KINGSOFT CORP(3888.HK)：3Q23 RESULTS REVIEW：WPS AI WILL BE THE GAME CHANGER-格隆汇

机构：中银国际
研究员：Alex LIN/Alina LIN

　　Kingsoft reported weak 3Q23 net income mainly due to Kingsoft Cloud loss and higher Opex for online game marketing costs. While Office revenue was 10% below our estimate due to Xinchuang weakness, we believe WPS AI will deliver long term growth to WPS’s MAU, paying ratio and ARPU. We expect Kingsoft’s WPS to remain the best domestic substitute of Microsoft 365 and Copilot is set to benefit from AI. We slightly lower TP from HK$39.18 to HK$37.5 to reflect Xinchuang weakness. Maintain BUY.
　　Key Factors for Rating
　　3Q23 results mixed: Revenue increased 12% YoY to RMB2.1bn, missing consensus by 3%. GPM was down 2.1ppts QoQ to 81.4%, in line with consensus.
　　OPM was down 12.5ppts QoQ to 18.3%, missing BOCIe and consensus by 9.8/5.4ppts, mainly due to increasing marketing cost for new games. Net income was RMB28m, below BOCIe and street by 88% and 77%, mainly due to high Opex, Kingsoft Cloud (KC) loss and FX.
　　Game: Revenue increased 15% YoY to RMB961m, in line with BOCIe. Kingsoft released World of Sword Origin (劍俠世界: 起源) in China in September and obtained license approval for JX3 Ultimate (劍網 3 無界) in October. Mgmt. keeps 2023 game revenue guidance unchanged, and believes the launch of JX3 mobile version which supports cross-platform play, another version of World of Sword and Code B.R.E.A.K (global mobile mecha game) in 2024 will bring more upside surprise.
　　Office software: Office software sales increased 9% YoY to RMB1,098m, driven by ToB (+36% YoY) and ToC subscription (+26% YoY), with increasing ARPU. MAU was stable at 589m. In 3Q23, Kingsoft achieved user bases expansion among SME through WPS 365 and is cooperating with Ali Cloud and iFlytek for digital and intelligent service ecosystem development. Kingsoft also started WPS AI public beta testing in November and plans for monetisation in December. With reference to Microsoft 365 Copliot which charges US$30 per user/month, we believe WPS AI also has huge potential to increase its MAU, paying ratio and ARPU in FY24/25.
　　Cloud: Revenue was down 17% YoY, missing street by 12%; GPM was in line at 12.1%; Net loss margin missed consensus by 15ppts due to heavy impairment loss. We remain cautious on KC breakeven outlook due to slow cloud market.
　　Key Risks for Rating
　　1) High reliance on JX game IP; 2) Xinchuang demand may fluctuate in short term; 3) online collaboration software competition; 4) AI product development.
　　Valuation
　　We apply 16x P/S on 2024 Office Software, 1.2x P/S on 2024 Cloud, 8x P/E on Online Game and a 35% holding company discount. Maintain BUY with new target price of HK$37.5 (was HK$39.18).