Kingsoft Q1 Net Profit Surges 284%; Buy Rating Maintained

Overview

Nomura released an earnings commentary on Kingsoft’s Q1 2026 results. The report notes that revenue grew only modestly by 3%, weighed down by gaming weakness, though this was partially offset by robust 25% growth in the software segment. Net profit soared 284% year-over-year, primarily due to a sharp turnaround in profits from associate companies (notably Xiaomi Group), which swung from a loss in the prior-year period to substantial gains. Despite near-term headwinds in gaming—stemming from aging titles and a lack of new releases—Nomura continues to assign a 'Buy' rating and HKD 51 target price using a sum-of-the-parts (SOTP) valuation methodology. The firm believes the current share price already reflects pessimistic expectations and sees long-term potential in the software business’s integration with AI.

Core views

Gaming remains under pressure, with meaningful contributions from new titles expected only in the second half of the year. Online gaming and other business revenue declined 22% YoY and 7% QoQ in Q1, extending the downward trend. Management noted that some existing flagship titles (e.g., 'Boundary Breaker') have underperformed, while new games are not expected to meaningfully contribute until Q4 2026 or FY2027. As such, the gaming segment will likely face continued challenges over the next 1–2 quarters. Additionally, sustained investment in upcoming game titles pressured gaming gross margin, which fell 2.2 percentage points YoY to 79.9%. The software segment emerged as the primary growth engine, with a clear AI-enhancement strategy. Office software and services revenue rose 25% YoY (down 8% QoQ due to seasonality), with stable gross margins. Management explicitly stated that the trend toward Agentic AI will not disrupt the company’s business model; instead, Kingsoft plans to leverage Agentic AI to enhance product functionality, improve user experience, and boost willingness to pay. This stance alleviates market concerns about AI potentially disrupting traditional software monetization models. Net profit surge driven by non-operating associate gains. Q1 net profit reached RMB 1.091 billion, up 284% YoY. This dramatic increase was largely attributable not to core operational improvements but to a RMB 1.83 billion profit share from associates and joint ventures, compared to a RMB 123 million loss in the same period last year. This highlights Kingsoft’s role as an investment holding platform, with earnings significantly influenced by its stakes in companies like Xiaomi and Cheetah Mobile. Meanwhile, operating profit declined 34% YoY due to restructuring costs, higher marketing expenses, and increased AI R&D spending.

Analysis framework

Nomura employs a sum-of-the-parts (SOTP) valuation approach—a standard method for diversified holding companies—to value Kingsoft. The firm breaks Kingsoft into four segments: Kingsoft Office, Kingsoft Cloud, online gaming, and Cheetah Mobile, valuing each separately before aggregating and applying a holding discount plus net cash adjustments. Specifically, Kingsoft Office is valued via DCF at RMB 57 billion on a consolidated basis, adjusted for a 32% A/H share discount. Kingsoft Cloud is valued at RMB 11.5 billion via DCF. The online gaming segment is valued at RMB 14.8 billion using a 10x P/E multiple on 2026E EPS. Cheetah Mobile is valued based on its latest market capitalization. A 40% holding company discount is then applied across all segments, followed by the addition of net cash, yielding the final target price. This methodology better captures the distinct growth trajectories and risk profiles of each business unit, avoiding distortions from applying a single valuation multiple.

Methodology notes

• Valuation MethodSOTP Valuation

  Sum-of-the-Parts (SOTP) Valuation

  Treats different business segments (e.g., gaming, software, cloud) as independent entities, applying the most appropriate industry-specific valuation methods (e.g., DCF, P/E) to each, then summing them and deducting a holding discount. Ideal for diversified conglomerates with heterogeneous business lines.

• Valuation MethodDCF Discounted Cash Flow

  DCF Model

  Forecasts future free cash flows and discounts them to present value using an appropriate discount rate. Used here to assess the intrinsic value of Kingsoft Office and Kingsoft Cloud, which exhibit stable or high-growth potential.

• Company Fundamentals & Financial Framework

  Associate Company Profit Share Analysis

  When analyzing holding-structure or ecosystem-based internet firms, it is essential to isolate the impact of 'share of profits from associates and joint ventures' on net income to distinguish core operational performance from investment-related gains or losses, thereby avoiding misinterpretation of underlying profitability due to large, non-recurring investment income.

Asset mapping & comparison

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

• Kingsoft Corporation (3888.HK)

  Primary coverage subject; benefits from software growth and associate profit inflows

  Strengths

  Strong software growth; clear AI-enhancement narrative; substantial associate profit contribution; undemanding valuation

  Weaknesses

  Gaming in a downturn cycle with a prolonged new-title gap; operating profit pressured by rising expenses

  Risks

  New games underperform expectations; softening IT spending on office software; slower-than-expected margin improvement at Kingsoft Cloud

Key data

• Q1 RevenueRMB 2.417 billionUp 3% YoY, down 8% QoQ
• Online Gaming RevenueRMB 803 millionDown 22% YoY, down 7% QoQ
• Software Business RevenueRMB 1.613 billionUp 25% YoY, down 8% QoQ
• Operating ProfitRMB 395 millionDown 34% YoY due to restructuring, marketing, and AI R&D expenses
• Net ProfitRMB 1.091 billionUp 284% YoY, primarily due to RMB 1.83 billion profit contribution from associates
• Gaming Segment Gross Margin79.9%Down 2.2 percentage points YoY

Impact & implications

The report argues that although short-term gaming weakness has dampened overall revenue growth, the resilient expansion of the software business demonstrates its counter-cyclical strength. AI integration is viewed as an enhancement—not a threat—to the software model, supporting long-term competitiveness. The substantial rebound in associate company profits provided a cushion for Q1 earnings, though investors should note the volatility inherent in such non-operating items. The maintained 'Buy' rating reflects the view that the current share price of around HKD 21 significantly undervalues the company, as it overstates pessimism around gaming while overlooking the intrinsic value of the software business and potential asset revaluation opportunities.

Risks

• Underperformance of newly launched games
• Weakening IT spending on office software and slow AI monetization
• Slower-than-expected margin recovery at Kingsoft Cloud (KC), impacting overall profitability

What to watch

• Revenue contribution from new game launches in Q4 2026
• Effectiveness of Agentic AI implementation in office software and user conversion to paid tiers
• Progress in Kingsoft Cloud’s marginal margin improvement