M IdeaChina IT Services and Software | Asia Pacific2024 outlook: A chilly year for enterprise IT spendingMorgan Stanley Asia Limited+Yang LiuEquity Analyst Yang.Liu@morganstanley.com +852 2239-1911 Lydia LinEquity Analyst Lydia.Lin@morganstanley.com +852 2239-1572 Pamela HuangResearch Associate Pamela.Huang@morganstanley.com +852 3963-4660 Tom TangResearch Associate Tom.Tang@morganstanley.com +852 3963-1860 Morgan Stanley appreciates your support in the 2024 Institutional Investor All-Asia Research Team Survey. Request your ballot here. Greater China IT Services and SoftwareAsia PacificIndustry ViewCautious Related report: 2024 Outlook: Estimate and Rating Changes Exhibit 1 : What's changed? NamePriceRatingRatingPTPTUpsideOldNewOldNewIndustry view: CautiousKingsoft20.6OWOW40.034.065%QAX34.2OWEW57.040.017%Topsec8.5EWEW11.310.321%DBAPPS81.9EWEW133.099.021%Baosight43.6UWEW32.045.03%Kingsoft Office242.2UWEW260.0260.07%MYC2.2EWEW4.12.2-1%Yonyou13.4EWEW16.015.012%Weaver38.3EWEW50.042.010%Hundsun24.5EWEW35.028.014%Glodon14.4EWEW20.017.018%ZWSoft82.3UWUW81.065.0-21%Winning Health6.1UWUW5.85.0-17%iSoftstone45.4UWUW33.030.0-34%Sangfor63.8UWUW75.057.0-11%NSFOCUS8.4UWUW7.46.4-24% Source: Morgan Stanley Research; price as of 18 Jan. 2024. Against the backdrop of ongoing 3D issues (debt, deflation, demographics), our industry view is still Cautious. We see two themes to show relative standouts: 1) overseas pioneers, and 2) sustainable market share gainers. We think the expectations gap in the AI value chain will offer opportunities. With macro developments pointing more negatively than when we published our industry downgrade (lackluster monthly data and a lack of reflationary policy), we reiterate our Cautious industry view and continue to believe the 3D issues in China will act as a major hurdle to enterprise IT spending, which is late cycle in nature. Painful digestion is still being processed given consensus forecasts and valuation have yet to reflect fundamentals. We see downside earnings risk in the 4Q23 earnings season and highlight that 1Q24 will face a very high base, particularly in the cybersecurity group. In this tough market environment, we identify two themes to find relative standouts. 1. Going overseas. Overall, Chinese players are currently not competitive in the global market. With more Chinese enterprise customers going abroad, they are attaching a higher importance to overseas markets. We see less price competition, better willingness to pay, and higher acceptance of the public cloud/subscription model overseas. Advantages include: 1) home customers, 2) attractive pricing, which is already much higher than domestic levels, and 3) leading technology in some niche areas. Among players with relatively large overseas exposure, we are bullish on Wondershare (initiated with OW), Tuya (OW) and GDS (OW). We also recommend monitoring the progress of Agora (EW) and Wangsu (EW). 2. Sustainable share takers. Market share b...
