20181213-兴业金融证券-金山软件-03888.HK-Smaller-Than-Expected_3Q18_Losses__Worst_Is_Over_7页_267kb

Kingsoft Summary

Core Content

Kingsoft, a Chinese technology company, reported third-quarter 2018 (3Q18) losses that were smaller than expected, indicating that the worst of its financial struggles may be over. The company's online gaming operations performed better than anticipated, primarily due to the success of its JX World II Mobile iOS version, which was launched in July. Despite this, the company remains cautious about the launch dates of its two JX-based games, which are expected in 2019.

Kingsoft's office software and cloud businesses demonstrated strong growth, which was a key factor in the margin decline. The cloud segment, in particular, saw rapid growth, driven by public demand for vertical cloud services such as those related to short videos. The office software operations are expected to continue growing, fueled by membership fees from personal editions.

The company's financial performance for 3Q18 showed a loss of CNY59 million, beating the forecast of CNY72 million and the consensus of CNY120 million. Analysts maintain a "Buy" rating with a reduced target price of HKD21.03, implying a 2019F P/E of 20x. The target price reduction reflects the analyst's belief that the online gaming industry is under pressure and peer multiples have fallen.

Main Points

• 3Q18 Financial Performance:

  • Losses were CNY59m, below the forecast of CNY72m and the consensus of CNY120m.
  • Online gaming operations performed better than expected due to the JX World II Mobile iOS version.

• Growth Drivers:

  • Cloud Business: Rapid growth due to demand for vertical cloud services.
  • Office Software: Membership fees from personal editions will be a key growth driver.

• Future Outlook:

  • Two JX-based games are expected in 2019, with JX III Mobile possibly launching in Q1 2019.
  • The company is still fine-tuning these games to ensure strong revenue performance.

• Financial Projections:

  • Analysts have maintained their financial forecasts but lowered the target P/E for online gaming to 7x from 9x.
  • The overall target price for Kingsoft is HKD21.03, which implies a 2019F P/E of 20x.

Key Information

• Target Price: HKD21.03
• Current Price: HKD11.70
• Market Cap: USD2,052m
• Bloomberg Ticker: 3888 HK
• Analyst: Yujie Li
• Contact: +852 2103 5680 | li.yu.jie@rhbgroup.com

Share Data

Shareholders

Financial Forecasts and Valuations

Investment Rating

• Buy: Share price may exceed 10% over the next 12 months.
• Trading Buy: Share price may exceed 15% over the next 3 months, but long-term outlook is uncertain.

SWOT Analysis

• Strengths: Strong growth in cloud and office software, solid brand recognition.
• Weaknesses: Declining margins, reliance on gaming revenue.
• Opportunities: Expansion in cloud services, potential for JX IP-based games.
• Threats: Market competition, regulatory challenges in the gaming industry.

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