Kingsoft:Post~results luncheon takeaway

Event

We hosted a post results luncheon with Kingsoft today. Managementacknowledged the headwinds on Cheetah Mobile from the overseas admarket may persist but on the other hand remained confident on onlinegaming, WPS and cloud. Mobile game and mobile WPS monetisation will benew drivers for 2H16revenue. Maintain OP with SOTP-based TP HK$23.

Impact

Online gaming rides on JX IP. The flagship PC game, JX III, contributed72% of total game revenue and revenue grew 57% YoY in 1Q16. Mobile JX,licensed exclusively to Tencent, will kick off unlimited beta testing on May 31.Management is confident on its performance given strong IP and Tencent’sdistribution channels. The second JX IP backed mobile game is licensedexclusively to Xiaomi and is scheduled to launch in 4Q16. We estimate themobile contribution to game revenue to increase from 4% in 2015to 19% in2016.

Start monetizing mobile WPS. In 1Q16, 49% of WPS revenue was driven byVAS while the rest was from government and enterprises. The company willbegin monetising mobile WPS with its mobile users reaching 89mn. Thecompany guides 20% YoY revenue growth in WPS, or potentially 40% YoYwith upside from mobile.

Cloud continues fast growth. Kingsoft Cloud is the largest game cloudplatform in China serving over 300game developers and operators. Mobilevideo cloud ramped up rapidly and has surpassed game cloud in revenue.The company guides 100% YoY cloud revenue growth in FY16and expectsloss to narrow going forward. We value Kingsoft cloud at US$1.5bn in ourSOTP vs its previous round of financing valuation of US$1.1bn in May 2016.

Little visibility on Cheetah’s recovery. Management has little visibility onthe revenue sharing change related to Facebook in the near term. Thecontent strategy is yet to be proven as the life cycle and retention of mobilecontents such as Piano Tile has not met the company’s expectation. Also,investments in emerging markets made logical sense to capture the newmarkets but might not generate sufficient revenue to cover the related useracquisition cost. With the Cheetah’s earnings cut and continuing investment incloud, we estimate Kingsoft’s op margin to decline from 9.7% in 2015to 5.9%in 2016.