KINGSOFT CORP(3888.HK)：OFFICE AND CLOUD CHART A RECOVERY PATH

Core Viewpoint - Kingsoft's 3Q25 results showed significant misses in both top and bottom lines, primarily due to a weak gaming business, while the Office segment demonstrated robust growth, indicating potential investment opportunities in the latter despite overall challenges in the gaming sector [1][2]. Financial Performance - Revenue for 3Q25 declined 17% YoY to RMB2.4 billion, missing expectations by 11% and 8% respectively, largely due to a 47% YoY drop in gaming revenue, partially offset by a 26% YoY increase in Office revenue [2]. - Gross profit margin (GPM) remained flat, while operating profit margin (OPM) decreased by 5.1 percentage points QoQ, primarily due to increased sales expenses related to online game promotions [2]. - Net income fell 48% YoY, missing estimates by 26-55% [2]. Office Segment Performance - The Office segment's revenue growth was driven by strong localization project orders for WPS (+51% YoY), expansion of the customer base for WPS 365 (+72% YoY), and an increase in paying subscribers for WPS individual (+11% YoY) [3]. - GPM and OPM for the Office segment increased by 2.4 percentage points and 3.3 percentage points QoQ, respectively, reflecting successful price increases and effective operational leverage [3]. Gaming Business Challenges - The gaming segment's revenue missed expectations by 32%, attributed to the lifecycle decline of older IP games and weaker performance from recent launches [4]. - Kingsoft plans to introduce two international IP games in the upcoming quarters to revitalize the gaming segment [4]. - Revenue estimates for 2026/27 for the gaming segment have been cut by 25% and 22% respectively, considering lower margins and increased costs [4]. Future Outlook - Continued strong performance is expected from the Office segment, supported by robust demand in 2026/27, low penetration rates in the 2B segment, and potential for increased average revenue per user (ARPU) from the domestic user base of 668 million [5]. - Anticipated recovery in the Cloud segment is driven by growing AI demand and increased contributions from Xiaomi [5]. - The stock rating has been upgraded from HOLD to BUY with a new target price of HK$40.0, reflecting an attractive risk-reward scenario after a prolonged correction [1][6].