J.P. Morgan: China’s AI application revenue growth diverges—who pays the computing bill?

Why doesn’t AI revenue growth necessarily translate into profit growth?

The marginal cost of adding users to traditional software is low; generating images, documents or videos with AI continuously consumes tokens. Even if the price per call falls, users may demand longer content and more generations, offsetting some of the savings.
J.P. Morgan believes the key is whether customers are willing to pay for visible results and whether heavy users pay more. Tiered subscriptions, credits or usage-based charges can bring revenue closer to usage costs; including AI in existing membership fees may leave software providers bearing the cost.
The change at Kingsoft Office illustrates the gap: compared with the same period a year earlier, each additional yuan of revenue in the first half of 2026 generated about 0.37 yuan in adjusted profit per 1 yuan of revenue; in the third quarter, that fell to about 0.17 yuan.

Meitu’s paid subscription users increased by 1.39 million quarter on quarter in the third quarter, the largest increase in four quarters. Paid users of its leisure business grew 24.1% year on year, faster than the 18.8% in the first half, driven mainly by growth in overseas paid users.
Most consumers subscribe monthly and use the services moderately, while higher-consumption tasks such as video are charged through higher-tier memberships or additional credits. In the first half of 2026, Meitu’s gross margin fell 3.8 percentage points year on year, but revenue grew 22.1% and adjusted net profit grew 39.5%; if video and agent usage grows faster than pricing adjustments, this buffer will be squeezed.
Tighter investment in the enterprise business also supports profit: the company closed 5 of its 10 AI innovation studios, while the remaining studios receive resources based on annual recurring revenue milestones. However, paid users of productivity products grew 18.3% year on year in the third quarter, below the roughly 30% in the first half; the company expects the design studio’s transition to e-commerce video to take another 6–12 months.
J.P. Morgan upgraded Meitu from Neutral to Overweight, raised its price target for December 2027 from HK$4.50 to HK$5.00, and increased its 2027 adjusted net profit forecast by 16%, mainly reflecting lower innovation spending.

In the third quarter of 2026, Kingsoft Office’s revenue rose 16.1% year on year, adjusted net profit rose 8%, and its adjusted net margin fell 2.2 percentage points. AI enhanced existing membership benefits, but heavy use increases costs, while revenue comes mainly from users who pay to upgrade.
Enterprise business also slowed: WPS 365 grew 34.3% year on year in the third quarter, below 60.1% in the second quarter. Revenue from the personal business still grew 16.8%, indicating that the pressure did not stem from a broad weakening in personal business demand.
J.P. Morgan downgraded the stock from Overweight to Neutral, cut its price target for December 2027 from 325 yuan to 251 yuan, and lowered its 2026 revenue forecast by about 5%. Its conditions for improvement include charging heavy AI users separately, adjusted profit growth at least matching revenue growth, and WPS 365 growth staying above 30%; all else equal, meeting two of these conditions could again support its earnings assessment.

Kingdee sells AI as a standalone product layered onto customers’ existing enterprise management software. Its subscription annual recurring revenue grew 19.3% year on year at the end of the third quarter of 2026, faster than 18.3% at the end of the second quarter; the value of new contracts signed for AI-native products in the third quarter was 397 million yuan. J.P. Morgan maintained its Neutral rating and is watching whether these products can deliver healthy gross margins.
Yonyou’s AI-related revenue grew 275.4% year on year to 760 million yuan in the first three quarters of 2026, but group revenue grew only 1.3% in the third quarter. J.P. Morgan believes some AI spending may replace older projects or services rather than increase customers’ total spending; it maintained its Underweight rating.
Yonyou’s subscription base continued to improve: as of the end of September, cloud services annual recurring revenue grew 10.9% year on year, faster than 8.2% at the end of the first half. J.P. Morgan is watching whether this growth can translate into higher customer contract values and retention.