UOB Kay Hian Private Limited
Date of Report: 29 May 2025

Kingsoft Corp 1Q25 Earnings: Revenue Miss, AI Ambitions Intact, and a Robust Game Pipeline Position for Growth

Overview: A Leading Force in Software and Internet Services

Kingsoft Corp Ltd (3888 HK), a prominent player in the communication services sector, continues to reinforce its status as a leading provider of software and internet services. Amid a dynamic business landscape, the company’s performance for the first quarter of 2025 reflects both challenges and strategic progress, particularly in artificial intelligence and gaming.

Stock Snapshot and Key Metrics

• Share Price: HK\$36.05
• Target Price: HK\$47.00 (down from previous HK\$55.00)
• Upside: 30.4%
• Market Cap: HK\$50,485.3 million (US\$6,440.9 million)
• 52-week High/Low: HK\$47.50/HK\$19.74
• Major Shareholders:
  • Lei Jun: 22.6%
  • TCH Saffron Ltd: 7.8%
  • Pak Kwan Kau: 7.3%

Kingsoft Corp’s recent share price performance has seen fluctuations, with a 1-year return of 41.7% and a year-to-date return of 7.1%, despite a 2.6% decline over the past month and an 18.3% drop over three months.

1Q25 Financial Performance: Revenue Misses, Margins Hold Steady

Kingsoft’s 1Q25 revenue increased by 9.4% year-on-year to Rmb2.3 billion, but fell short of consensus estimates by 6.0%. Gross margin improved 1 percentage point year-on-year to 82.1%. Operating profit was flat at Rmb601 million, with a 2.4 percentage point year-on-year contraction in operating margin to 26%, reflecting subdued revenue growth. Net profit also remained flat at Rmb284 million, with net profit margin dipping 1 percentage point year-on-year to 12.1%.

Segment Performance: Online Gaming and Office Software

Online Games: Growth Normalizes as New Titles Await Launch

Online games revenue grew 13.7% year-on-year to Rmb1.0 billion, supported by anime game Snowbreak: Containment Zone and JX3 Online. The new release, JX3 Ultimate, further propelled user growth. However, sequential revenue dropped due to fewer content updates for JX3 Online during the quarter.

• Online game gross profit margin dropped to 45% (from 85% in 1Q24).
• Online game operating margin turned negative at -19% (from 34% a year ago), reflecting cost pressures and content update cycles.

Kingsoft Office (WPS): Resilient Subscription Growth

WPS revenue grew 6.2% year-on-year to Rmb1.3 billion, driven by the expansion of WPS 365 and the individual office subscription business. Growth in paying subscribers and operational strategies to boost AI-active users underpinned this performance. However, sequential revenue dipped due to a slowdown in the WPS software business.

• WPS monthly active devices rose 8% year-on-year to 647 million.
• WPS gross profit margin surged to 111%, with operating margin climbing to 61%.

Cost and Margin Analysis

Operating expenses as a percentage of revenue increased by 3 percentage points year-on-year to 56% in 1Q25.

• Selling and Distribution: Up 30% year-on-year at Rmb340.3 million, mainly due to promotional efforts for new game launches and pre-launch activities.
• R&D Expenses: Rose 16% year-on-year, reflecting increased AI-related investments and higher headcount, plus enhanced investment in new gaming genres.

Key Financials and Projections

Upcoming Catalysts: New Games and AI-Powered Ecosystem

Upcoming Game Releases: Mecha BREAK and Fate of Sword: Zero

• Mecha BREAK: Internal testing in March yielded player feedback and further optimizations. An official announcement is expected in early June with a targeted release in July.
• Fate of Sword: Zero: A new mobile game from the classic Sword series is slated for 2H25, aiming to uphold martial arts gaming heritage.

Kingsoft remains vigilant regarding potential challenges, such as the reception of new content, emerging game genres, and shifting player preferences.

AI Strategy: Building a Vertically Integrated AI Ecosystem

• Kingsoft is embedding AI across all business units, including office, cloud, and gaming.
• An AI product centre was established on 31 March, aligning subsidiaries and sharing AI capabilities and insights.
• The strategy leverages Xiaomi’s foundational model, with scalable AI solutions for productivity, gaming, and cloud.
• The overseas market is recognized as a powerful growth engine, especially for the Kingsoft Office segment.

Kingsoft Cloud: Slower but Steady Growth

• Kingsoft Cloud’s 1Q25 revenue grew 11% year-on-year (down from 30% in 4Q24).
• Public cloud services revenue rose 14% year-on-year, driven by AI business growth.
• Enterprise cloud services revenue increased 4.8%, with a sequential decline due to Chinese New Year and project schedules.
• Non-GAAP net loss narrowed to Rmb190.6 million from Rmb217.3 million a year ago but widened sequentially from Rmb70.3 million in 4Q24.

Earnings Revision and Risks

• 2Q25 and 2025 revenue estimates have been trimmed by 1% and 2%, respectively, due to moderated online games growth and rising competition.
• 2Q25 adjusted net profit forecast was cut by 9%, factoring in increased AI investments.
• Key risks include obsolescence of flagship PC games and delays in government localization projects.

Valuation and Recommendation

• Recommendation: Maintain BUY
• Target Price: HK\$47.00 (implies 26x 2025F PE)
• Current Trading: 20x 2025F PE, below the historical mean of 45.7x

The cautious optimism is underpinned by robust AI development and a promising game pipeline, offsetting the softer performance in Kingsoft Cloud.

Share Price Catalysts

• Continuous launch of online game expansion packs
• Growth in WPS revenue from licensed software and subscription services

SOTP Valuation Breakdown

Financial Outlook and Key Metrics

Conclusion: Poised for Growth Amid Short-Term Challenges

Kingsoft Corp’s 1Q25 results reflect a company balancing short-term revenue pressures with strategic investments in AI and a strong game development pipeline. The company’s robust financial position, ambitious AI-driven growth initiatives, and strong track record in gaming and office software position it as a compelling investment opportunity for the medium to long term. With a maintained BUY call and a target price of HK\$47.00, Kingsoft stands out as a notable play in China’s evolving tech landscape.