20180810-中国银河国际证券-金山软件-03888.HK-Q2_performance_even_softer_than_previous_guidance_and_market_expectations._Wait_for_final_resetting_of_expectations._2页_569kb

Kingsoft Corporation Summary

Core Content

Kingsoft Corporation Ltd. (Kingsoft) is a Hong Kong-listed company with a market capitalization of US $2,972 million and a free float of 55.3%. The company operates in four main segments: Online games, Cheetah Mobile, WPS, and Kingsoft Cloud. It develops and markets computer software, including role-playing games and office productivity tools.

Q2 Performance

• Q2 Expectations: The company's Q2 performance is expected to be weaker than both previous guidance and market expectations.
• Online Games: Revenue from online games is anticipated to drop below RMB632 million, with a potentially flat gross margin compared to the previous quarter.
• Net Profit: A substantial quarterly decline in net profit is expected due to the continued weakness in the core online game business.
• Gross Margin: The gross margin is projected to decrease to 53.1% in 2018 and 56.1% in 2019, reflecting a shift in the sales mix towards cloud services and office software, which have lower margins.
• Market Environment: The challenging market environment, including competition from PUBG and the impact of the World Cup, is expected to persist.

Potential Challenges in Q3

• YSYY Performance: The new mobile game YSYY, despite initial success, has underperformed due to less innovative features. This may affect the launch of JX Mobile III.
• JX Mobile III Delay: The original expected release of JX Mobile III in October 2018 may be delayed to late 2018 or 2019, which could cap growth potential in the second half of 2018.
• Re-rating Catalyst: JX Mobile III is seen as a potential catalyst for re-rating Kingsoft's stock, as it could revitalize the online game business.

Ex-Game Business Outlook

• Cloud Computing and WPS: These segments are expected to continue driving growth in 2018 and 2019, with reported YoY turnover growth of 56% and 66%, respectively.
• Profitability Impact: However, the lower contribution from the online game business will negatively impact overall profitability due to lower gross margins in these segments.
• Profit Forecasts: Net profit forecasts for 2018 and 2019 have been cut by 36.3% and 12.2%, respectively, and are expected to be softer than the market consensus.

Our View

• Share Price Correction: Kingsoft's shares have corrected since August, but the weaker-than-expected performance has not been fully priced in.
• Market Expectations: The actual performance in 2018 may be even softer than the lower end of market consensus.
• Earnings Surprise: The company is set to announce its 1H 2018 results on 21 August 2018, which could potentially offer a negative surprise to the market.
• Investor Perception: Investors may no longer view Kingsoft as a proxy for Xiaomi, given Xiaomi's IPO and direct investment opportunities.

Catalysts

• Q2 2018 Results: Expected to provide clarity on the company's performance.
• JX Mobile III and YSYY News Flow: Potential updates on the development and performance of these key titles.
• Co-operation with Tencent: Continued support from Tencent may influence the company's growth trajectory.
• Potential Spin-off: The spin-off of WPS and Kingsoft Cloud is seen as a positive catalyst, though the market may adopt a wait-and-see approach.

Financial Highlights (RMB million)

Disclaimer & Disclosure

• Disclaimer: This report is not directed at, or intended for distribution to, any person or entity in jurisdictions where such distribution would be contrary to applicable laws.
• Disclosure of Interests: China Galaxy International may have financial interests in Kingsoft, potentially equal to or exceeding 1% of its market capitalization.
• Analyst Certification: The analyst certifies that all views expressed reflect personal opinions and that no part of compensation is related to the specific views in the report.
• Equity Ratings Explanation:
  • BUY: Share price will increase by >20% within 12 months.
  • SELL: Share price will decrease by >20% within 12 months.
  • HOLD: No clear catalyst, and downgraded from BUY pending clearer signal.

Conclusion

Kingsoft faces challenges in its core online game business, with Q2 performance expected to be weaker than Q1. While cloud computing and WPS are expected to drive growth, the overall profitability is under pressure. The company's stock is seen as potentially undervalued, but the market may remain cautious until further clarity is provided, particularly regarding the spin-off of its WPS and cloud business.