J.P. Morgan: China AI application revenue growth comes with costs; upgrades MEITU (01357) rating to "Overweight"

J.P. Morgan released a research report stating that the third-quarter results of Chinese AI application companies show that AI revenue growth comes with increased costs, and investors should focus more on the ability to ultimately convert revenue into profit. The bank upgraded MEITU (01357) from "Neutral" to "Overweight," raising its 12-month target price from HK$4.5 to HK$5; downgraded Beijing Kingsoft Office Software, Inc. (688111.SH) from "Overweight" to "Neutral," cutting its target price from RMB325 to RMB251. Meanwhile, it maintained the HK$8.3 target price for KINGDEE INT'L (00268), maintained the "Underweight" rating on Yonyou Network Technology (600588.SH), and lowered its target price from RMB6 to RMB5.6. The bank noted that additional revenue from SaaS businesses can almost entirely convert into additional profit, but AI businesses consume tokens for every task, so there may be a significant difference between revenue and profit growth rates. Token prices are broadly similar across companies, and the key difference lies in pricing power. If AI can provide customers with new reasons to pay, be priced according to labor costs, and charge higher fees for heavy usage, companies can pass on costs; if AI is merely incorporated into existing charges to retain customers, companies must bear the related costs themselves. The bank therefore places more emphasis on incremental gross profit, paying user growth, and cost discipline rather than AI usage volume or token consumption. MEITU's consumer-end monetization strengthened; management controls enterprise-end spending J.P. Morgan noted that MEITU's consumer-end paid conversion rate still has room for improvement in China, and overseas markets also have substantial growth potential. Third-quarter paid subscribers recorded the largest quarterly increase in a year, and although the AI business incurs token costs, revenue growth has been sufficient to cover the related costs. On the enterprise side, management treats each AI product as a project that must recover costs and has shut down about half of its innovation studios. On valuation, MEITU's share price corresponds to about 12x 2027 forecast price-to-earnings, and below 10x after excluding net cash. The company's share price has fallen about 45% year-to-date, and the bank believes the negative impact reflected in the share price far exceeds what the third-quarter results show. The bank expects the company's earnings compound annual growth rate from 2026 to 2028 to be about 16%, and to provide shareholders with a return equivalent to about 5% of market capitalization. Beijing Kingsoft Office Software, Inc.: AI costs growing faster than revenue, weakening earnings upside The bank noted that the AI features of Beijing Kingsoft Office Software, Inc.'s WPS mainly enhance the value of existing memberships, and heavy usage causes costs to grow faster than revenue. Third-quarter adjusted net profit grew only 8% year-on-year, while revenue grew 16% year-on-year, and WPS365 growth also slowed markedly. J.P. Morgan believes the company's original business advantages remain, but it no longer sees the earnings upside that previously supported the "Overweight" rating. If the company explicitly charges for heavy AI usage, the bank's view could change, all else being equal. For KINGDEE INT'L, third-quarter subscription annual recurring revenue (ARR) growth accelerated to 19.3% year-on-year, and the contract value of AI-native products continued to rise. J.P. Morgan maintained its earnings forecasts and target price unchanged. For Yonyou Network Technology, although AI-related revenue grew substantially, the group's third-quarter revenue grew only 1.3% year-on-year, indicating that the AI business partially replaced original project work. The bank therefore lowered its revenue forecast.