AI Innovations And Gaming Expansion Propel Future Revenue Growth Across Office And Online Sectors

Key Takeaways

• Significant investments in AI and international market expansion are expected to drive substantial future revenue growth in office software and overseas operations.
  
• Strategic focus on gaming segment growth and shareholder returns suggests promising revenue and earnings per share improvements.
  
• Dependence on key titles and Chinese market, coupled with international expansion challenges and AI investment risks, may pressure revenue and profitability.

Catalysts

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

• The company is making significant investments in AI-driven features, such as WPS AI and WPS HarmonyOS NEXT, which are expected to improve user engagement and conversion rates, likely driving future revenue growth in the office software sector.
  
• Expansion in international markets, particularly with mobile and PC products leveraging AI capabilities, showcases substantial growth potential, which is anticipated to increase revenue from overseas operations.
  
• Kingsoft's strategy to grow its gaming segment by introducing new genres and games, like the successful launch of JX3 Ultimate and upcoming releases such as Mecha BREAK, suggests strong revenue growth prospects for its online gaming business.
  
• The company's focus on broadening its domestic institutional subscription offerings, particularly through enhanced products like WPS 365, is aimed at driving sustainable revenue growth and improving net margins in the office software division.
  
• Kingsoft's continued share repurchase activities and cash position indicate strong shareholder return strategies, which can contribute to an increase in earnings per share (EPS) and support the overall attractiveness of the stock.

Kingsoft Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kingsoft's revenue will grow by 14.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.2% today to 19.2% in 3 years time.
• Analysts expect earnings to reach CN¥2.9 billion (and earnings per share of CN¥2.06) by about January 2028, up from CN¥1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.2x on those 2028 earnings, down from 32.3x today. This future PE is greater than the current PE for the HK Entertainment industry at 18.1x.
• Analysts expect the number of shares outstanding to grow by 1.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.05%, as per the Simply Wall St company report.

Kingsoft Future Earnings Per Share Growth

Risks

• The competitive nature of the gaming industry and dependency on a few successful titles, such as JX3 Online and Mecha BREAK, could lead to revenue volatility if newer releases do not perform as expected. This may impact future revenue growth.
  
• The company's international expansion plans, especially in the office software segment, face uncertainties due to past minimal promotion and the need to reallocate focus from AI development. This could affect international revenue streams.
  
• The substantial share of losses from associates, notably Kingsoft Cloud, poses a risk to the company's net earnings and profitability if such losses persist or grow.
  
• High reliance on the Chinese market, particularly in office software through government contracts, means that any negative macroeconomic changes or policy shifts could impact domestic revenue streams.
  
• Significant R&D and capital expenditures aimed at AI and gaming innovation may pressure net margins if these investments do not yield proportionate returns.

Valuation

• The analysts have a consensus price target of CN¥37.85 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 CN¥44.77, and the most bearish reporting a price target of just CN¥33.82.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥14.9 billion, earnings will come to CN¥2.9 billion, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 8.0%.
• Given the current share price of CN¥33.65, the analyst's price target of CN¥37.85 is 11.1% 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.