Kingsoft (3888 HK) Buy (maintained) Target price: HK$20.77

Transcription

1 Equity Research Information Technology May 24, 216 Kingsoft (3888 HK) Buy (maintained) Target price: HK$2.77 Full-year earnings forecast trimmed as 1Q16 results miss; maintain Buy but lower target price to HK$2.77 1Q16 results missed on lower-than-expected OPM Kingsoft saw net profit and non- GAAP net profit (excluding share-based compensation costs) grow by 17% and 28% YoY to Rmb134m and Rmb199m in 1Q16, the latter being 18% below Bloomberg consensus (Rmb243m), mainly due to a lower-than-expected OPM. Non-GAAP OPM came in at 14.6% in 1Q16, down 3.1pp YoY or.8pp QoQ, mainly attributable to the rising traffic acquisition cost in Cheetah Mobile s (CM) advertising business. Revenue rose by 8% YoY to Rmb1,72m during the quarter, underpinned by 41%, 7% and 126% YoY growth in online games (representing 26% of total revenue), CM (62%) and office software & cloud & other businesses (12%). Ryan Zhu, CPA SFC CE No. BDK82 zhuran@gfgroup.com.hk GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Stock performance % -1% CM s growth to slow in 2Q16 CM s management has guided for just 1-13% YoY revenue growth (or ~14% QoQ decline) for the business in 2Q16, following 7% YoY growth in 1Q16. The slowing growth momentum is mainly a result of a decline in ecpms from some of its overseas third-party advertising partners, and slower-than-expected progress in the execution of its direct sales and content product strategy. CM s user base continued to expand to 61m MAU at end-1q16 from 63m the previous quarter. The company is putting more effort into getting rid of overseas headwinds by accelerating progress in its direct sales and content strategy. Eye-catching performance in cloud service and WPS businesses The company s cloud service business recorded revenue growth of over 2% YoY in 1Q16, driven by rapidly growing market demand, strong competitiveness in internet games and video verticals and further penetration into the healthcare sector. The WPS office business also surprised us with 6% YoY sales growth in 1Q16, led by strengthening monetization of its substantial personal WPS user base and a demand recovery in its enterprise and government business. Mobile games the near term catalyst Online games revenue posted solid sequential growth of 1% QoQ (41% YoY) in 1Q16, driven by the ongoing growth momentum of its flagship PC client game JX III. The mobile version of JX III is set to be commercialized in a few weeks (in 2Q16) on the Tencent platform. Management expects over Rmb1m in gross billing per month from this game given JX III s popularity and Tencent s strong channel capabilities. Through its partnership with Xiaomi, the company will launch another key mobile game in 3Q16. -2% -3% -4% -% -6% Source: Bloomberg Kingsoft HSI Maintain Buy but lower target price to HK$2.77 We cut our earnings forecasts for 216/17/18 by 2%/31%/29% due to CM s headwinds in overseas advertising. We now expect 43% YoY growth (previously 92%) in non-gaap net profit and weaker expansion in non-gaap operating profit, from 16% in 21 to 17.2% (previously 2.3%) in 216. While CM s growth visibility has deteriorated, the company s other businesses remain very healthy. We cut our SOTP-based target price from HK$24.7 to HK$2.77, still implying 42% upside, but maintain our Buy rating. Key risks Failure of CM to implement its new strategy and a longer-than-expected investment cycle for its cloud business. Key data May 23 close (HK$) 14.6 Shares in issue (m) 1,33 Major shareholder Lei Jun 27.12% Market cap (HK$ bn) 19. 3M avg. vol. (m) 7.8 2W high/low (HK$) 31.6 / 14.3 Source: Bloomberg Stock valuation Turnover YoY Net profit * Adj. net YoY * Adj. diluted YoY P/E P/B ROE Dividend Net gearing (Rmb m) (%) (Rmb m) profit (Rmb m) (%) EPS (Rmb) (%) (%) yield (%) (%) 214 3, cash 21, (38) cash 216E 7, cash 217E 9, , cash 218E 11, ,314 1, cash * excluding share-based compensation costs.

2 May 24, 216 Figure 1: 1Q16 results review Rmb m 4Q14 1Q1 2Q1 3Q1 4Q1 1Q16 YoY QoQ Online games % 1% Cheetah Mobile ,119 1,8 7% -3% Office software and others % -14% Revenue 1,72 1,19 1,282 1,7 1,778 1,72 8% -1% Cost of sales (226) (224) (37) (369) (42) (47) Gross profit ,138 1,38 1,281 4% -6% GPM (%) 78.9% 79.8% 76.1% 7.% 76.4% 73.2% -6.7% -3.2% S&M (244) (29) (396) (477) (93) (493) 7% -17% R&D costs (264) (294) (32) (363) (36) (46) 38% 11% Admin exp. (9) (11) (117) (131) (94) (137) 3% 46% SBC (9) (8) (6) (12) (113) (114) 97% 1% Opex (67) (743) (898) (1,96) (1,16) (1,1) % -1% Opex/Revenue (%) -61.3% -67.% -7.% -72.7% -6.% -6.6% Operating profit % -44% OPM(%) 17.6% 12.4% 7.8% 4.3% 14.1% 8.1% -4.4% -6.% Finance income Finance costs (19) (2) (18) (22) (18) (22) Others (18) (26) (3) (71) 11 Pre-tax income % -1% Taxation (16) (28) (34) (26) (113) (49) Net profit % 18% NPM(%) 16.2% 1.3% 7.3% 3.2% 6.4% 7.6% -2.7% 1.3% Adj. operating profit % -3% Adj. OPM(%) 23.1% 17.7% 12.% 12.6% 2.4% 14.6% -3.1% -.8% Adj. net profit % 39% Adj. NPM(%) 18.8% 14.% 1.6% 7.8% 8.% 11.3% -2.7% 3.3% Figure 2: Forecast revisions Rmb m New Previous Chg (%) FY16E FY17E FY16E FY17E FY18E FY16E FY17E FY18E Revenue 7,31 9,291 11,836 8,289 1,72 13,711-11% -13% -14% Adj. net profit 79 1,93 1,621 1,9 1,7 2,278-2% -31% -29% Adj. EPS (Rmb cents) % -31% -29% Gross margin(%) (1.) (1.9) (1.2) Adj. operating profit (%) (3.1) (4.6) (4.) Adj. net margin(%) (2.) (2.9) (2.9) Figure 3: Revenue breakdown (Rmb m) Figure 4: Revenue and gross margin forecasts 14, 8% 69% 12, 7% 1, 4% 4% 6% % 8, 4% 6, 3% 26% 27% 3% 4, 2% 2, 1% - % FY13 FY14E FY1 FY16E FY17E FY18E Cloud business Office software Cheetah Mobile 14, 12, 1, 8, 6, 4, 2, , ,291 7,31,676 3,3 2,174 1,21 1,411 FY11 FY12 FY13 FY14 FY1 FY16E FY17E FY18E Revenue (Rmb m) Gross margin (%) Online gaming Overall growth (%) 2

3 May 24, 216 Figure : Adjusted operating profit and OPM forecasts Figure 6: Adjusted net profit and net margin forecasts 3, 2, 2, 1, 1, , , , FY11 FY12 FY13 FY14 FY1 FY16E FY17E FY18E Adjusted operating profit (Rmb m, LHS) ,8 1,6 1,4 1,2 1, , , FY12 FY13 FY14 FY1 FY16E FY17E FY18E Adjusted operating margin (%, RHS) Adjusted net profit (Rmb m, LHS) Adjusted net margin (%, RHS) Figure 7: 1-year forward P/E trend Sources: Wind, GF Securities (HK) Figure 8: SOTP valuation Rmb m Ownership (%) FY16 revenue (Rmb m) FY16 adj. net profit (Rmb m) * Cash value is based on estimated net cash position at end-216 FY16 P/E (x) FY16 P/S (x) Valuation Value attributable to (Rmb m) Kingsoft (Rmb m) Per share value (HK$) Online gaming 76.% 1, ,474, Cheetah mobile 48.% 4, ,683 4, WPS office 7.% ,668 1, Kingsoft cloud 2.2% 67 (277) 8,4 2, Vianet 11.6% 7, Cash value* 1.% 6,799 6, Total 1,12 22, % of total 3

4 May 24, 216 Figure 9: Financial statements Income Statement Balance Sheet Year end Dec (Rmb m) E 217E 218E Year end Dec (Rmb m) E 217E 218E Online games 1,23 1,369 1,779 1,97 2,13 Cash and ST deposit 6,984 8,66 9,48 1,62 12,38 Cheetah Mobile 1,674 3,62 4,42,788 7,24 Other cash equivalent Office software Account receivables 89 1,83 1,8 2,696 2,71 Kingsoft cloud and others ,13 1,19 Inventory Turnover 3,3,676 7,31 9,291 11,836 Other Current Assets 23 YoY (%) Total current assets 8,72 1,642 11,3 13,6 1,37 Property, plant & equipment Cost of sales (9) (1,319) (1,98) (2,694) (3,433) Intangible assets Gross profit 2,76 4,37,366 6,97 8,44 Prepaid land lease payments Other income and gains Goodwill Selling & marketing exp. (797) (1,76) (1,948) (2,343) (2,689) Financial assets 77 2,22 2,22 2,22 2,22 Admin exp. (297) (443) (1) (6) (769) Other LT Assets R&D costs (96) (1,348) (1,691) (1,91) (2,486) Total non-current assents 2,39 4,843 4,884 4,869 4,814 Other expenses (226) (416) (414) (47) (613) Total Assets 1,382 1,48 16,184 18,429 2,31 Operating profit ,288 1,987 Finance income ST Debt Finance costs (76) (78) (78) (78) (78) Trade payables 1,12 1,994 1,899 3,21 3,247 Others 28 (116) (1) (1) (1) Deferred revenue Pre-tax income ,34 2,3 Other Current Liabilities Taxation (9) (21) (16) (23) (361) Total current liabilities 1,39 2,7 2,73 4,3 4,419 MI (98) 27 (128) (214) (329) Long term debt 2,792 2,711 2,711 2,711 2,711 Net profit ,314 Deferred tax liabilities YoY (%) 1 (2) Other non-current liabilities Adj. net profit ,93 1,621 Total non-current liabilities 2,87 2,869 2,886 2,886 2,886 YoY (%) 22 (37) Total liabilities 4,26,74,621 6,89 7,36 Diluted EPS (Rmb) Minority Interests 1, 2,41 2,169 2,383 2,711 YoY (%) 1 (4) Shareholders' Equity 4,61 7,871 8,394 9,17 1,334 Adj. diluted EPS (Rmb) Total Equity & liabilities 1,382 1,48 16,184 18,429 2,31 YoY (%) 17 (38) BPS (Rmb) YoY (%) Cash Flow Statement Financial Ratios Year end Dec (Rmb m) E 217E 218E E 217E 218E Margins Pretax profit ,34 2,3 Gross margin (%) Tax Paid (9) (1) (16) (23) (361) EBITDA margin (%) Depr/Amort Operating margin (%) Change in working capital Net margin (%) Others (183) Adj. operating margin (%) Operational cash flow 92 1,41 1,222 1,1 2,322 Adj. net margin (%) Capex (27) (64) (27) (27) (27) Returns and profitability Assoc, MI, Invsmt (1,13) (1,12) 17 ROE (%) Investment cash flow (1,4) (1,62) (289) (272) (272) ROA (%) Net Change in Debt 1,677 Working capital New Capital 1,379 2, Receivables (days) Dividend (111) (122) (9) (93) (137) Inventory (days) Others 6 (194) Payable (days) Financing cash flow 2,9 2,234 (9) (93) (137) Financial health FX and others Current ratio (x) Chg in Cash 2,3 1, ,14 1,913 Net gearing (%) cash cash cash cash cash Beginning cash 4,481 6,984 8,66 9,48 1,62 Ending cash 6,984 8,66 9,48 1,62 12,38 Others Dividend payout ratio(%) Effective tax ratio(%)

5 May 24, 216 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 1% Accumulate Stock expected to outperform benchmark by more than % but not more than 1% Hold Expected stock relative performance ranges between -% and % Underperform Stock expected to underperform benchmark by more than % Sector ratings Positive Sector expected to outperform benchmark by more than 1% Neutral Expected sector relative performance ranges between -1% and 1% Cautious Sector expected to underperform benchmark by more than 1% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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