Kingsoft Office 1Q26 net profit significantly beat expectations due to investment income; Goldman Sachs maintains Neutral rating

Overview

This report is a company research update by Goldman Sachs on Kingsoft Office 688111.SS. It focuses on the WPS Office AI agent upgrade, WPS AI user base expansion, 1Q26 earnings beating expectations, and changes in valuation methodology. Goldman Sachs believes the company has AI monetization potential in ToC subscriptions, ToB industry solutions, and the WPS 365 platform, but conversion and monetization of new AI users still require time, and therefore maintains a Neutral rating.

Core views

The key views include: first, Kingsoft Office's 1Q26 revenue growth accelerated to 24% YoY, up from 17% in 4Q25 and 16% in 2025; second, the substantial 1Q26 net profit beat was mainly driven by one-off non-operating investment income, rather than entirely by operating profit; third, WPS AI MAU in China has exceeded 80m, and upgrades to the Lingxi/Office AI agent, AI knowledge graph, intelligent document library, and the iPad version of WPS AI should help expand user reach; fourth, Goldman Sachs raised its 2026E earnings forecast by 61%, but lowered its 2027E and 2028E earnings forecasts by 8% and 4%, reflecting lower revenue expectations and higher expense investment.

Analysis framework

The report analyzes the company using quarterly results, revenue growth by business segment, gross margin and operating margin, user scale, AI product progress, revisions to earnings forecasts, and DCF valuation. The valuation method was switched from the previous near-term P/E approach to a two-stage DCF to better reflect long-term free cash flow generation capability.

Methodology notes

• Valuation methodsTwo-stage DCF

  Target price calculation

  Goldman Sachs uses a two-stage DCF to calculate the Rmb326 target price, assuming 25% annual growth in stage-2 free cash flow from 2032E to 2036E, a terminal growth rate of 2%, and a WACC of 12.1%.

• Valuation benchmarkImplied P/S multiple

  Relative valuation cross-check

  The target price implies about 20x 2026E P/S, which lies between the company's 12-month forward P/S mean minus one standard deviation of 18x and the mean of 28x since January 2020.

• Factor analysisGS Factor Profile

  Growth, financial returns, valuation multiples, and composite percentile

  Goldman Sachs' factor framework compares individual stocks with the market and industry peers through growth, financial returns, valuation multiples, and composite indicators.

Asset mapping & comparison

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

• Kingsoft Office (688111.SS)

  Covered stock; A-share software and office productivity company

  Strengths

  Rapid WPS AI user growth, strong revenue growth from the WPS 365 platform, gross margin remaining at a high level, and AI agents and industry solutions enhancing product competitiveness.

  Weaknesses

  The 1Q26 net profit beat was mainly driven by one-off investment income; operating profit missed expectations; monetization of new AI users still requires time, and subsequent expense investment may pressure earnings.

  Comparison

  The target price implies about 20x 2026E P/S, between the historical 12-month forward P/S mean minus one standard deviation of 18x and the mean of 28x.

  Risks

  The transition to the membership system, ToB customer adoption, and the pace of AI monetization could all be slower or faster than expected.

Key data

• 1Q26 RevenueRmb1.613bn, YoY +24%6% above Goldman Sachs forecast and 3% above consensus.
• 1Q26 Net ProfitRmb2.195bn, YoY +445%315% above Goldman Sachs forecast and 425% above consensus, mainly driven by one-off investment income.
• 1Q26 Gross Margin86.6%Largely flat versus 86.9% in 4Q25.
• WPS AI China MAUMore than 80mAs of end-2025, up 307% YoY.
• WPS AI daily token usageMore than 200bnManagement said AI users continued to expand in 1Q26.
• 2026E Net Profit RevisionRaised by 61%Mainly due to one-off non-operating investment income.
• 2027E/2028E Net Profit RevisionLowered by 8%/4%Mainly due to lower revenue forecasts and higher operating expense investment.
• Target PriceRmb326Previously Rmb346; based on DCF methodology.
• Current Price and UpsideRmb249.12; 30.9%Price as of the close on April 24, 2026.

Impact & implications

The report is positive on Kingsoft Office's long-term AI monetization, but its short-term investment implication is more neutral: the quality of the 1Q26 profit beat was affected by one-off investment income, and operating profit was below Goldman Sachs forecasts and consensus expectations; improvements in WPS AI user scale and product capabilities support long-term revenue upside, but the pace of monetization, expense investment, and ToB customer adoption remain key to valuation re-rating.

Risks

• A slower-than-expected or faster-than-expected transition to the new membership system could affect the pace of subscription revenue.
• Slower-than-expected or faster-than-expected ToB customer adoption could affect growth in WPS 365 and industry solutions.
• Slower-than-expected or faster-than-expected AI monetization could affect revenue growth, expense investment, and valuation.
• The sharp 1Q26 net profit beat included one-off non-operating investment income, with limited sustainability.

What to watch

• Whether WPS AI MAU, engagement, and token usage can continue to grow.
• The impact of the Lingxi/Office AI agent upgrade on productivity scenarios and paid conversion.
• Customer adoption and ARPU changes for the WPS 365 platform and ToB industry versions.
• Whether revenue growth in 2027E-2028E validates Goldman Sachs' view that AI monetization still needs time.
• The impact of operating expenses, especially R&D and sales investment, on operating margin.