AI-Driven WPS Office And Upcoming Games Will Strengthen Global Presence

Key Takeaways

• Kingsoft's focus on AI integration and localized international expansion aims to boost revenue and improve net margins through operational efficiencies and high-value services.
  
• New flagship gaming product launches are expected to diversify earnings and strengthen global market revenue.
  
• Heavy reliance on AI for products and competition pressures may strain growth, with challenges in international markets and rising costs impacting profitability.

Catalysts

Engages in the entertainment and office software and services businesses in Mainland China, Hong Kong, and internationally.

• The strong growth in Kingsoft Office Group's user base and commercialization capabilities, along with the release of WPS AI version 2.0, indicate a significant enhancement in product offerings that can drive revenue growth.
  
• The deep integration of AI features in WPS Office, including the AI office assistant, and the targeted growth in enterprise and government sectors, suggest potential improvements in net margins due to efficiencies and higher-value services.
  
• Strategic efforts to expand internationally by localizing offerings for different regions and encouraging mobile users to shift to larger screens could lead to increased revenue from the global market.
  
• The robust pipeline of gaming products, particularly the forthcoming launch of new flagship games targeting global markets, is likely to enhance future revenue and diversify the company's earning sources.
  
• Ongoing investment in AI-driven product technologies across both office software and gaming platforms positions Kingsoft to increase operational efficiencies and potentially enhance earnings by reducing costs and improving user engagement.

Kingsoft Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kingsoft's revenue will grow by 13.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.0% today to 20.9% in 3 years time.
• Analysts expect earnings to reach CN¥3.1 billion (and earnings per share of CN¥2.37) by about April 2028, up from CN¥1.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥3.8 billion in earnings, and the most bearish expecting CN¥2.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.9x on those 2028 earnings, down from 28.4x today. This future PE is greater than the current PE for the HK Entertainment industry at 13.7x.
• Analysts expect the number of shares outstanding to decline by 2.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.02%, as per the Simply Wall St company report.

Kingsoft Future Earnings Per Share Growth

Risks

• The reliance on AI technology integration for Kingsoft's WPS products and games could pose risks if the AI models do not perform as expected or if integration costs outweigh the benefits, impacting both operating expenses and net margins.
  
• There is uncertainty regarding user acceptance and the commercial performance of new games, especially given the mixed feedback and potential server issues noted during testing phases, which could affect revenue from the gaming segment.
  
• The company faces challenges from increasing R&D expenses due to AI development and expanded global market efforts, which could pressure net income if these investments do not yield proportional growth in revenue.
  
• Kingsoft's success in international markets may be hindered by localization challenges and varying user preferences that complicate scaling efforts, potentially limiting revenue growth in the mobile and office software sectors.
  
• Increased competition in both gaming and office software markets could affect Kingsoft’s market share and profitability, particularly in regions where local alternatives are gaining popularity, which could impact overall revenue growth and net profit margins.

Valuation

• The analysts have a consensus price target of HK$45.512 for Kingsoft based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$57.4, and the most bearish reporting a price target of just HK$33.78.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥15.0 billion, earnings will come to CN¥3.1 billion, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 9.0%.
• Given the current share price of HK$35.35, the analyst price target of HK$45.51 is 22.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.