Kingsoft Corp: AI Ecosystem Synergies Gradually Taking Shape, Gaming Business Showing Initial Stabilization

Overview

The report summarizes Kingsoft Corp's 2Q26 earnings call. Its core view is that although the gaming business weighed on overall operating profit and caused a slight earnings shortfall, gaming revenue has shown signs of sequential stabilization. Meanwhile, AI synergies between Kingsoft and the Xiaomi ecosystem across chips, computing power, models, and the application layer are becoming clearer, with WPS's vertical agent Lingxi emerging as an important implementation point. Morgan Stanley believes these developments do not yet alter its existing view and maintains its Equal-weight rating and HK$30.00 target price.

Core views

Regarding the earnings reaction, Morgan Stanley characterized the 2Q26 results as a "slight miss," but believes the impact on its existing view is unchanged, while the direction of consensus EPS estimates over the next 12 months also remains broadly unchanged. The main shortfall came from the gaming business: gaming revenue declined 15% year over year and was 5% below Morgan Stanley's expectation, causing overall second-quarter operating profit to come in slightly below its forecast. However, gaming revenue increased 1% quarter over quarter, the first positive sequential growth since 3Q24. The report therefore believes the business has shown initial signs of stabilization. The decline in gaming revenue was driven more by monetization issues than by user attrition. Management stated that JX3's relatively dated graphics weakened spending performance, while approximately 90% of its revenue comes from cosmetic skin sales. At the same time, JX3 monthly active users remain highly stable compared with 2023–2024 levels. The company is revamping JX3's graphics engine, with a comprehensive upgrade expected to be completed in 2027, and hopes to use it to reinvigorate monetization. Goose Goose Duck is also entering a phase of stable operations, with commercialization to proceed gradually. Accordingly, the report's logic is that the stable user base preserves the conditions for revenue recovery following product upgrades, but the gaming business will remain a source of near-term earnings pressure until the new graphics and commercialization measures are implemented. The AI strategy centers on layered collaboration between Kingsoft and the Xiaomi ecosystem. The division of responsibilities across the technology stack outlined in the report is as follows: Xiaomi is responsible for chips, Kingsoft Cloud provides computing power, MiMo provides AI models, and Kingsoft Office and the gaming business support application-layer use cases, while Kingsoft Corp and Xiaomi are increasingly playing strategic roles in connecting the entire ecosystem. Specific investments are concentrated in four areas: advancing WPS AI product innovation and user acquisition; embedding AI throughout the entire game development and operations process; expanding Kingsoft Cloud's intelligent computing power and enterprise AI capabilities; and strengthening cross-product synergies. Morgan Stanley expects collaboration among Kingsoft, Xiaomi, and their related businesses to continue deepening, while management continues to emphasize maintaining a balance between AI investment and shareholder returns. In office productivity scenarios, Lingxi is viewed as an important pillar of Kingsoft Office's AI strategy. Management believes that AI may evolve from general-purpose platforms into vertical, domain-specific agents, just as the PC internet and mobile internet did. Therefore, Lingxi does not directly compete head-on with the comprehensive enterprise AI portals launched by major internet platforms. Instead, it is positioned as a document-native agent for collaborative content creation, differentiating itself through WPS's understanding of document workflows and user intent. The company deliberately limited the scale of early commercial access to test model performance, user behavior, and computing requirements. Initial users showed high engagement and substantial Token consumption, and the company plans to expand access by approximately 10 times in the next phase. The financial model shows net revenue of RMB9,683 million, RMB10,536 million, RMB12,326 million, and RMB13,892 million for 12/25, 12/26e, 12/27e, and 12/28e, respectively; EBITDA of RMB1,778 million, RMB2,022 million, RMB2,890 million, and RMB3,351 million, respectively; and ModelWare net income of RMB2,004 million, RMB2,386 million, RMB1,699 million, and RMB2,254 million, respectively. The two EPS series in the original table are RMB1.48, RMB1.74, RMB1.23, and RMB1.61, and RMB1.16, RMB1.42, RMB1.24, and RMB1.51, respectively. P/E multiples for the same periods are 17.3x, 12.6x, 17.9x, and 13.6x, respectively, while EV/EBITDA multiples are 18.3x, 12.7x, 8.3x, and 6.4x, respectively. These forecasts indicate continued revenue and EBITDA growth, although the paths of net income and EPS are not linear. The target price is based on a sum-of-the-parts valuation: online gaming is valued at 10x 2026e P/E; WPS uses a DCF with assumptions of a 9.8% WACC and a 3% perpetual growth rate; and Kingsoft Cloud is valued at 5.5x 2026e EV/EBITDA, incorporating Kingsoft's 32.9% equity stake. A 50% holding-company discount is then applied, using a spot USD/RMB exchange rate of 6.8. The report ultimately assigns an Equal-weight rating and a target price of HK$30.00, compared with the listed price of HK$25.56 on August 19, 2026. Upside scenarios listed in the report include: product upgrades driving a recovery in gaming revenue growth; government policy support or higher budgets for nationwide office software installations and cloud adoption; and the disposal of listed investments lacking substantive synergies with the core business. Downside risks include slower-than-expected progress in localization tenders and delivery, as well as a failure to further improve the WPS paid conversion rate.

Analysis framework

The report first compares the 2Q26 results with Morgan Stanley's expectations and consensus forecasts, then uses year-over-year, quarter-over-quarter, and user metrics to determine whether the gaming revenue decline resulted from user attrition or weaker monetization. It subsequently breaks down AI ecosystem synergies across chips, computing power, models, and the application layer, and evaluates progress in office AI based on Lingxi's product positioning, testing approach, and expansion plan. Finally, it combines ModelWare financial forecasts with a sum-of-the-parts valuation to aggregate the values of online gaming, WPS, and Kingsoft Cloud, incorporating a holding-company discount and exchange-rate assumptions.

Methodology notes

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Decomposition of User Scale and Monetization Capability

  The report decomposes the decline in JX3 revenue into user and monetization dimensions: monthly active users remained stable, while aging graphics weakened monetization primarily driven by cosmetic skin sales, leading to the conclusion that current pressure is not mainly caused by user attrition.

• Valuation MethodSOTP Valuation

  Sum-of-the-Parts Valuation

  The report separately assesses the values of online gaming, WPS, and Kingsoft Cloud, then incorporates the ownership stake, a 50% holding-company discount, and a USD/RMB exchange rate of 6.8 to derive the company's overall target price.

• Valuation MethodPE/PEG valuation

  Online Gaming P/E Valuation

  The online gaming business is valued at 10x 2026e P/E, measuring the segment's value by multiplying forecast earnings by the corresponding price-to-earnings multiple.

• Valuation MethodDCF Valuation

  WPS Discounted Cash Flow Valuation

  WPS is valued using a DCF with a 9.8% weighted average cost of capital and a 3% perpetual growth rate, discounting future cash flows to their present value.

• Valuation MethodEV/EBITDA valuation

  Kingsoft Cloud EV/EBITDA Valuation

  Kingsoft Cloud is valued at 5.5x 2026e EV/EBITDA, with the segment value incorporated based on Kingsoft's 32.9% equity stake.

• Company Fundamentals and Financial Framework

  Morgan Stanley ModelWare Framework

  The report uses the Morgan Stanley ModelWare framework to develop forecasts for revenue, EPS, EBITDA, net income, and valuation multiples, comparing the results with consensus expectations and actual second-quarter performance.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Kingsoft Corp Ltd (3888.HK)

  The report focuses on the stabilization of its gaming business, progress in WPS's vertical AI agent, and AI synergies with the Xiaomi ecosystem.

  Strengths

  JX3 monthly active users remain stable; the business spans gaming, office software, and cloud computing applications; and the AI ecosystem has a foundation for synergies across chips, computing power, models, and the application layer.

  Weaknesses

  2Q26 gaming revenue declined 15% year over year and was 5% below Morgan Stanley's expectation, with gaming weakness causing overall operating profit to come in slightly below expectations; Lingxi commercialization remains in a limited-access testing phase.

  Comparison

  Although gaming revenue declined year over year and missed Morgan Stanley's expectation, it increased 1% quarter over quarter, marking the first positive growth since 3Q24; the direction of consensus EPS estimates over the next 12 months remains broadly unchanged.

  Risks

  Downside risks include slower-than-expected localization tenders and delivery, as well as a failure to further improve the WPS paid conversion rate.

Key data

• 2Q26 Gaming Revenue GrowthYoY -15%, QoQ +1%5% below Morgan Stanley's expectation; the first positive sequential growth since 3Q24.
• Share of JX3 Revenue from Cosmetic Skin SalesApproximately 90%The report therefore believes aging graphics have had a significant impact on monetization, while monthly active users remain stable.
• Comprehensive JX3 Graphics Engine UpgradeExpected in 2027The company hopes to reinvigorate gaming monetization through the upgrade.
• Lingxi Access Scale in the Next PhaseApproximately 10x expansionEarly access was deliberately limited to test the model, user behavior, and computing requirements.
• Net RevenueRMB9,683/10,536/12,326/13,892 millionCorresponding to 12/25, 12/26e, 12/27e, and 12/28e, respectively.
• EBITDARMB1,778/2,022/2,890/3,351 millionCorresponding to 12/25, 12/26e, 12/27e, and 12/28e, respectively.
• ModelWare Net IncomeRMB2,004/2,386/1,699/2,254 millionCorresponding to 12/25, 12/26e, 12/27e, and 12/28e, respectively.
• Two EPS SeriesRMB1.48/1.74/1.23/1.61; RMB1.16/1.42/1.24/1.51Corresponding to 12/25, 12/26e, 12/27e, and 12/28e in the order shown in the original table.
• P/E17.3/12.6/17.9/13.6xCorresponding to 12/25, 12/26e, 12/27e, and 12/28e, respectively.
• EV/EBITDA18.3/12.7/8.3/6.4xCorresponding to 12/25, 12/26e, 12/27e, and 12/28e, respectively.
• Core SOTP AssumptionsGaming at 10x 2026e P/E; WPS WACC of 9.8% and perpetual growth rate of 3%; Kingsoft Cloud at 5.5x 2026e EV/EBITDAKingsoft Cloud is included based on a 32.9% ownership stake, with an additional 50% holding-company discount and a USD/RMB exchange rate of 6.8.
• Rating and Target PriceEqual-weight; HK$30.00The listed share price on August 19, 2026 was HK$25.56.

Impact & implications

The report believes that JX3's stable user base indicates that the gaming problem is mainly concentrated on the monetization side, and the 2027 graphics upgrade could become a key milestone for restoring revenue growth. In AI, Kingsoft is not relying solely on a single product; rather, it is attempting to create comprehensive synergies through Xiaomi's chips, Kingsoft Cloud's computing power, MiMo's models, and WPS and gaming applications. Lingxi's vertical document positioning also provides a path differentiated from general-purpose enterprise AI portals. However, commercial access to AI remains in the testing phase, and the gaming recovery has yet to fully materialize, so the report maintains its Equal-weight rating.

Risks

• Upside risk: New product upgrades may drive a recovery in gaming revenue growth.
• Upside risk: Government policy support or increased budgets for nationwide office software installations and cloud adoption may improve business performance.
• Upside risk: Disposing of listed investments lacking substantive synergies with Kingsoft's core business may unlock value.
• Downside risk: Localization tenders and delivery progress may be slower than expected.
• Downside risk: The WPS paid conversion rate may fail to improve further.

What to watch

• Monitor the progress of the JX3 graphics engine revamp and whether the comprehensive upgrade in 2027 can improve monetization from cosmetic skin sales.
• Monitor whether gaming revenue can sustain its sequential stabilization and the performance of Goose Goose Duck's gradual commercialization.
• Monitor user engagement, Token consumption, model performance, and computing requirements after Lingxi's approximately 10x expansion in the next phase.
• Monitor whether synergies among Kingsoft, Xiaomi, and related businesses across chips, computing power, models, and the application layer continue to deepen.
• Monitor the balance between AI investment and shareholder returns, as well as changes in localization tenders, delivery, and the WPS paid conversion rate.