China's software sector is likely to see gains from the rapid adoption of artificial intelligence, countering investor concerns that AI could disrupt or undermine demand for traditional software providers, HSBC analysts said.
Fears that large language models could displace enterprise software have weighed on valuations, leaving China's software stocks trading below their historical averages. HSBC said those concerns now appear overstated and are largely priced in.
"We believe AI creates opportunities for the software sector rather than posing a threat," HSBC analysts Yiran Liu and Heng Zhang said in a note on Thursday. They cited software firms’ familiarity with business workflows, regulatory requirements and data security — areas where AI models still have limitations.
The report comes as global software and services stocks have come under pressure this year after the release of new AI tools from Anthropic rekindled disruption concerns, with the S&P 500 software and services index down about 15 percent year-to-date.
HSBC said lower AI model costs and gains in coding efficiency are helping Chinese software companies develop products more quickly, add features and adapt business models.
The brokerage also flagged alternative pricing approaches, such as workflow- or outcome-based charging, which could further support earnings growth as AI adoption accelerates.
Among individual stocks, HSBC said it prefers Intsig, which focuses on smart text recognition software, and ArcSoft, an imaging algorithms provider.
The brokerage started coverage on both with “buy” ratings, citing their ability to monetise AI through new applications and overseas expansion.
HSBC also highlighted enterprise software makers Kingdee and Yonyou as potential beneficiaries of rising demand for AI-native enterprise resource planning tools.
AI-related orders have increased among Chinese software firms, the brokerage said, accounting for about 7 percent of total revenue on average for full-year 2025, compared with around 6 percent earlier in the year.
Overseas markets are also becoming a key growth driver, HSBC said, noting higher willingness among international customers to pay for AI-powered software subscriptions.
"AI has become a new growth engine for China's software sector," HSBC said, adding that an earnings recovery combined with strong AI order momentum could lead to a re-rating of valuations.
Reuters
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