Kingsoft. Small deal is big win for WPS Office. December 31, Breaking Events. Maintain BUY

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1 Relative Value (%) Equity Research December 31, 2013 Kingsoft Small deal is big win for WPS Office Breaking Events Maintain BUY What happened Kingsoft announced several connected transactions, including: WPS license agreement with Tencent Technology: Tencent agreed to pay Rmb2mn to purchase the permanent usage rights for WPS Office 2013 V9.6 as well as three years of after sales service for all Tencent owned computers in Chinese offices. Cooperation agreement with Tencent Shenzhen: KIS agreed to provide multi-channel distribution & promotion services to Tencent, with 2014/15e revenue guidance of Rmb22mn/Rmb33mn. Amended cooperation agreement with Xiaomi: The pair amended their previous agreement, extending their cooperation by one more year to end-2015 and increasing the maximum service fee to Rmb5.3mn/Rmb40mn for 2013/14e. Comments We believe the deals are positive catalysts for Kingsoft. Kingsoft have previously signed WPS agreements with ICBC and CNPC. We note that not only government- and state-owned companies, but also big private companies are starting to implement WPS Office. Although the size of the Tencent deal is not big, WPS s market potential is huge. Instead of selling WPS by the set, by cooperating with private companies Kingsoft will generate more revenue as there are many similar companies in China. Tencent s move is representative; more Chinese companies will use WPS service as the government continues to support software legalization. KIS s promotion services to Tencent: the 2014/15e guidance is significantly lower than 2012/13 revenue due to fact the promotion service agreement between SoSo and KIS will be terminated as Tencent will not directly operate SoSo s search engine. However, Kingsoft will now work with Sogou s search engine. We believe the revenue from search engine promotion will be stable in 2013/14e. We predicted potential deals with Xiaomi and Tencent in our previous report. The industry chain effect and opportunities brought by Xiaomi and Tencent have taken shape. Kingsoft services such as its cloud services and distribution platform help Xiaomi to create a closed loop ecosystem. The fact the two companies agreed to increase the guidelines and extend the deal s period proves the strong synergetic growth between them. Ticker Last close CICC target HK HK$20.85 HK$ wk price range HK$23.30~5.45 Market cap (bn) HK$25 Daily value (mn) HK$ Shares outstanding (mn) 1,180 Free float (%) 63 Daily volume (mn sh) Business sector Internet HK HSCEI 14 Dec-2012 Mar-2013 Jun-2013 Sep-2013 Dec-2013 (Rmb mn) 2011A 2012A 2013E 2014E Revenue 1,021 1,411 2,048 2,807 (+/-) 5.1% 38.3% 45.1% 37.1% Net profit (+/-) -10.5% 38.0% 50.8% 30.6% EPS BPS DPS CPS P/E P/B EV/EBITDA Dividend yield -0.5% 0.0% 0.0% 0.0% ROAA 12.3% 13.9% 15.0% 14.6% ROAE 16.2% 18.9% 22.8% 23.3% Source: Bloomberg, company data, CICC Research Haofei CHEN haofei.chen@cicc.com.cn SFC CE Ref: AJD676 Kai QIAN kai.qian@cicc.com.cn SFC CE Ref: AZA933

2 Figure 1: Original vs. amended agreement with Xiaomi Service to Xiaomi (Rmb mn ) Cloud 2013 (original agreement) 2013 (amended) Guidelines of max revenue 2014 (original agreement) 2014 (amended) 2015 (amended) Game cooperation Promotion of Xiaomi & related products Service from Xiaomi (Rmb mn ) Xiaomi products Promotion on Xiaomi Platform Figure 2: Agreement with Tencent Shenzhen Guidelines of max revenue Service (Rmb mn ) Until December 31, 2012 Until November 30, Promotion Service to Tencent

3 Figure 3: Comparison between MS Office and WPS Quite similar 3

4 Figure 4: Users can also use mobile WPS to edit on Smartphone Light office Users can edit the same file on a Smartphone Log-in Figure 5: Apple vs. Xiaomi ecosystem 4

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