Kingsoft Summary
Core Content and Key Information
Kingsoft is a well-established developer and operator of online PC games and software, with a focus on expanding into mobile applications and cloud services. The company has been reported to have a diversified business model, encompassing online games, software and Internet services, and cloud services. Despite a 52% YoY decline in 1Q non-GAAP earnings due to weak online game revenue, the company is expected to see a rebound in 2H driven by new mobile game launches and strong growth in its office software business.
Main Points and Views
Revenue and Earnings Outlook
- 1Q Performance: Non-GAAP earnings dropped 52% YoY due to weak online game revenue.
- 2Q Expectations: Challenging due to similar reasons, but expected to improve in 2H with the launch of new mobile games.
- Mobile Game Revenue:
- JX Online 3 Mobile is set to launch in early September.
- Yunshangyuyi (YSYY) is expected to launch by end-June.
- Forecasted monthly gross billings for JX Online 3 Mobile to exceed CNY500m in the first month and stabilize at over CNY300m.
- YSYY's monthly gross billings are expected to reach CNY100-200m in the first month and stabilize at around CNY100m for the remainder of the year.
- Total mobile game revenue for FY18 is forecasted at CNY1.8bn, a 64% YoY increase, with CNY1.35bn expected in 2H.
- PC Game Revenue:
- JX Online III for PC is expected to generate CNY1.6bn in FY18, down from CNY1.8bn in FY17.
- However, the company plans to boost revenue through an extension pack and anniversary promotion in 2H.
- Office Software Revenue:
- Value-added services now contribute about 75% of total office software revenue, including advertising and subscription income.
- Office software revenue is forecasted to grow 49% YoY this year, following a 66% YoY increase in 1Q.
- Full-Year Guidance:
- Kingsoft expects online games, office software, and cloud revenues to grow 25%, 40%, and 60% YoY respectively.
- Gross profit margin (GPM) is expected to widen from FY17's 15.7%.
Financial Outlook
- The company lowers its revenue and earnings forecasts for FY18-20 by roughly 7% annually due to lower PC game revenue and profit as users shift to mobile.
- Despite this, the analyst remains bullish on the mobile games and office software segments.
- The estimated earnings CAGR for FY17-20 is 34%.
Valuation and Target Price
- Target Price (TP): HKD32.50, a 41% upside from the current price of HKD23.1.
- Valuation Metrics:
- Recurring P/E for FY18F is 17.1x, with a PEG of 0.7x.
- The company's P/B, P/CF, and EV/EBITDA are also noted, with EV/EBITDA at 5.1x for FY18F and expected to decline further to 2.2x by FY20F.
- Dividend Yield: Remains at 0.5% for all forecasted years.
- Return on Average Equity (ROAE): Expected to rise from -3.4% in FY17 to 9.7% in FY18F and 16.6% in FY20F.
Key Drivers
- Mobile Games: Launch of JX Online 3 Mobile and YSYY is expected to drive 2H performance.
- Monetisation on WPS' Mobile Version: Increasing focus on mobile monetisation strategies.
- Cloud Business Expansion: Plans to further penetrate into other large clients and sector verticals.
Key Risks
- Launch Delays: Possible delays in the release of new mobile games.
- Game Reception: Potential for weaker-than-expected performance of new games.
- Cloud Price War: Risk of a more severe cloud price war than anticipated.
Shareholder and Market Data
- Shareholders: Management holds 27.1%, Tencent holds 8.2%.
- Market Cap: USD4,043m.
- Share Performance:
- YTD: -11.2%
- 1m: -3.6%
- 3m: -9.8%
- 6m: +1.5%
- 12m: +5.0%
- Average Daily Turnover: HKD255m/USD31.9m.
- 52-Week Price Range: HKD17.9 - HKD29.6.
Financial Exhibits and Forecasts
Forecasts and Valuations
| Metrics |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Total turnover (CNYm) |
3,834 |
5,181 |
6,872 |
9,652 |
12,394 |
| Reported net profit (CNYm) |
(271) |
978 |
1,228 |
1,990 |
2,720 |
| Recurring net profit (CNYm) |
954 |
1,213 |
1,502 |
2,170 |
2,900 |
| Recurring net profit growth (%) |
73.4 |
27.2 |
23.8 |
44.5 |
33.6 |
| Recurring EPS (CNY) |
0.74 |
0.91 |
1.10 |
1.59 |
2.12 |
| DPS (CNY) |
0.09 |
0.09 |
0.09 |
0.09 |
0.09 |
| Recurring P/E (x) |
25.3 |
20.5 |
17.1 |
11.8 |
8.8 |
| P/B (x) |
3.07 |
2.12 |
1.94 |
1.70 |
1.45 |
| P/CF (x) |
26.0 |
14.5 |
11.7 |
9.5 |
6.6 |
| EV/EBITDA (x) |
10.8 |
5.4 |
5.1 |
3.3 |
2.2 |
| Return on average equity (%) |
(3.4) |
9.8 |
9.7 |
14.1 |
16.6 |
| Net debt to equity |
Net cash |
Net cash |
Net cash |
Net cash |
Net cash |
Income Statement (CNYm)
| Metrics |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Total turnover |
3,834 |
5,181 |
6,872 |
9,652 |
12,394 |
| Gross profit |
2,541 |
3,012 |
3,804 |
5,394 |
7,024 |
| EBITDA |
1,376 |
1,382 |
1,668 |
2,640 |
3,771 |
| Operating profit |
925 |
814 |
1,242 |
2,095 |
3,069 |
| Net profit - reported |
(0.21) |
0.74 |
0.90 |
1.46 |
1.99 |
| Net profit - non-GAAP |
371.4 |
325.5 |
320.7 |
238.7 |
328.6 |
Cash Flow (CNYm)
| Metrics |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Change in working capital |
(302) |
243 |
349 |
(373) |
(294) |
| Cash flow from operations |
928 |
1,723 |
2,191 |
2,685 |
3,902 |
| Capex |
(578) |
(821) |
(745) |
(1,037) |
(1,330) |
| Cash flow from investing activities |
(963) |
364 |
(736) |
(1,034) |
(1,328) |
| Dividends paid |
(116) |
(120) |
(125) |
(125) |
(125) |
| Cash at beginning of period |
8,783 |
9,993 |
8,599 |
8,785 |
9,799 |
| Net change in cash |
1,210 |
(1,394) |
185 |
1,014 |
1,674 |
| Ending balance cash |
9,993 |
8,599 |
8,785 |
9,799 |
11,473 |
Balance Sheet (CNYm)
| Metrics |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Total cash and equivalents |
10,198 |
8,687 |
8,785 |
9,799 |
11,473 |
| Tangible fixed assets |
1,366 |
1,619 |
1,938 |
2,430 |
3,058 |
| Intangible assets |
1,250 |
66 |
57 |
55 |
52 |
| Total investments |
1,694 |
5,388 |
5,388 |
5,388 |
5,388 |
| Total other assets |
163 |
144 |
315 |
402 |
501 |
| Total assets |
17,579 |
17,762 |
18,828 |
21,333 |
24,547 |
| Short-term debt |
380 |
374 |
374 |
374 |
374 |
| Total long-term debt |
438 |
288 |
288 |
288 |
288 |
| Total liabilities |
7,577 |
5,209 |
5,152 |
5,792 |
6,412 |
| Shareholders' equity |
7,887 |
12,089 |
13,211 |
15,076 |
17,671 |
| Net debt |
(6,152) |
(7,037) |
(7,135) |
(8,149) |
(9,823) |
| Total liabilities & equity |
17,579 |
17,762 |
18,828 |
21,333 |
24,547 |
Key Metrics
| Metrics |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Revenue growth (%) |
88.6 |
35.2 |
32.6 |
40.5 |
28.4 |
| Recurrent EPS growth (%) |
72.0 |
23.3 |
20.3 |
44.5 |
33.6 |
| Gross margin (%) |
66.3 |
58.1 |
55.4 |
55.9 |
56.7 |
| Operating EBITDA margin (%) |
35.9 |
26.7 |
24.3 |
27.3 |
30.4 |
| Net profit margin (%) |
(7.1) |
18.9 |
17.9 |
20.6 |
21.9 |
| Dividend payout ratio (%) |
(42.7) |
12.3 |
10.2 |
6.3 |
4.6 |
| Capex/sales (%) |
15.1 |
15.8 |
10.8 |
10.7 |
10.7 |
| Interest cover (x) |
8.64 |
7.24 |
5.01 |
16.79 |
24.97 |
| Net profit - non-GAAP |
1,618.9 |
1,501.8 |
2,328.2 |
2,170.3 |
3,111.3 |
Analyst Information
- Analyst: Yujie Li
- Contact: +852 2103 5680
- Email: li.yu.jie@rhbgroup.com
- Bloomberg Ticker: 3888 HK
- Recommendation: Buy (Maintained)
- Target Price: HKD32.5
- Price: HKD23.1
Summary
Kingsoft is a diversified technology company focusing on online games, software, and cloud services. Despite a weak 1Q performance due to declining online game revenue, the company is expected to rebound in 2H with new mobile game launches. The analyst maintains a "Buy" rating with a target price of HKD32.5, implying a 41% upside from the current price. Key growth areas include mobile games and office software, with the latter showing a significant increase in value-added services. The company's financials indicate a lower growth forecast for FY18-20, primarily due to reduced PC game revenue, but the analyst remains optimistic about its future performance. Valuation metrics show a declining trend in P/E and EV/EBITDA, reflecting market expectations and the company's growth strategy. The analyst highlights the company's potential in cloud services and mobile monetisation as key drivers for future growth.
