20180822-中国银河国际证券-金山软件-03888.HK-Q2_2018_results_better_than_feared,_but_challenges_remain_in_the_coming_quarters_2页_1016kb

Kingsoft Corporation Q2 2018 Summary

Core Content

Kingsoft Corporation (3888.HK), a software development and marketing company, reported its Q2 2018 financial results, which were better than market expectations despite challenges ahead. The company operates in four main segments: Online games, Cheetah Mobile, WPS, and Kingsoft Cloud. The results highlight both opportunities and obstacles in its business model.

Key Financial Performance

• Revenue: RMB1,345.8m for Q2 2018, up 5% YoY and 6% QoQ, driven by strong cloud services performance.
• Net Profit: RMB100.9m, down 59.6% YoY, but higher than market expectations.
• Gross Margin: 50% in Q2 2018, a decrease of 12ppt YoY, attributed to the lower margin of cloud services compared to other segments.
• Market Cap: US$2,527m; Free Float: 55.3%; 3-months Average Daily Turnover: US$31.4m.

Segment Analysis

Online Games Segment Details

• ADPCU: 0.8m, down 15% YoY and 14% QoQ.
• APA: 3.3m, down 24% YoY and 1% QoQ.
• New Game Launches:
  • YSYY (3D costume-changing game) launched in June 2018 but underperformed.
  • JX Online III mobile version expected in early 2019.
  • JX Online II mobile game planned for October 2018.
  • Chinese Paladin: Sword and Fairy expected in Q4 2018.
• Reasons for Delay:
  • Market conditions and user behavior (shift to PUBG, reduced gaming time due to online videos).
  • Focus on ensuring quality and success of the JX series.

WPS Segment Highlights

• WPS Business Growth:
  • Revenue increased 60% YoY in Q2 2018.
  • Enterprise and personal editions both grew by over 60%.
• Monetization Strategy:
  • Emphasis on membership growth and user stickiness rather than online advertising.
  • MAU of WPS Family reached 300m in June 2018.
  • New products: WPS Office 2019 and WPS Office for Mac.

New IP and Monetization

• First Animation: "Dream Tower" with 40m views, showing potential for expansion into movies, animations, and offline theme parks.
• IP Strategy: Expanding monetization through multiple channels, including core IP development.

Analyst View

• Share Price Movement: Kingsoft shares have corrected since the Q2 2018 results were released, but some negatives have been priced in.
• Valuation: Despite the correction, the stock does not look particularly cheap compared to other TMT names like IGG.
• Outlook: Shares may remain range-bound in the coming months due to uncertainty in the growth path.
• Investor Perception: After Xiaomi's IPO, investors may no longer view Kingsoft as a proxy for Xiaomi's growth.
• Catalysts:
  • Q3 2018 results.
  • News flow on JX Mobile III.
  • Potential spin-off of WPS and Kingsoft Cloud business.

Ratings and Disclaimer

• Equity Ratings:
  • 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.
• Disclaimer:
  • This report is for institutional clients and not for general public distribution.
  • No warranty is given regarding the accuracy or completeness of the information.
  • The report does not constitute an offer to buy or sell securities.

Disclosure of Interests

• China Galaxy International may have financial interests in the company, potentially equal to or exceeding 1% of its market cap.
• There may be conflicts of interest due to involvement in investment banking services and potential spin-offs.

Analyst Certification

• The analyst certifies that the views expressed reflect personal opinions and are not influenced by compensation or trading activities.