Chinese software Kings plot expansions

HONG KONG (Reuters) - Two of China's largest and fastest-growing listed software firms, Kingsoft Corp Ltd (3888.HK) and Kingdee International (0268.HK), plan to raise cash, boost spending and buy firms to take on the likes of Microsoft (MSFT.O) in a booming, multi-billion dollar arena.

Kingsoft Corp Ltd will boost research staff by a third and lift spending up to five-fold this year to capture a larger share of an Internet games market set to hit $5.7 billion by 2010.

Unaffiliated Kingdee International Software Group Ltd, which designs software to help businesses run more efficiently, expects to more than double revenues to 2 billion yuan ($285 million) by 2010 and spin off a fast-growing middleware division on Chinese exchanges -- when the depressed market recovers.

Both firms, which vie in China with local compatriots such as Netease (NTES.O) and Shanda (SNDA.O) (online gaming) and foreign players such as SAP (SAPG.DE) and Oracle (ORCL.O) (corporate software), are riding a software arena growing at double digits annually alongside record-breaking economic growth.

Analysts say Chinese firms dominate especially in highly local online gaming, but deep-pocketed multinationals prevail in the large-corporates market -- for now.

"The U.S. economic slowdown may affect IT spending and China's exports, but domestic demand is getting stronger and stronger," said Robert Xu, founder of Kingdee, the No. 2 player in enterprise software.

"Our competition with SAP and Oracle in China's high-end market is intensifying. Yet with a good price and localized service network, we can hurt them. And in the small to mid-sized enterprise market, we're unimpeded."

Kingsoft's "Jinshan Ciba" is one of China's most popular word processing and dictionary programs. But the firm, grappling with piracy, now focuses on a faster-growing online games arena.

Co-founder and chairman Qiu Junbo said in an interview he wants to grow his firm's share of that market to 7-10 percent in three years from 4 percent in 2007 -- hopefully closing the gap with Shanda's 20 percent and Netease's 14 percent.

To get there, he has earmarked more than 250 million yuan for capital expenditure in 2008, up from 51 million yuan, and will add about 300 staff to a team of more than 900 researchers.

"Our intention from the start was to become China's Microsoft," Qiu said. "We're coming close to achieving that."

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Kingsoft, in which the Government Investment Corp of Singapore and Intel (INTC.O) are shareholders, developed the "First Myth" and "JX Online" online role-playing games.

Online games accounted for about 70 percent of the company's revenue in 2007. The company, which posted a 65 percent rise in 2007 earnings, saw its shares jump 15 percent on Tuesday.

"Right now, the Chinese gaming arena is mostly split between three firms," said Qiu, which according to the Hurun report boasts a personal fortune of $100 million. "Getting to a 7, or even 10, percent market share will be a challenge."

Analysts say Chinese firms enjoy backing from state-run firms and local governments. Going toe to toe with the global players, that's another story.

"Kingdee definitely needs to demonstrate its competitive advantages against these renowned international players," CLSA's Li Yin and Paul Quah wrote on Tuesday.

Kingdee -- which posted revenues of 766.9 million yuan in 2007 -- now planned to float a middleware business that designs software to link applications that users see with the back-end.

Last June, IBM (IBM.N) and Lehman Brothers LEH.N agreed to pay nearly $17 million for 7.7 percent of Kingdee, kicking off an alliance intended to help the Chinese company expand globally.

"Corporate software is no longer just adding flowers to the brocade, it's become a necessity for Chinese companies," Xu said.

Now, Xu said Kingdee is in advanced talks to buy two Chinese firms, and is targeting several more, each with more than 100 million yuan in revenue. Kingsoft is also pursuing acquisitions, Qiu said without elaborating.

In addition, Xu's firm Kingdee planned to try to list the middleware unit on a soon-to-be-launched Chinese market intended to host high-growth enterprises. Kingdee itself would like to pursue a secondary listing on the main Chinese bourses -- a popular trend in past years.

($1=7.012 Yuan)

(Writing by Edwin Chan; Editing by Anne Marie Roantree)