by winston » Mon Jun 09, 2014 1:20 pm
not vested
KINGSOFT CORP LTD – Concern on the sustainability of high growth in Internet business
May 14, 2014
Rating: Neutral
Closing price: 22.00
Target price: 21.42
The revenue rose by 54% yoy to RMB 2.173 billion (as below) for FY13, which revenues from online games increased by 28.7% to $1.096 billion and from application software surged 94% yoy to $1.056 billion.
Gross profit increased by 53.3% to $1.876 billion, the gross profit margin was about the same of 86% as before.
Operating profit was $682 million, an increase of 65% while profit attributable to shareholders was $671 million, an increase of 55%.
Final dividend was HK$ 0.12. Kingsoft’s performance for last year was excellent, especially in the Internet services and software, both achieved significant increase in sales.
Compared to the previous financial year, the product mix for FY13 has changed significantly.
In FY12, revenue from online game was a major source of revenue for the company, accounted for 60%of the total revenue; followed by the software business, 20% of total revenue; Internet services, including Internet security software, online platform and mobile applications, consist of only 18% of the total revenue.
However in FY13, revenue from online game was $1.096 billion, accounted for 50% of total revenue; software revenue as $370 million, 17% of the total while revenue from Internet service surged to $686 million, as of 32% of total revenue.
It is expected in the next few years, the revenue from Internet service will continue to rise. The proportion will increase to 45% to total revenue in FY14, which will become the largest source of income. In FY16, there will be a further rise to 53%.
Kingsoft spin-off its former Kingsoft Internet Software (KIS) Holdings Ltd, renamed to Cheetah Mobile Inc. (CMI). According to company reports, CMI shall not engage in games and software research and development, or operation of its self developed games.
CMI will mainly engage in information security software, web browser. Its main mission is to develop and operate mobile games and applications, and provides online advertising services and Internet value-added services.
After the spin-off of CMI, Kingsoft’s voting power on CMI remains unchanged, but the stake will decrease 7.1% to 47%. Therefore, the profit attributable to non-controlling interests will increase, resulting to profit attributable to Kingsoft’s to reduce accordingly.
In addition, Kingsoft has also announced its subscription of 31.94 million of Xunlei Series E preferred shares, representing 9.98% of the total shares that had been issued. These preferred shares were convertible at any time to Xunlei Series ordinary shares. The subscription was to strengthen Kingsoft’s Internet services penetration rate.
We believe that the market valuation of over 40x P/E of Kingsoft at the beginning of this year is indeed too high. Despite of supportive government policy for its software business and the high growth in Internet business, the revenue growth of Internet service in FY13, in partly due to a substantial increase in online sales for the Single Festival last year.
Besides, the market estimate on Kingsoft’s mobile Internet revenue was just over-optimistic. Given the recent market volatility, the out-performing stock last year dropped significantly recently, and investors begin to pay attention to the high valuation of IT stocks.
After re-examine the valuation, we estimate the 6-12 months target price for Kingsoft to be HK $ 21.42, which is 24 times of FY14 forecasted earnings and give rating as "neutral". This is calculated by the valuation HK $ 17.63 for operation and HK $ 3.79 for cash.
Source: Phillips
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