Kingsoft reported in-line 1Q24 results overall with net income slightly beating our estimate by 5%. Driven by the strong momentum of Snowbreak, management raised 2024 online game revenue growth guidance to 10% or higher. We believe the new guidance implies that the current market consensus of 2024 net income of RMB1bn is too low as online game accounts for about 50% of group net income.
Regarding WPS, we believe the recent AI API price war (as much as 97% off or even free) will benefit Kingsoft as WPS relies on external AI API service. We slightly increase TP from HK$38.5 to HK$39.0 based on SOTP. Reiterate BUY.
Key Factors for Rating
1Q24 results generally in line: Revenue increased 8% YoY to RMB2.1bn with GPM down 0.6ppt QoQ to 81.5%, both slightly below consensus by 3% and 0.9ppt due to slow online game. OPM was down 2.8ppts QoQ to 28.2%, missing BOCIe by 1.3ppts but beating consensus by 2.7ppts thanks to new games marketing cost control, partly offsetting higher AI R&D cost. Net income was RMB285m, beating BOCIe by 5%.
Bullish game outlook for 2Q24: Revenue decreased 1% YoY to RMB912m, missing BOCIe by 6%, mainly due to the natural revenue decline from certain existing games, partially offsetting the revenue contribution from new games released in 2H23. Per Diandian, Kingsoft’s new game Snowbreak: Containment Zone (塵白禁區) generated US$1.63m China iOS revenue over 17 Apr - 16 May.
Based on assumed revenue mix of 1) 1:2:2 for Apple iOS, Android and PC and 2) 6:4 for China and overseas, we estimate the past 30 days’ global cross- platform revenue from Snowbreak may reach over US$13.6m (RMB98m). We believe Kingsoft’s game revenue momentum will continue as Snowbreak is still in an uptrend. Mgmt. raised 2024 online game revenue growth guidance to 10% or higher, in line with our latest forecast. We expect the proactive operation of Snowbreak and the launch of JX3 Ultimate will contribute to remarkable group profit consensus upward revision in following months.
Office monetisation on track: Office software sales increased 17% YoY to RMB1,225m, driven by ToC (+25% YoY) and ToB subscription (+14% YoY), with increasing ARPU. We believe the upgraded Copilot and Microsoft’s latest AI PC demo will inspire Kingsoft to unlock more AI features for WPS commercial and customer products, which will increase users’ interest and payment willingness.
In addition, we expect the recent industry-wide AI API price cut of up to 97% off or even free will benefit WPS AI which is based on external API such as Tongyi.
Cloud: Revenue was down 5% YoY, in line with street; GPM was a small 0.8ppt beat at 16.5% thanks to better revenue mix, abandonment of low-margin project and efficient cost control; Net loss margin missed consensus by 8ppts due to interest expense and FX loss. We forecast KC loss will continue to narrow.