2024Q3 Results Exceed Our and Market Expectations

Jinshan Software announced 2024Q3 results: revenue of 2.91 billion yuan, a year-on-year increase of 42%; operating profit of 1.14 billion yuan, corresponding to an operating profit margin of 39.3%, or +21.0pp/month-on-month, all exceeding our and market expectations, mainly due to gaming business performance exceeding expectations.

Development trends

The gaming business is growing rapidly. Game business revenue reached 1.71 billion yuan in the third quarter, up 78%/33% month-on-month, mainly due to outstanding contributions from the flagship IP “Sword Net 3” and two-dimensional games. “Sword Net 3: Unbounded” has performed well since the public beta launch in June. The all-platform strategy has brought strong user additions and returns to the “SwordNet 3” IP. In October, “Sword Net 3” released its annual documentary, including new factions, new level caps, and innovative gameplay, further enhancing players' stickiness and activity. The sci-fi mecha game “Unrestricted Machine” completed its first public test in August; according to the company's performance announcement, the number of reservations for “Unrestricted” is close to 3 million, ranking 17th on the Steam wish list. Also, the mobile game “Sword Man Affair? “Zero” has received a version number, and the company plans to launch it next year. Looking ahead to the whole year, we expect the company's annual game revenue growth rate to reach 30%; thanks to the acceleration of game growth and the performance of self-developed and spontaneous games exceeding expectations, the company's overall operating profit margin for the whole year is expected to improve markedly, and we expect +7ppt year-on-year.

Office business continues to soar. Office business revenue in the third quarter was 1.21 billion yuan, up 10%/2% month-on-month. The short-term disturbance brought about by fluctuations in localization order trends and pure subscription transformation to institutional business growth is gradually being digested. In terms of the personal subscription business, the company continues to optimize the product functions of WPS AI to provide a more convenient and efficient creative experience and further enhance individual user stickiness and payment conversion. According to the results announcement, in September 2024, the number of monthly active devices for major products in the office business reached 0.618 billion units, an increase of 5% over the previous year. In terms of institutional subscription business, the company relies on the continuous improvement of WPS 365 products to steadily advance the transformation of the subscription system. In terms of AI application innovation, the company launched a series of core capabilities and solutions, including text companion writing, AI Docs intelligent document library, and WPS smart assistant WPS Spirit, and released the WPS Hongmeng edition to further promote the development of the AI office ecosystem.

Profit forecasting and valuation

The revenue and net profit forecasts for 2024 and 2025 remain largely unchanged. Maintaining an outperforming industry rating; increasing the target price by 14% to HK$40 (switching the SOTP valuation to 25 years; considering that the A/H valuation premium implied by the office business in the group's overall valuation increases as the market value rises, increasing the group discount rate from 35% to 40%; considering the increase in the revenue share of self-developed spontaneous games, the profit margin of the game business was raised from 15% to 17%; corresponding 28 times the 2025 price-earnings ratio). Currently, the company is trading at 23 times the 2025 price-earnings ratio, which corresponds to a 23% upside.

risks

The performance of the game business fell short of expectations; the commercial implementation of WPS AI in the office business fell short of expectations, or the pace of promotion of localization fell short of expectations.