Company reported strong 3Q24 results driven by online game. Online game revenue grew 78% YoY. Upon successful launch of JX3 Ultimate, JX3 Online achieved more than double DAU growth, contributing to decent in-game revenues. Company expects strong 2025 online game momentum to help offset near-term weakness in office business due to weak macro. We believe office software remains an attractive long- term SaaS business to own with increasing expectation on government stimulus and the strong online game momentum over 2024-25 is a strong positive. Maintain BUY with new TP HK$35.8.
　　Key Factors for Rating
　　3Q24 results review: Revenue increased 42% YoY to RMB2.9bn with GPM up 1.7ppts QoQ to 84.2%, beating consensus thanks to strong online game revenue and profitability. OPM rose 7.2ppts QoQ to 39.3% due to increase in online game revenue mix. Net income surged 1,351% YoY to RMB413m, beating BOCIe and consensus by 4% and 14% respectively.
　　JX3 Ultimate boosting JX3 popularity: Online game revenue remarkably increased 78% YoY to RMB1,708m, beating BOCIe by 27%, mainly driven by 1) outstanding performance of JX3 Online, and the successful launch of JX 3 Ultimate (劍網 3 無界) further boosting the game popularity; and 2) the active operation and enhanced experience of other games. Company guides online game to grow 30% YoY in 2024 and expect a strong 2025 though without specifying a growth guidance at the moment. There are five new games for 2025 launch which is a relatively packed pipeline for Kingsoft. In additional, the sci-fi mecha game Mecha BREAK (解限機) completed its first public beta test in August, with strong and widespread players attention generating 3m pre-registrations globally. As such, we raise 2025/26E online game revenues by 7%/7%.
　　Office software will benefit from stimulus: Office software results were already reported, with revenue up 10% YoY and 2% QoQ to RMB1,207m. ToC subs (+17% YoY), ToB subs (flat YoY) and ToB license (+9% YoY) all fell short of our expectation due to weak macro and IT spending. However, management believes as China launches more stimulus package in upcoming months, the IT spending willingness of government, SOE and private sector will increase meaningfully. We believe as domestic substitution momentum comes back following stimulus plan, Kingsoft Office will become a key shopping list item again.
　　Cloud: Revenue was up 16% YoY, slightly beating BOCIe by 2%; GPM of 16.1% dipped 0.7ppt QoQ; Net loss margin would have been narrowed QoQ excluding impairment. We expect AI cloud for Xiaomi to become key driver of KC in 2025- 26, turning around its fundamentals. Company had just renewed and extended the contractual framework with Xiaomi by another three years.
　　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 12x 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$35.8 (was HK$28.6).