Comprehensive Analysis of Kingsoft Corp’s Financial Performance and Market Position

Date: November 20, 2024
Broker: UOB Kay Hian

Introduction

In this detailed analysis, we delve into the financial performance and market prospects of Kingsoft Corp, a leading provider of software and internet services. The company’s recent quarterly earnings have showcased remarkable growth, underscoring its strong position in the competitive landscape of communication services. We will explore the company’s financial metrics, key developments, and future outlook, providing a comprehensive understanding for investors and stakeholders.

Kingsoft Corp: A Deep Dive into Financial Performance

Outstanding 3Q24 Results

Kingsoft Corp delivered impressive third-quarter results for 2024, surpassing market expectations. The company’s revenue surged by 17.8% year-over-year, reaching RMB 2.9 billion. This growth was primarily driven by robust performance in its online games segment. The gross margin also saw a notable increase of 3 percentage points year-over-year, aligning with market consensus. Kingsoft’s non-IFRS operating profit was reported at RMB 1.2 billion, with an operating margin of 41%, reflecting a significant 20 percentage point jump from the previous year.

Revenue Breakdown and Key Segments

Kingsoft’s revenue from online games soared by 78% year-over-year to RMB 1.7 billion in 3Q24. This was largely attributed to the exceptional performance of JX3 Online and the successful launch of JX3 Ultimate, which significantly enhanced the game’s popularity. Meanwhile, the Kingsoft Office segment, known as WPS, posted a solid performance with revenue growing 10% year-over-year to RMB 1.2 billion, albeit falling short of consensus estimates by 5%.

Margin Overview and Cost Management

The company’s net profit for 3Q24 stood at RMB 413 million, bolstered by a reduction in total operating expenses as a percentage of total revenue, which dropped 18 percentage points year-over-year to 45%. Sales and marketing expenses declined by 17% year-over-year due to a high base in 3Q23. However, research and development expenses rose by 28% year-over-year, driven by an increased headcount to support AI and collaboration product development.

Future Prospects and Strategic Initiatives

Encouraging Performance in Online Games

Kingsoft’s online games segment continues to show promising growth. The sci-fi mecha game, Mecha BREAK, completed its first beta test in August, attracting nearly 3 million pre-registrations worldwide. The game has already reached the 17th spot on the Steam Global Wishlist. Kingsoft is also making significant investments in new genres and market opportunities within the JX Online series, with 3-5 titles in the pipeline for 2025.

AI Monetization and Cloud Growth

Kingsoft is adopting a gradual approach to AI monetization, focusing on enhancing its B2B offerings, particularly in institutional subscriptions. The company has made notable progress in AI and commercialisation, aligning with its strategic adjustments from the previous year. In the cloud segment, Kingsoft Cloud’s 3Q24 revenue grew by a solid 16% year-over-year, driven by strong AI demand and strategic focus on selected verticals.

Share Repurchases and Financial Outlook

Kingsoft has executed share repurchases totaling HK\$500 million in 2024, with a buyback ratio of 1.55%. The company has revised its revenue estimates for 4Q24 and 2024, anticipating meaningful contributions from its new game launches and improved visibility on AI monetization. Risks include potential obsolescence of flagship PC games and delays in government software localization projects.

Valuation and Investor Recommendations

UOB Kay Hian maintains a “BUY” recommendation on Kingsoft Corp, with a slightly higher target price of HK\$40.00. The company’s strong market position, coupled with resilient contributions from new games and margin improvements, supports this optimistic outlook. The target price implies a 27.2x 2025 forward price-to-earnings ratio, with the company currently trading at a lower 20x 2025 forward PE.

Conclusion

Kingsoft Corp’s robust financial performance and strategic initiatives position the company well for future growth. Investors can look forward to continued expansion in the online games sector, bolstered by the company’s strategic investments in AI and cloud services. As the company navigates potential risks, its proactive approach to market dynamics and innovation promises sustained value for stakeholders.