zeljkosantrac
Elevator pitch
KINGSOFT LIMITED (OTCPK:KSFTF) (3888:HK) is classified as Hold. In its press releases, Kingsoft describes itself as a “Chinese software and Internet services company” that generates revenue from “online games” and “office software.”
for me before July 19, 2021 article She touched on the outlook for KSFTF’s software and gaming business. In the current article, I review Kingsoft Corporation’s recent quarterly financial performance and financial prospects.
KSFTF posted a revenue loss and profit beat in the first quarter of 2024. Looking ahead, new games are expected to boost the performance of Kingsoft Corporation’s online gaming business. But the company’s office software business may face stiff competition as new office software products compete for AI-related features. Therefore, I have chosen to maintain a Hold rating for Kingsoft Corporation.
Readers should be aware that the company’s shares It is listed on both the over-the-counter or over-the-counter market and on the Hong Kong Stock Exchange. Trading liquidity for Kingsoft Corporation’s OTC shares is low, but its Hong Kong-listed shares feature a reasonably high three-month average daily trading value of $20 million (Source: Standard & Poor’s Capital IQ). Investors can trade the company’s shares in Hong Kong with US brokerages such as Interactive Brokers.
The top line performance was below expectations due to outdated games
Kingsoft Corporation released the company’s latest Q1 2024 results announcement last week. The outstanding performance of KSFTF has not been as good as the market expected.
The company recorded revenues of 2,136.9 million Chinese yuan in the first quarter of this year. This was -2.4% lower than the CNY2,190.0 million sales forecast by analysts. Standard & Poor’s Capital IQ Data. Moreover, Kingsoft Corporation’s headline expansion in local currency or RMB terms slowed from +12.1% y/y for Q3 2023 and +9.4% y/y for Q4 2023 to +8.5% y/y in Q1 2023. Year 2024.
In the fourth quarter, strong revenue growth in the office software business segment was partially offset by weakness associated with the online gaming segment. Specifically, profit from online gaming decreased by -0.8% YoY to CNY 911.5 million in Q1 2024, while office software revenue increased by +16.5% YoY to CNY 1,225.4 million over the same time period. .
KSFTF attributed the decline in forecasts and slower revenue growth over the last quarter to a “natural decline in revenues from some existing games” in its Q1 2024 results announcement. In other words, Kingsoft Corporation’s relatively older games saw a decline in sales contribution as they reached later stages Of their life cycles.
But profits beat consensus because of cost control
KSFTF managed to post higher-than-expected earnings for the first quarter of 2024, although the company’s latest quarterly profit fell short of expectations.
Net income attributable to shareholders of Kingsoft Corporation increased +48.0% year-on-year to RMB284.6 million in the first quarter of the year. KSFTF’s actual bottom line for Q1 2024 was +4.6% above the sell-side consensus earnings estimate of CNY272.0 million (Source: Standard & Poor’s Capital IQ).
Good expense management allowed Kingsoft Corporation to record better-than-expected net profit for the latest quarter. The company’s selling and distribution costs decreased by -25.6% year-on-year from CNY 351.2 million in Q1 2023 to CNY 261.3 million in Q1 2024.
In announcing its first-quarter results, KSFTF noted that it had reduced “promotional spending on online gaming.” It is reasonable to assume that Kingsoft Corporation has done well in terms of optimizing marketing expenses related to older games that were generating less revenue.
Kingsoft Corporation’s share price performance post results indicates that the market had a mixed view on the company’s latest quarterly financial performance. The company announced its first-quarter 2024 results on May 22 after trading hours (Hong Kong time). Subsequently, Hong Kong-listed Kingsoft shares rose +1.3% on May 23, before falling -1.3% on May 24.
Mixed prospects
Looking beyond the company’s Q1 2024 results, Kingsoft Corporation’s prospects are mixed considering both its online gaming and desktop software business.
In the company’s Q1 2024 earnings summary, Kingsoft Corporation guided for +10% growth in its revenues derived from its online gaming business segment for the full fiscal year 2024. This would represent a significant improvement compared to the online gaming business’s -0.8% year-over-year sales contraction in the first quarter.
KSFTF revealed in the company’s first-quarter results announcement that “animated shooter game Snowbreak: Containment Zone” recorded “significant increases in both daily active users and total revenue” for the first quarter. The company also shared in its recent quarterly earnings announcement that “sci-fi game Mecha Break has received licensing approval in March 2024.” Given these recent developments, Kingsoft Corporation’s revenue contribution from new games will likely offset the decline in revenue from legacy games for the coming quarters.
On the other hand, there is uncertainty about the future performance of Kingsoft Corporation’s office software business segment. The company’s office software revenues grew an impressive +16.5% year over year in the first quarter of 2024, but competitive forces may impact the outlook for its office software business.
“From an AI perspective, my understanding is that for Office products, the AI competition is very tough,” KSFTF’s CEO stated on the company’s Q1 earnings call. A news article dated April 10, 2024 published in a Chinese media outlet yikai global “Chinese internet companies, including Kingsoft Office Software, Tencent Holdings (OTCPK:TCEHY) (OTCPK:TCTZF) and Alibaba Group (BABA), have integrated AI into their office software products,” he noted.
As such, the increase in competitive intensity of China’s office software market with the rise of artificial intelligence could lead to slower revenue growth (losing market share) or higher costs (increasing investments to remain competitive) for Kingsoft Corporation’s office software business. Notably, Kingsoft Corporation’s R&D expenses increased +8% year-over-year in Q1 2024. The KSFTF attributed the rise in R&D expenses to “investments in Kingsoft Office Group’s AI and collaborative products and services” in its Q1 results announcement.
In short, the company’s overall outlook is ambiguous given how its office software and online gaming segments perform in the remaining quarters of the year.
Concluding thoughts
I have a mixed view on Kingsoft Corporation’s latest quarterly results and its business outlook. Also, Kingsoft Corporation is fairly valued based on a price-to-earnings or PEG multiple that is close to 1. According to Standard & Poor’s Capital IQ According to the data, the PEG is 0.93 times consensus FY2024 normalized P/E of 24.9x and consensus FY2024-2026 adjusted P/E forecast of +26.7%.
Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please be aware of the risks associated with these stocks.
