HAITONG INT'L: Initiates KINGSOFT (03888) with an "outperform" rating, target price of HK$46.85.

HAITONG INT'L released a research report stating that, for the first time, it has covered KINGSOFT (03888) and given it a "outperform the market" rating. It is estimated that the operating revenue from 2024 to 2026 will be 10.192 billion, 12.271 billion and 14.829 billion RMB respectively, with year-on-year growth rates of 19.4%, 20.4%, and 20.8%; the net profit attributable to the parent company will be 873 million, 1.645 billion and 2.335 billion RMB respectively, with year-on-year growth rates of 80.5%, 88.5% and 41.9%; earnings per share will be 0.65, 1.23 and 1.75 RMB respectively, with a target price of 46.85 HKD. The report stated that KINGSOFT is a leading software and internet services company in China. After implementing the "mobile internet transformation" strategy, the company has formed a strategic platform with interactive entertainment and office software as its pillars, and cloud services and AI as new directions. The company's core businesses are divided into office software and services, as well as network games, with the corresponding controlling subsidiaries being Beijing Kingsoft Office Software, Inc., Xishanju, and Kingsoft World. Beijing Kingsoft Office Software, Inc. continues to operate steadily and adhere to the "multi-screen, cloud, content, collaboration, AI" strategy, focusing on research and development in the fields of AI and collaboration. By empowering individual and institutional customers with technological innovation, it brings them a one-stop AI office experience and promotes the landing of new quality productivity in the office field. The network gaming business continues to iterate the classic Swordsman series and actively expands into new categories. In addition, the bank believes that KINGSOFT has a deep collaboration with Lei Jun's companies and is expected to continue to release synergies. Last November 19, the company's non-wholly owned subsidiary KOSC signed an advertising service agreement with Xiaomi Singapore. KOSC will provide overseas advertising services to Xiaomi Singapore and its customers through its application. All advertising traffic from KOSC's overseas versions of applications will be provided to Xiaomi Singapore, and Xiaomi Singapore will pre-install the WPS Office Android app on its overseas mobile devices (including all series of smartphones and tablets) for free. Based on this, KOSC's advertising revenue sharing income in 2024 will be $2.97 million and the minimum advertising revenue sharing income in 2025 will be $4 million, with a suggested annual sharing income cap of $8 million in 2025. (If the annual advertising revenue total exceeds $10 million, KOSC's share is 40%). The bank expects that as KINGSOFT's AI commercial contributions accelerate and benefit from the continuous release of creativity demand, the revenue from the office business will experience faster growth. It is estimated that the revenue growth rates of the company's office business from 2024 to 2026 will be 12.09%, 20.28%, and 22.93% respectively; in terms of the gaming business, the company continues to create the classic Swordsman series and innovate and expand. The game business revenue achieved high growth after the launch of "The Swordsman 3 Unlimited" in June last year, with new games "Jie Xian Ji" and "Swordsman's Love. Zero" expected to go online this year, contributing to the continuous growth of the game business. The bank expects the revenue growth rates of the company's game business from 2024 to 2026 to be 28.02%, 20.59%, and 18.8% respectively. With regards to the gross profit margin, the bank expects the company's comprehensive gross profit margin to remain stable, with gross profit margins of 82.44%, 82.85%, and 83.31% from 2024 to 2026.