Microsoft 365 Copilot will available for enterprise and business users on Nov 1, according to Microsoft's recent announcement. We reiterate our emphasis on the core scenario of AI application implementation in office software. Kingsoft Office held its 2023 Technology Open Day on Sep 20, announcing WPS AI has been integrated into all products. Kingsoft Office provides an explanation of the technical path for implementing WPS AI, based on considerations of high efficiency, low cost, and segmented scene functions. It self-developed 7B and 13B small models on an open-source platform, supporting the ability to generate formulas in table calculations and read and understand text searches. In addition, Kingsoft Office announced WPS AI will be combined with the enterprise knowledge base to assist in activating digital assets and forming a closed loop. Since the beginning of 2023, Kingsoft Office has anchored three strategic directions on WPS AI, namely AIGC, Copilot, and Insight. We think that the implementation of WPS AI will be initiated and the commercialization process is likely to accelerate. Reiterate the "BUY" rating on Kingsoft Office.

Microsoft 365 Copilot announced its launch date; we reiterate the emphasis on office software in the core scenario of AI applications.

According to Microsoft's official blog, on Sep 21, Microsoft announced that Microsoft 365 Copilot will be available to enterprise and business customers starting from Nov 1, launching a new Microsoft 365 Chat and introducing new Copilot features in Outlook, Word, Excel, and more. We reiterate that office software is one of the core scenarios for AI application implementation: 1) Solid application scenarios: Office scenarios have multiple connections, high information content, and strong timeliness; 2) Efficiency improvement is clear: AI+office software will bring efficiency improvements in areas such as AIGC , Copilot and Insight; 3) Clear functional evolution: With the expansion of testing scope and formal promotion to customers, the functions may evolve rapidly in combination with feedback; 4) Commercial space availability: Microsoft 365 Copilot will be available at US$30 per month, with E3, E5, Commercial Standard Edition, and Commercial Premium Edition charging US$36/57/12.5/22 per month, exceeding expectations for price increases.

WPS AI is integrated into the entire product line, providing users with a full component AI experience.

On September 20th, Kingsoft Office announced on the 2023 Technology Open Day that the WPS AI, an intelligent office assistant based on a large model, has been integrated into all products, allowing users to experience full component AI functions. Since the beginning of 2023, Kingsoft Office has anchored three strategic directions: AIGC, Copilot, and Insight. In terms of AIGC, WPS AI provides users with an iterative document or demo draft to solve the problem of creating from scratch; In terms of Copilot, WPS AI is likely to transform and change the 28 laws through software interaction, simplify the WPS product interface, and reduce user barriers to use; In terms of Insight, WPS AI will fully utilize the structured and unstructured data accumulated by enterprises to achieve knowledge reuse through dialogue.

Looking ahead to the future, we are optimistic that the commercialization of WPS AI will accelerate, the threshold for product use will be lowered, and the enhancement of functions will drive an increase in penetration rate. AIGC will lead the growth of payment rate, and with Microsoft 365 Copilot pricing as a reference, there is broad room for improvement in WPS ARPU.

Develop small models to efficiently implement WPS AI segmentation function with low cost.

Kingsoft Office showcased the progress of its self-developed models for the first time on the Technology Open Day. Given the high cost of large model inference and operation deployment, as well as insufficient scalability in some niche scenarios, Kingsoft Office's R&D and algorithm engineering teams have trained small models such as 7B and 13B based on industry open-source models. In terms of engineering methods, the total corpus of the 7B model reaches TB level, and the training efficiency can reach 1600token/sec/GPU on dozens of GPU clusters. It performs better than other open source models in the industry in natural language understanding tasks. The training data of the 13B model reaches trillions of tokens, and the training utilization rate on GPU clusters is higher than 65%. In practical applications, such as generating WPS formulas in table computing scenarios and reading and understanding unstructured data in document search scenarios, small models have achieved fast response time and controllable costs, providing further support for the implementation of WPS AI in the Copilot direction.

WPS AI combined with enterprise knowledge base to achieve content intelligence.

The construction cost of traditional knowledge bases is high, the response to new knowledge in the public domain is slow, and the efficiency of traditional retrieval mechanisms is low. In recent years, users have created a large number of documents in WPS, stored in the cloud to form cloud documents that can be dynamically updated and collaborated in real-time. Based on this, Kingsoft Office combines WPS AI with enterprise knowledge base to directly implement intelligent Q&A based on cloud documents. Relying on retrieval-augmented generation (RAG) technology, Kingsoft Office combines private data with the general communication capabilities of large models, expands knowledge boundaries, and solves the problem of large model illusion. In addition, document library Q&A can also be integrated into other business systems of the enterprise, such as building customer service robots in Kingsoft Collaboration, binding document library Q&A, and assisting customer service work. We think that the new knowledge can help users fully activate unstructured documents and data assets in the cloud, forming a closed loop of enterprise digital assets for WPS AI in the Insight direction.

Potential risks: The Company's new product promotion doesn't meet expectations; The payment conversion of C-end users is too slow; The demand from government and enterprises is lower than expected; Market competition is becoming increasingly fierce; Information security risks.

Investment recommendation: With the upgrade of membership system and expansion of WPS AI, WPS 365 and other new products, Kingsoft Office will further open up the growth space via the closed loop of productization-cloudification-collaboration. We maintain the revenue forecast of Rmb4,875mn/6,190mn/8,037mn for 2023E/24E/25E, and attributable net profit (ANP) forecast of Rmb1,417mn/1,831mn/2,433mn, corresponding to EPS of Rmb3.07/3.96/5.27. Since the beginning of 2023, generative AI has experienced accelerated development, and external environmental changes have further established the development trend of the information technology application innovation industry. We select AI/Xinchuang key field leaders Empyrean Technology (301296.SZ), Primarius Technologies (688206.SH), Fortune Trend Technology (688318.SH) and Cambricon Technologies (688256.SH) as comparable companies. Based on the average PS multiple of 30x for comparable companies in 2024E (Wind consensus estimate), considering the scarcity of the Company as a domestic office software leader and high visibility of the AI and cloud collaborative development trend, we believe Kingsoft Office deserves some valuation premium and assign 33x 2024E PS to derive a TP of Rmb442 for the Company. Reiterate the "BUY" rating.