The growth rate of the game business is expected to pick up in 2024Q2, and the smooth progress of WPS AI will benefit the platform's valuation increase

Considering that the game business growth rate exceeded our previous expectations, we raised our 2024-2026 net profit forecast to 9.23/11.66/1,583 billion yuan (previous value: 7.86/11.59/1,576 billion yuan), with year-on-year growth rates of 91.0%/26.3%/35.8%, corresponding to the diluted EPS of 2024-2026 of 0.7/0.9/1.2 yuan. The current stock price corresponds to 34.3/27.2/20.0 times PE in 2024-2026. Improved game profits, steady performance of WPS, and narrowing of Jinshan Cloud's losses are expected to drive overall net profit release; AI is still the main line that continues to be the main line in the medium to long term, and the smooth progress of WPS AI is beneficial to increasing the platform's valuation and maintaining a “buy” rating.

The performance of the 2024Q1 game business is lackluster, and “Dusky White Forbidden Zone” and “Sword Net 3: Unbounded” are expected to drive growth acceleration

The company's 2024Q1 revenue rose 8.5% year on year, and the year-on-year growth rate slowed, mainly due to the lackluster growth rate of the game business. 2024Q1's game business fell 0.8% year on year and 11% month on month, mainly due to the lack of major updates to “Sword Net 3” in 2024Q1, which led to a lackluster overall game revenue growth rate. We expect the company's game business to grow significantly from 2024Q2. The company is leading to a year-on-year growth rate of about 10% in the full year of 2024. Considering that the “Dust and White Forbidden Zone” two-dimensional mobile game achieved higher than expected sales performance through continuous iterative optimization, “Sword Net 3 Unbounded” is expected to achieve full platform interoperability after the official launch in June 2024, and plans to continue to launch several new games in 2024Q4, including the “Legend of the Moon Shadow” mobile game and the “Origin of Fengshen” mobile game.

The 2024Q1 Jinshan office business grew steadily, and the WPS AI payment grayscale test progressed smoothly. In 2024Q1, the Jinshan office business achieved a 16.5% year-on-year increase, and subscription revenue for individual customers increased 24.0% year over year; subscription revenue for institutional customers increased 13.6% year over year, and the growth rate temporarily slowed due to the impact of sales model transformation; the office product licensing business returned to a 6.3% year-on-year increase, driven by trust-based purchase orders. The AI era strategy focuses on heavy PC usage scenarios. 2024Q1 PC monthly active devices increased 7.1% year over year, while mobile monthly active devices declined slightly by 1.5% year over year. The WPS AI C-side grayscale testing of the company's office business is progressing well. In the future, it will continue to improve and optimize product experience and functions, and continue to polish products around the three major fields of AIGC, Copilot, and Insight to enhance user stickiness and payment conversion. The core business philosophy of the B-side of WPS AI is clear. Since 2023Q3, it has been deeply tied to existing customers, combined with customer privatization data and scenarios, and co-created around large-scale model implementation scenarios.

Risk warning: New game performance falls short of expectations, customer growth falls short of expectations, competition intensifies, and economic growth is slowing down.