2Q24 results review: online game outshined office slowdown
　　Kingsoft reported in-line 2Q24 revenue (up 13% YoY) and strong net income (up 588% YoY). Online game revenue growth achieved 20% YoY, mainly driven by strong gross billing of Snowbreak. However, office software momentum slowed down with revenues narrowed to 6% YoY, erasing the online game outperformance. The weakness is a mix of accounting treatment change which we are not too worried about and the pervasive industry headwind of enterprises cutting spending. We expect online game momentum to sustain in 3Q24 given the robust performance of Snowbreak and JX3 Ultimate in Jul and Aug. We lower TP from HK$39.0 to HK$28.6 to reflect office software weakness but remain positive on its paying user growth potential. Maintain BUY.
　　Key Factors for Rating
　　2Q24 results review: Revenue increased 13% YoY to RMB2.5bn with GPM up 1.1ppt QoQ to 82.5%, generally in line with consensus and BOCIe. OPM rose 3.9ppts QoQ to 32.1%, beating BOCIe and consensus by 2.5ppts and 1.6ppts mainly due to online game beat which had a higher OPM. Net income surged 588% YoY to RMB393m, beating BOCIe and consensus by 8% and 40% respectively.
　　Game momentum continues: Revenue increased 20% YoY to RMB1,286m, beating BOCIe by 13%, mainly driven by sustained strong performance from Snowbreak. We expect Kingsoft’s game revenue momentum to continue as 1) Snowbreak maintained good gamer traction and gross billings in the last two banner sales. According to Sensor Tower, global gross billings of Snowbreak mobile (except China Android) recorded US$3.9m revenue in July, another record high from May; 2) JX3 Ultimate MAU exceeded 6m in June and JX3 DAU was up more than 100% since JX3U launch. Company expects July and Aug to achieve record gross billing for JX3 thanks to the launch of JX3 Ultimate; 3) new game launches such as Mecha BREAK, which has very good public beta test numbers recently.
　　Office software slowdown is a drag: Office software sales increased 6% YoY but decreased 3% QoQ to RMB1,188m, missing consensus and BOCIe by 8% and 13%. ToC subs (+20% YoY) was in-line but ToB subs (-2% YoY) and ToB license (-27% YoY) were below market expectation. Management believes the accounting treatment change from annual plan to monthly plan this year partially underestimated the actual growth, as evidenced by the strong growth in 2Q24 contract liabilities. 2B subs business now has over 18k key clients including China United Property Insurance, China Huaneng Group, Guangzhou Metro, BOE, New Oriental, etc. We also believe the slowdown in office business is partly a result of flat WPS MAU growth, enterprise IT spending cut and slow AI monetisation, which are common industry headwinds so far.
　　Cloud: Revenue was up 3% YoY, slightly beating BOCIe by 4%; GPM was a small 0.4ppt beat at 16.8% thanks to better revenue mix with higher AI exposure and efficient cost control; Net loss margin missed consensus by 8ppts due to increased personnel costs. We forecast KC loss will continue to narrow.
　　Key Risks for Rating
　　1) High reliance on JX game IP; 2) Xinchuang demand may fluctuate in short term; 3) online collaboration software competition; 4) AI product development.
　　Valuation
　　We apply 8x 2025 P/S on Office Software, 1.2x 2025 P/S on Cloud, 9x 2025 P/E on Online Game and a 35% holding company discount. Maintain BUY with new target price of HK$28.6 (was HK$39.0).