Kingsoft will report 1Q24 results on 22 May and our preview of the results and outlook is becoming more positive. Since Mar-Apr, its ACG game Snowbreak: Containment Zone has been regaining user growth momentum and even ranked 2nd in free game download in China iOS app store. Regarding office software, we expect the kick-off of WPS AI monetisation should also bring decent paying user and APRRU growth from 2H24 onwards. We increase 2024 online game revenue estimate by 7% and group net profit by 24% to primarily factor in a more bullish online game business outlook. We raise our TP from HK$37.5 to HK$38.5 based on SOTP. Kingsoft is now our software top BUY.
Key Factors for Rating
Strong online game 2024 outlook: Snowbreak: Containment Zone (塵白禁 區, CBJQ) is an ACG third person shooting game published by Kingsoft Seasun studio with competing games like Goddess of Victory: Nikke. We raised Kingsoft 2024 online game revenue estimate by 7% and GPM by 2ppts, mainly thanks to the strong performance of Snowbreak from Mar-April 2024. According to Diandian, Snowbreak generated US$1.63m China iOS revenue over 17 Apr - 16 May. Based on assumed revenue mix of 1) 1:2:2 for Apple iOS, Android and PC and 2) 6:4 for China and overseas, we estimate the past 30 days' global cross- platform revenue from Snowbreak may reach over US$13.6m (RMB98m). Given the game is still in an uptrend, especially among male gamers, we become bullish on Kingsoft's net profit from 2Q24 onwards.
Office software remains key long-term catalyst: per Kingsoft Office's released 1Q24 results, Office software sales increased 17% YoY to RMB1,225m, driven by ToC (+25% YoY) and ToB subscription (+14% YoY), with increasing ARPU. MAU was stable at 602m. In 1Q24, Kingsoft started to monetise WPS AI (RMB25 per user/month or RMB35 per user/month for all-in-one package including WPS super member and WPS AI). While we find WPS AI's capability does not differentiate much from other AI products like Microsoft 365 Copilot in terms of word doc and slide generation, we believe the huge domestic installed base of WPS offers a unique competitive edge for AI user acquisition, which will accelerate its paying user and ARPPU growth.
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, 9x P/E on Online Game (was 8x) and a 35% holding company discount. Maintain BUY with new target price of HK$38.5 (was HK$37.5).