20180322-兴业金融证券-金山软件-03888.HK-Multiple_Catalysts_In_2018__11页_441kb

Kingsoft 2018 Summary

Core Content

Kingsoft is a leading Chinese company in online games, software, and cloud services. In 2018, the company showed strong performance with its 4Q17 recurring earnings exceeding expectations due to lower tax expenses and improved operating leverage. Management is optimistic about the revenue growth in 2018 across all business segments and anticipates margin improvements from FY17 levels.

Main Points

• Mobile Game Launches: Kingsoft plans to launch three mobile games in FY18, including JX Online III Mobile, which is expected to launch in 4Q18. The company anticipates significant revenue contributions from these games, especially in 2H18.
• PC Game Revamp: The revamped version of JX Online III PC game was launched at the end of FY17, setting the stage for future development.
• Cloud Business: Kingsoft solidified its position as the third-largest IaaS provider in China according to IDC. It maintains a strong presence in video and game cloud services.
• Office Software IPO: The IPO of the Office software business (mainly WPS) is on track for completion in 3Q18. This is viewed as a positive catalyst, with the potential for a higher valuation post-IPO.
• Financial Forecast: The financial forecasts for FY18 and FY19 show a 33.4% and 43.8% growth in recurring net profit, respectively. The company expects a strong 2H18, with a surge in profit sequentially.
• Target Price: The target price is maintained at HKD34.20, implying 32x/24x P/Es for FY18F and FY19F, respectively. The PEG for FY18F is 0.6x.
• Valuation Basis: The company's diverse business segments (online games, software, cloud services) are valued using the Sum of Parts (SOP) method.
• Key Drivers: Mobile game launches, continued growth from PC games, monetization of WPS mobile version, improved user engagement through content products, and expansion of cloud services into new sectors.
• Key Risks: Potential failure of new mobile games, cloud price wars, and adverse economic conditions affecting advertising revenue.

Key Financial Highlights

Shareholder and Share Performance

• Shareholders: Management holds 27.1%, Tencent holds 8.2%.

• Share Performance:

  • YTD: 13.8%
  • 1m: 13.4%
  • 3m: 24.4%
  • 6m: 60.2%
  • 12m: 54.2%

• Relative Performance:

  • YTD: 8.8%
  • 1m: 13.5%
  • 3m: 17.4%
  • 6m: 48.4%
  • 12m: 26.5%

• Market Cap: USD5,182m

• Bloomberg Ticker: 3888 HK

• Avg Daily Turnover: HKD314m/USD40.1m

• 52-wk Price Range (HKD): 17.9 - 29.6

• Free Float: 55%

• Shares Outstanding (m): 1,299

• Estimated Return: 15%

Key Metrics

Financial Exhibits

• Income Statement:

  • Total Turnover: Increased from CNY3,834m in Dec-16 to CNY7,208m in Dec-18F.
  • Gross Profit: Rose from CNY2,541m in Dec-16 to CNY4,084m in Dec-18F.
  • EBITDA: Grew from CNY1,376m in Dec-16 to CNY1,725m in Dec-18F.
  • Operating Profit: Increased from CNY925m in Dec-16 to CNY1,291m in Dec-18F.
  • Net Profit - reported: Rose from CNY133.8m in Dec-16 to CNY1,414.8m in Dec-18F.
  • Net Profit - non-GAAP: Increased from CNY1,189m in Dec-16 to CNY1,618.9m in Dec-18F.

• Cash Flow:

  • Cash Flow from Operations: Increased from CNY928m in Dec-16 to CNY2,382m in Dec-18F.
  • Net Change in Cash: Rose from CNY1,210m in Dec-16 to CNY238m in Dec-18F.
  • Ending Balance Cash: Increased from CNY9,993m in Dec-16 to CNY8,838m in Dec-18F.

• Balance Sheet:

  • Total Cash and Equivalents: Increased from CNY10,198m in Dec-16 to CNY8,838m in Dec-18F.
  • Tangible Fixed Assets: Rose from CNY1,366m in Dec-16 to CNY1,966m in Dec-18F.
  • Total Assets: Increased from CNY17,579m in Dec-16 to CNY21,686m in Dec-19F.
  • Total Liabilities: Rose from CNY7,577m in Dec-16 to CNY5,899m in Dec-19F.
  • Shareholders' Equity: Increased from CNY7,887m in Dec-16 to CNY15,323m in Dec-19F.

Valuation

• Sum of Parts Valuation:

  • Games: FY18F EPS of CNY1.277, with a P/E target of 12x.
  • Office Software (WPS): FY18F EPS of CNY0.122, with a P/E target of 34.48x.
  • Other segments: Include CMI, Xunlei, and 21Vianet, each with their own valuation metrics and discount factors.

• Target Price: HKD34.20, indicating a 15% upside from the current price of HKD29.65.

Conclusion

Kingsoft is expected to see significant growth in FY18 and FY19, driven by mobile game launches, cloud expansion, and the IPO of its office software business. The company's diverse business model and strong financial performance support its BUY rating, with a revised target price that reflects its growth potential and valuation metrics. However, potential risks such as cloud price wars and the success of new mobile games should be closely monitored.