Matters:

The company announced its report for the third quarter of 2024. In the first three quarters of 2024, it achieved operating income of 3.627 billion yuan, an increase of 10.90% year on year; realized net profit to mother of 1.04 billion yuan, an increase of 16.41% year on year.

Ping An's point of view:

The company's performance grew steadily in the first three quarters of 2024. The company achieved operating income of 3.627 billion yuan in the first three quarters of 2024, up 10.90% year on year; realized net profit of 1.04 billion yuan, up 16.41% year on year; realized net profit deducted from mother 0.991 billion yuan, up 15.16% year on year. The company's revenue, net profit to mother, and net profit after deducting non-return to mother grew steadily in the first three quarters of 2024. On a quarterly basis, in the third quarter of 2024, the company achieved revenue of 1.214 billion yuan, an increase of 10.53% year on year; realized net profit of 0.318 billion yuan, up 8.33% year on year; realized net profit after deduction of 0.303 billion yuan, up 6.66% year on year; and net cash flow from operating activities was 0.451 billion yuan, up 31.20% year on year. The company's operating cash flow performance in the third quarter was outstanding. By business: In the third quarter of 2024, the company's domestic personal office service subscription business achieved revenue of 0.762 billion yuan, up 17.24% year on year; domestic institutional subscription and service business achieved revenue of 0.248 billion yuan, up 0.02% year on year; domestic agency licensing business achieved revenue of 0.143 billion yuan, up 8.97% year on year; international and other business achieved revenue of 0.061 billion yuan, a decrease of 10.43% year on year.

The company's expense ratio declined year-on-year during the first three quarters of 2024, and R&D investment increased. The company's gross margin for the first three quarters of 2024 was 85.10%. Although down 0.55 percentage points from the same period last year, it remained at a high level. The company's expense ratio for the first three quarters of 2024 was 61.89%, down 0.77 percentage points from the same period last year. Among them, the sales expense ratio and management expense ratio were 18.93% and 8.65%, respectively, down 2.89/1.73 percentage points year on year, and the R&D expenses rate was 34.78%, up 1.88 percentage points from the same period last year. In the first three quarters of 2024, the company increased R&D investment. The company's R&D investment was 1.262 billion yuan, an increase of 17.26% over the previous year. The company invested 0.454 billion yuan in R&D in the third quarter of 2024, an increase of 26.54% over the previous year. The company's net operating cash flow for the first three quarters of 2024 was 1.079 billion yuan, exceeding the current net profit to mother, indicating that the company's operating quality is good.

The company's domestic personal office service subscription business maintained relatively rapid growth in the third quarter, and the number of monthly active devices for major products further increased at the end of the third quarter. In the third quarter of 2024, the company's domestic personal office service subscription business achieved revenue of 0.762 billion yuan, an increase of 17.24% over the previous year. The company's domestic personal office service subscription business continued to grow rapidly in the third quarter of 2024, mainly because the company's WPS AI 2.0 added AI writing assistants, AI reading assistants, AI data assistants, and AI design assistants to provide users with a more convenient and efficient creative experience, strongly promote user stickiness and payment conversion, and drive steady growth in the domestic personal office service subscription business. In the third quarter of 2024, the domestic institutional subscription and service business achieved revenue of 0.248 billion yuan, an increase of 0.02% over the previous year. The main reason was that the company relied on more complete WPS 365 to develop large-scale private enterprises and local state-owned enterprises in the public cloud market, continuously increasing the share of related revenue, promoting further upgrading of revenue models, and laying a solid foundation for the long-term healthy development of domestic institutional subscription business. In the third quarter of 2024, the domestic institutional licensing business achieved revenue of 0.143 billion yuan, an increase of 8.97% over the previous year. The main reason was that the company continued to closely track policy changes and customer needs, fully lay out the sinking market in the field of party, government, and credit innovation. The increase in related orders led to growth in domestic institutional licensing business. As of September 30, 2024, the number of monthly active devices for the company's main products was 0.618 billion, an increase of 4.92% over the previous year. Among them, the number of monthly active devices on the PC version of WPS Office was 0.277 billion, up 6.95% year on year; the number of monthly active devices on the mobile version was 0.338 billion, up 3.36% year on year. According to the WPS website, the annual fee for WPS members (including super membership & AI membership benefits) is 228 yuan/year. Considering the huge number of monthly active devices in the Jinshan office, WPS AI will bring more room for imagination for the company's future development.

Profit forecast and investment suggestions: According to the company's 2024 three-quarter report, we adjusted our performance forecast. We expect the company's net profit to be 1.536 billion yuan (previous value was 1.65 billion yuan), 1.969 billion yuan (previous value was 2.162 billion yuan), 2.505 billion yuan (previous value was 2.89 billion yuan), and EPS was 3.32 yuan, 4.26 yuan and 5.42 yuan, respectively, corresponding to the closing price on October 28 The PE is approximately 81.0x, 63.2x, and 49.7x, respectively. The company has excellent quality, and years of unremitting R&D investment have formed a deep moat, and is in a leading position in domestic basic office software. Considering the huge number of monthly active devices in Jinshan Office, WPS AI will bring more room for imagination for the company's future development. With the gradual promotion of WPS 365, the future development of the company's domestic institutional subscription and service business can be expected. We are optimistic about the company's future development and maintain a “recommended” rating for the company.

Risk warning: 1) The software legalization process is slow. Intellectual property protection and software legalization driven by it are an important driving force for the company's product promotion and monetization. If domestic software legalization progresses slowly, it will affect the company's growth performance. 2) Member ARPU increased less than expected. The company's smart office application WPS AI officially launched a billing model in April 2024. If the pace of promotion of WPS AI falls short of expectations, there is a risk that the ARPU value of the company's personal office subscription business will rise lower than expected. 3) The promotion progress of WPS 365 fell short of expectations. The company released WPS 365 for enterprise users in April 2024. If the user experience of WPS 365 falls short of expectations, there is a risk that the company's WPS 365 promotion progress will fall short of expectations.