AI agents and AI native tools in expansion to drive growth; Meitu down to Neutral on fair valuation vs. coverage

China Software industry's July revenues saw slight recovery to 6.7% YoY from 6.4% YoY in Jun 2026, while still below Jul 2025 at 14.0% YoY, given muted IT spending with higher allocation to AI computing power and AI foundation models/customized AI projects, and software suppliers prioritizing new products on AI agents/AI native tools to drive paying subscribers. We reviewed software names' 2Q26/1H26 results and see gradual growth recovery and improving profitability for some companies. We downgrade Meitu to Neutral from Buy on fair valuation relative to our coverage, considering sector de-rating due to potential competition and longer timeline for AI monetization. We believe the company is focused on core scenarios, leveraging last-mile tools to drive user adoption. We would turn more positive if we see accelerated ramp up in the company's paying ratio, driven by overseas user penetration with localized products, roll-out of attractive AI image/video features or applications, and expan