20180822-兴业金融证券-金山软件-03888.HK-Undervalued,_Though_Online_Game_Headwinds_Persist_11页_515kb

Kingsoft Summary

Core Content

Kingsoft is a diversified technology company primarily engaged in online games, software and Internet services, and cloud services. The report outlines the company's financial performance and valuation as of August 2018, highlighting both the challenges and opportunities in its business segments.

Main Points

2Q18 Performance

• 2Q18 results were largely in line with its previously issued profit alert, or slightly better due to profit from associate.
• The company maintains a BUY rating with a reduced target price (TP) to HKD27.75 from HKD32.50, indicating a 92% estimated return.

Online Game Headwinds

• The online game sector is facing headwinds due to user time shifting to survival games and short videos.
• The launch of JX III Mobile game was postponed to FY19, which affects the company's earnings forecast.
• Regulatory uncertainties are a significant concern, especially for survival games that are pending approval for monetization.

Strong WPS Growth

• WPS business is growing strongly, with the personal edition now accounting for 60% of total WPS revenue.
• Membership fees are the fastest-growing component and are more recurring and sustainable compared to advertising revenue.
• The report raises revenue forecasts for WPS due to this growth.

Cloud Business Outlook

• The cloud business grew by 54% YoY in 2Q18 but faced increased losses due to intensified price wars.
• The company has a mixed view of the cloud business: it's strong in game and video cloud but faces competition and price pressure from large players.

Financial Outlook

• Earnings for FY18F and FY19F were slashed by 73% and 32%, respectively, due to the JX III launch delay and higher opex.
• 3Q18 is expected to be under the same pressure as 2Q18, but 4Q18 may see some recovery due to the JX Mobile II game launch and expansion pack for JX III PC game.

Key Information

Valuation

• The target price (HKD27.75) implies 53x and 21x P/Es for FY18F and FY19F, respectively.
• The company uses SOP (Shareholder's Overall Profit) to value its diverse business segments.

Key Drivers

• Mobile game launch
• Continued solid growth from PC game JX Online
• Monetisation on WPS mobile version
• Cheetah improving user engagement through content products
• Cloud business expanding reach to other large clients and sector verticals

Key Risks

• Potential failure of new mobile games
• Price wars for cloud services
• Adverse impact on advertising revenue from a weak economy

Shareholder Data

• Management holds 27.1% of shares
• Tencent holds 8.2% of shares
• Free float is 55%
• Shares outstanding: 1,299 million
• Market cap: USD2,527 million
• Bloomberg Ticker: 3888 HK

Share Performance

• Absolute return: -44.5% YTD, -30.9% 1m, -38.2% 3m, -44.7% 6m, -29.1% 12m
• Relative return: -37.2% YTD, -29.2% 1m, -27.0% 3m, -33.0% 6m, -31.3% 12m

Financial Exhibits

Forecasts and Valuations

Financial Summary

Valuation Metrics

Income Statement

Cash Flow

Balance Sheet

Key Metrics

Figures

Figure 1: Quarterly results

Figure 2: Earnings changes

Figure 3: Annual P&L

Figure 4: SOP Valuation Table