERP revenue and cloud migration speed.
- AI-native product and AI agent adoption may be slower than management expects.
- A smaller-than-expected increase in subscription revenue mix could hurt Kingdee's revenue quality and valuation.
- Weak mid-market client spending at Yonyou and higher AI R&D investment may delay earnings recovery.
- DCF valuation is sensitive to assumptions about WACC, terminal growth rate, free cash flow growth, and margin expansion.
What to watch
- Whether Kingdee AI suite revenue in 2026 approaches or exceeds Rmb1bn.
- Whether Kingdee's 20% year-over-year subscription revenue guidance and higher subscription revenue mix are achieved.
- Whether the increase in AI-generated code actually translates into improved R&D efficiency and revenue per employee.
- Whether Yonyou's AI contract growth can translate into scalable revenue contribution.
- The pace of recovery in enterprise IT budgets and large/mid-market customer spending.
- Whether 2026-2028E revenue, gross margin, operating margin, and free cash flow for both companies match the revised model assumptions.