AI-native features and subscriptionization become a new driver of Chinese ERP spending, but near-term IT budget pressure still limits earnings recovery

Overview

This report reviews 1Q results from Chinese ERP vendors and focuses on how AI-native features, AI agents, subscription migration, and AI-driven internal R&D efficiency affect customer spending and profitability. Goldman Sachs believes the AI transition can create additional revenue opportunities for ERP vendors and improve productivity per employee, but enterprise IT spending remains under pressure in the near term, so it maintains Neutral on Kingdee and Sell on Yonyou.

Core views

The core views are: first, rising adoption of AI-native features and AI agents should bring incremental AI revenue and higher customer spending; second, the shift to subscription models continues to improve product mix, and Kingdee's subscription revenue mix has already risen to 51%; third, AI-generated code and operating efficiency gains should improve revenue per employee and margins; fourth, both companies' 2026-2028E earnings forecasts were reduced because of weaker on-premise ERP revenue, weak mid-market customer spending, and increased AI R&D investment.

Analysis framework

The report combines a review of results, management's 2026 outlook, earnings estimate revisions, DCF valuation, and comparable valuation trends. Kingdee's valuation is based on a two-stage DCF with a WACC of 12.1% and a perpetual growth rate of 2%; Yonyou's valuation is also based on a two-stage DCF with a WACC of 10.8% and a perpetual growth rate of 2%.

Methodology notes

• Valuation methodsTwo-stage DCF

  Estimates a company's intrinsic value by discounting long-term free cash flow.

  Kingdee's target price of HK$11.1 is based on 2-stage free cash flow growth of 2%-7% for 2032E-2036E, a perpetual growth rate of 2%, and a WACC of 12.1%; Yonyou's target price of Rmb8.58 is based on 2-stage free cash flow growth of 14%-23% for 2032E-2036E, a perpetual growth rate of 2%, and a WACC of 10.8%.

• forecast_revisionEarnings forecast revision

  Incorporates the latest results, customer spending trends, and AI R&D investment into 2026-2028E forecasts.

  Kingdee's 2026-2028E earnings forecasts were cut by 7%/10%/11% respectively; Yonyou's 2026E forecast was revised from net profit to a Rmb278m net loss, and its 2027/2028E earnings forecasts were cut by 22%/18%.

• factor_profileGS Factor Profile

  Goldman Sachs uses Growth, Financial Returns, Multiple, and Integrated factors to measure a stock's relative attributes.

  The framework uses standardized rankings of sales, EBITDA, and EPS growth, ROE, ROCE, CROCI, and valuation metrics such as P/E, P/B, and EV/EBITDA to form percentile comparisons against the broader market and industry peers.

Asset mapping & comparison

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

• Kingdee (0268.HK)

  One of the core covered companies, benefiting from AI suites, subscriptionization, and operating efficiency gains.

  Strengths

  ARR rose 19% YoY to Rmb4.2bn, the subscription revenue mix increased, the 2026 AI suite revenue target is above Rmb1bn, and the AI-generated code target rises to 70%.

  Weaknesses

  On-premise ERP revenue is weak, 2026-2028E earnings forecasts were cut, and enterprise IT spending remains under pressure in the near term.

  Comparison

  Compared with Yonyou, Kingdee's subscription mix and AI suite revenue target stand out more, but valuation and earnings forecasts remain affected by revenue downgrades.

  Risks

  AI adoption slower than expected, a weaker-than-expected macro environment, and subscription revenue contribution below expectations.

• Yonyou (600588.SS)

  One of the core covered companies, using AI integration for product upgrades and efficiency improvements.

  Strengths

  1Q26 revenue rose 6% YoY, cloud revenue increased 17% YoY, gross margin improved to 44.7%, and management emphasized AI capabilities and data integration.

  Weaknesses

  2026E was revised from profit to net loss, mainly due to weak mid-market customer spending and increased AI product R&D investment; large-scale AI-native revenue contribution still needs time.

  Comparison

  Compared with Kingdee, Yonyou has a more negative rating, its target price implies downside versus the current price, and the certainty of earnings recovery is weaker.

  Risks

  Faster-than-expected AI ERP adoption, stronger-than-expected large-customer spending, and quicker-than-expected customer penetration could create upside risk; the opposite would further pressure profitability.

Key data

• Kingdee ARRRmb4.2bnUp 19% YoY as of the end of March 2026.
• Kingdee AI-native product contract valueRmb230mAs of the end of March 2026.
• Kingdee 2026 subscription revenue guidanceUp 20% YoYSubscription revenue accounted for 51% of total revenue in 2025, versus 47% in 2024.
• Kingdee AI suite revenue targetAbove Rmb1bnManagement targets this to be achieved in 2026 as customer adoption increases.
• Kingdee AI-generated code target70% in 2026It was 41% in 2025, highlighting AI's improvement in internal R&D efficiency.
• Kingdee target priceHK$11.1Previously HK$12.0, based on DCF valuation.
• Yonyou 1Q26 revenueRmb1.5bnUp 6% YoY, with cloud revenue up 17% YoY.
• Yonyou 1Q26 gross margin44.7%Improved by 5.7 percentage points YoY.
• Yonyou 2026E net profit revisionRmb278m net lossPreviously forecast at Rmb435m net profit.
• Yonyou target priceRmb8.58Previously Rmb9.03, based on DCF valuation.

Impact & implications

The report implies that in the Chinese ERP industry, AI is moving from a concept-driven theme to measurable levers such as product suites, AI agents, code generation, and productivity improvements, but the pace of revenue realization and customer IT budgets remain key constraints. Kingdee has a clearer path to subscription and AI revenue growth, so it is rated Neutral; Yonyou's AI integration helps product upgrades, but earnings recovery and mid-market demand remain under pressure, so it stays Sell.

Risks

• Kingdee AI adoption could be faster or slower than expected.
• The macro environment could be better or worse than expected, affecting enterprise IT budgets.
• Subscription revenue contribution could be higher or lower than expected, affecting revenue quality and margins.
• If Yonyou AI ERP adoption, large-customer spending, and customer penetration are stronger than expected, that would create upside risk to the Sell rating.
• If AI product R&D investment is higher than expected, it could continue to pressure Yonyou's near-term profits.

What to watch

• Whether Kingdee's AI suite can achieve revenue above Rmb1bn in 2026.
• Whether the share of new code generated by AI at Kingdee can rise from 41% in 2025 to 70% in 2026.
• Whether Kingdee's subscription revenue mix can remain above 51% in 2026.
• Whether Yonyou's AI contract growth can translate into large-scale AI-native product revenue.
• Whether Yonyou's 2026E net loss narrows and whether the 2027E earnings recovery is achieved as assumed in the DCF.
• The enterprise IT spending environment and purchasing pace among large and mid-sized customers.