KINGSOFT Maintains Outperform Rating but Sees Target Price Cut to HK$32

A research report maintains an Outperform rating on KINGSOFT (03888) but has lowered its target price by 18% to HK$32, implying a 28x price-to-earnings ratio for 2026. This adjustment reflects uncertainties in the near-term growth of the company's gaming segment. KINGSOFT currently trades at a 2026 P/E multiple of 21x, suggesting a 35% potential upside.

Based on more cautious assumptions for the gaming business, the 2026 revenue forecast has been reduced by 7.1% to RMB 10.14 billion. However, considering the potential recognition of investment gains, the 2026 net profit attributable to shareholders has been raised by 26.8% to RMB 1.42 billion. Initial forecasts for 2027 project revenue of RMB 11.34 billion and net profit of RMB 1.01 billion.

The report follows KINGSOFT's fourth-quarter 2025 results, which showed revenue of RMB 2.62 billion, a decrease of 6.2% year-on-year, aligning with market expectations. Operating profit was RMB 514 million, down 53.5% year-on-year but exceeding market forecasts, primarily due to better-than-expected profit contributions from the office software business.

In the office segment, fourth-quarter revenue grew 16.6% year-on-year and 15.1% quarter-on-quarter, with all three core business units showing growth. Conversely, the gaming business reported a 32.8% year-on-year and 3.3% quarter-on-quarter decline in revenue, attributed to a high comparative base from the previous year and a drop in revenue from existing games.

The quarterly operating profit margin was 19.6%, down 20.0 percentage points year-on-year but up 8.2 percentage points quarter-on-quarter. The annual decline was mainly due to increased investment in AI and higher promotional marketing expenses. The net profit margin attributable to shareholders reached 37.2%, increasing by 20.8 percentage points year-on-year and 28.4 percentage points quarter-on-quarter, largely driven by a one-time deemed disposal gain from a placement of shares in Kingsoft Cloud Holdings Ltd.

The game "Goose Goose Duck" officially launched in January 2026, accumulating over 30 million new users and topping the iOS free chart for two consecutive months. Looking forward, management indicated plans to continue investing in flagship IPs, moderately scale back some projects, and deepen the application of AI in game development. For the first quarter of 2026, the office business revenue is expected to maintain robust double-digit growth, while near-term pressures on the gaming business are likely to persist.