Investment Highlights

1. One-sentence logic

Kingsoft Office is a leading domestic office software, and with the entrance of WPS card slot office scenarios, with WPS Lingxi accessing the DeepSeek R1 large model, the commercialization of the company's AI application is expected to exceed expectations. As of June 30, 2024, the number of monthly active devices of Kingsoft Office's main products was 602 million, and the cumulative number of annual paying individual users was 38.15 million.

Second, the logic of exceeding expectations

Market expectations: the company mainly benefits from the trend of localization of office software under the trend of information and innovation, and the current penetration rate of office software such as WPS has been high, and it is difficult for products to have exponential growth space.

We believe that Deepseek, as an open-source leading AI model, has greatly promoted the penetration and rich application of China's AI industry, and is China's "GPT moment", so the degree of benefit of Chinese AI application companies may exceed the stage of GPT3.5 in 2023, and Kingsoft Office, as the office counterpart of the four major AI applications (office, finance, medical care, and education), has a use scenario that gives better play to Deepseek's text capabilities, which is expected to promote WPS The AI experience is complete. At present, WPS has successfully connected to DeepSeek R1, and users can directly ask questions in the input box. Lingxi is a super entrance to WPS that includes AI network search, AI reading, AI writing, AI summarizing, AI making PPT and other functions.

On the one hand, with the support of the chain of thought, the R1 model has the ability of logical reasoning and task disassembly, which can better understand user needs and perform tasks more autonomously, which is expected to bring users a more intelligent experience in office scenarios such as text writing, proofreading, and data collation, and improve users' willingness to pay. On the other hand, the R1 large model is free and open-source, with only 660B parameters in the full-blood version, and there is also a distilled version of 1.5B-70B, which lowers the threshold and cost for AI application manufacturers to obtain and use large models, and the company is expected to provide users with more AI use experiences at a lower price, thereby promoting the popularization of AI large model functions. In addition, DeepSeek has a high popularity in the world, and Kingsoft Office is expected to expand the global market after connecting to DeepSeek.

3. Test indicators and catalysis

1. Test indicators: the company's MAU, the number of AI product users, the number of overseas users, the payment rate, and the ARPU value; The company's revenue growth, gross profit margin, net profit margin and other profitability indicators.

2. Possible catalysts: the progress of domestic basic large models, the launch of new functions based on DeepSeek models in applications such as WPS, and the reduction of AI inference costs.

4. Research value

1. Unique understanding: The market believes that Kingsoft Office AI large model technology is not leading, and it is impossible to establish technical barriers based on AI. We believe that the company's products are mainly for personal applications, with user minds and word-of-mouth building the core moat, and AI can increase market capacity. The progress of the basic large model has led to the improvement of users' willingness to pay and the enrichment of application scenarios, and office software is an important entrance and indispensable tool for personal office.

2. Different understanding from before: The launch of the DeepSeek R1 large model has led to the popularization of the application of large models with thinking ability, and the popular large models on the market have shallow thinking level, or although they have the ability to think but the service is expensive, so in the past, it was mainly believed that AI large models will be the first to be applied to scenarios with relatively limited accuracy requirements such as customer service, copywriting, and image generation. With the open source of R1, the thinking of the basic large model is more organized and clear, and it is expected that the "assistant" who completes the basic work will be transformed into an "agent" who understands the user's intentions and performs the task autonomously in the office scenario.

This will greatly enrich the functions of AI applications and enhance the value of AI applications.

Profit forecast and valuation

It is estimated that the company's operating income in 2024-2026 will be 52.44, 64.51 and 7.925 billion yuan, a year-on-year increase of 15.11%, 23.01% and 22.84%; The net profit attributable to the parent company was 15.49, 18.55 and 2.369 billion yuan, a year-on-year increase of 17.58%, 19.74% and 27.71%. The company's 2025 PE corresponds to 93x, maintaining a "buy" rating.

Risk Warning: The

commercialization of AI products is less than expected, the progress of AI technology is less than expected, the advancement of information innovation is less than expected, and the risk of intensified market competition.