Investment advice
On March 25, the company launched the C-side WPS AI grayscale test and announced the new membership system and pricing plan; on April 9, the WPS AI Enterprise Edition was released to open the B-side commercial landing curtain 1. We believe that WPSAI is expected to bring a new growth engine to the company's dual subscription business, and we are optimistic about the progress and profitability of WPS AI commercialization. We reaffirm the leading position of the Jinshan Office in the domestic AI application circuit and continue to focus on recommending it.
rationales
WPS AI is on the C-side: Prioritize user size and gradually achieve revenue conversion. On March 25, the WPS AI grayscale test was launched. The pricing is basically in line with the market's previous expectations of 15 yuan/month, which is cost-effective compared to domestic and international applications. In terms of business strategy, unlike Microsoft's first landing on top overseas customers, we expect the company to adopt a bottom-up monetization approach. In the short term, the primary goal will be user size, and the gradual transformation from active users to turnover and revenue is expected from the end of '24 to the beginning of '25. We believe that WPS AI is expected to bring new growth engines to the company's personal subscription business in terms of both new revenue and price increases. WPS AI is expected to bring the company an incremental revenue of 2.36/6.24/1,090 million yuan in 2024-2026, and personal subscription business revenue is expected to reach close to 30% CAGR in 2023-2026.
WPS AI is on the B-side: A new product has been released, and AI is expected to further improve B-side ARPU. On April 9, the company released the WPS 365 new productivity platform to form a complete office+AI+ collaboration product system. We believe that as an incremental module, the WPS AI Enterprise Edition is expected to further increase the unit price of the company's institutional subscription business customers. It is expected that the company will co-create application scenarios with dozens of customers in 2024, that initial orders will be implemented during the year, and that orders will expand on a large scale in 2025. We expect WPS AI on the B-side to bring incremental revenue of 0.17/0.60/127 million yuan in 2024-2026, and the company's institutional subscription business is expected to achieve 25%-30% CAGR in 2023-2026.
WPS AI cost side: Costs are manageable, and gross margin is expected to remain high. The cost of WPS AI mainly comes from the API call costs of large third-party models (including Baidu, Smart Spectrum, Minimax, Ali, Shangtang, etc.) and the computing power costs of self-developed small models. We estimate that under a pricing of 15 yuan/month and an average daily input & output usage of about 8,000 words (about 250,000 words per month), the gross margin of WPS AI is over 75%. Considering the declining trend in API call costs related to the big AI model, we believe that WPS AI gross margin still has room to rise. In terms of R&D investment, we have observed that the main R&D strength of WPS AI comes from the company's existing team reserves. The overall R&D staff size and R&D expenditure have increased steadily, and the cost pressure on the company is limited.
Profit forecasting and valuation
Keep profit forecasts unchanged. Maintaining an industry rating and target price of 382 yuan (based on 56x 2025eP/OCF), there is 35.9% upside compared to the current price, and the current price corresponds to 41.3 x 2025e P/OCF.
risks
R&D investment exceeded expectations; commercial implementation of WPS AI fell short of expectations; the pace of promotion of localization fell short of expectations.