Broker: UOB Kay Hian
Date of Report: Thursday, 21 August 2025
Kingsoft Corp (3888 HK) Q2 2025: Results Miss, But WPS and Cloud Show AI-Driven Resilience

Executive Summary: Kingsoft Corp Faces Mixed Q2 Amid AI Momentum and Gaming Headwinds

Kingsoft Corp, a leading provider of software and internet services, reported a mixed set of results for Q2 2025. While headline numbers fell short of expectations, the company’s WPS Office suite and Kingsoft Cloud division demonstrated robust growth, driven by AI integration and expanding enterprise demand. The online gaming segment, however, struggled due to a high revenue base last year and new market challenges. UOB Kay Hian maintains a BUY rating, albeit with a slightly lowered target price of HK$45.00, reflecting cautious optimism on recovery prospects, especially in games and cloud services.

Stock Overview and Major Shareholders

• Share Price: HK\$33.80
• Target Price: HK\$45.00 (Down from HK\$47.00)
• Upside: 33.1%
• Market Cap: HK\$47,334.4m (US\$6,059.2m)
• Shares Issued: 1,400.4 million
• GICS Sector: Communication Services
• Major Shareholders:
  • Lei Jun: 22.6%
  • TCH Saffron Ltd: 7.8%
  • Pak Kwan Kau: 7.3%
• 52-week High/Low: HK\$47.50 / HK\$19.74

Q2 2025 Financial Performance: Headline Miss, Margin Pressure

Segment Analysis: Online Games, WPS Office, and Kingsoft Cloud

Online Games: Revenue Under Pressure, Operational Challenges

• Revenue declined 26% YoY to Rmb952m, hit by a high base from last year’s success with Snowbreak: Containment Zone and JX3 Online.
• Sequential decline attributed to reduced income from Snowbreak and JX3 Online.
• Operating margin for games fell to 0%, down 42.5 ppt YoY, reflecting increased costs and market disruption.
• Challenges included underestimated impact of China’s gaming “black industry,” and content misalignment with player expectations.
• Mecha BREAK showed initial engagement but performance waned post-launch; feedback cited high effort and investment requirements as a double-edged sword for retention.

WPS Office: Accelerated Growth, AI-Driven Engagement

• WPS Office revenue grew 14% YoY to Rmb1.4b, up from 6% YoY in prior quarters.
• Growth propelled by WPS 365 and increased subscriptions, thanks to enhanced product features and penetration into new industry scenarios.
• AI-enabled features, improved user experience, and optimized operations drove further adoption.
• Monthly active devices for core WPS products rose 8% YoY to 651 million.
• Operating margin for WPS reached 28%, up 7.6 ppt YoY.

Kingsoft Cloud: Robust AI-Driven Revenue Expansion

• Cloud segment revenue jumped 24% YoY in Q2 2025, with public cloud services up 32% YoY due to strong AI gross billing.
• Enterprise cloud services accelerated to 10% YoY growth, supported by rising software IT service demand and faster project delivery.
• Non-GAAP net loss remained flat at Rmb300.5m compared to Rmb301m last year, but widened sequentially.
• Kingsoft collaborated with Kingsoft Cloud and partners (Xiaomi, DeepSeek, Drupal) to launch the GV-AI Accelerator and delivered AI-powered solutions to a national bank, automating credit report generation with high performance feedback.

Expense and Margin Trends: Investments in AI and Promotions

• Total operating expenses as a percentage of revenue increased 13 ppt YoY to 64% (vs. 56% in Q1).
• Selling & distribution expenses rose 12% YoY and 25% QoQ to Rmb424m, reflecting heavier promotional activity for new games and WPS products.
• R&D expenses up 15% YoY, driven by higher headcount, AI-related costs, and investments in new game genres.

Financials: Key Metrics and Forecasts

Balance Sheet and Cash Flow Highlights

• Net cash position remains strong, with net debt/cash to equity at -94.8% for 2025F, improving to -97.5% by 2027F.
• Shareholders’ equity forecasted to rise from Rmb30.8bn in 2025F to Rmb35.0bn in 2027F.
• Cash and ST investments expected to increase from Rmb29.2bn (2025F) to Rmb34.1bn (2027F).
• Operating cash inflow to remain solid, with net cash inflow of Rmb5.4bn in 2025F, Rmb2.5bn in 2026F, and Rmb2.4bn in 2027F.

Valuation: Attractive Multiples and SOTP Breakdown

• Target price of HK\$45.00 implies 28x 2026F PE, above the current trading PE of 21x and below the historical mean of 45.7x.
• UOB Kay Hian remains cautiously optimistic on games revenue recovery in Q4 2025, with ongoing strength in WPS and cloud services.

Risks and Earnings Revisions

• 3Q25 and 2025 revenue estimates cut by 18% and 9% respectively, reflecting online games weakness and uncertainty in new game monetization.
• Adjusted net profit forecasts trimmed by 10% (3Q25) and 5% (2025), accounting for higher AI investments.
• Main risks: aging flagship PC games and delays in government software localization projects.

Share Price Catalysts and Outlook

• Ongoing launch of expansion packs for online games to spur growth.
• Continued momentum in WPS revenue from licensed and subscription software.
• Recovery in online gaming revenue anticipated in Q4 2025.
• WPS and Kingsoft Cloud maintain strong growth trajectories, supported by AI integration.

Conclusion: Kingsoft Corp Navigates Challenges, Remains a Strategic AI Play

Kingsoft Corp’s Q2 2025 results revealed a company in transition. While online gaming faces headwinds, the strategic investment in AI, cloud, and office productivity software offers compelling growth opportunities. With a robust cash position, attractive valuation, and positive momentum in cloud and WPS, Kingsoft remains well-placed to capitalize on enterprise digitalization and AI adoption. Investors should watch for signs of recovery in gaming and continued traction in cloud and office segments as the key catalysts for share price appreciation.