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Investor Notes - Phillip Securities (HK) Ltd
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5 Jul, 2019 (Friday)

It is the second largest interactive advertising company in terms of 2017revenue. With and increased market share from 7.2%in 2017 to 12% in the first half of 2018, it ranked second among all interactive advertising platforms. For the nine months ended September 30 2018, its interactive advertising was with 138.3 million MAUs, 268.8 millions click-through, 29.3 click-through rate .Revenue of 2018 increased by 58.2% y.o.y. to RMB 352 million. The adjusted net profit increased by 77.8% y.o.y. to RMB 60.759 million.The size of China`s interactive advertising market grew by more than ten times in revenue from 2016 to 2017, and is expected to grow at a CAGR of 60.5% until 2022, accounting for 1.2% of the total mobile advertising market and being one of the most fast-growing advertising forms.
Buy-in Price: $ 0.51, Target Price: $ 0.60, Cut Loss Price: $0.40

ETFMG Prime Mobile Payments ETF ( IPAY )
ETFMG Prime Mobile Payments ETF is the first and only ETF to track the performance of the mobile payment industry, with market cap of approximately USD 337.64 million and expense ratio of 0.75%. IPAY ETF passively tracks the performance of the Prime Mobile Payments Index. Some of the top 10 holdings include MasterCard Inc., Visa Inc., Square Inc., PayPal Holding Inc. and Adyen NV. IPAY ETF is a thematic ETF which enables investors to capitalize on the shift from credit card & cash transactions to digital & electronic. There are several factors supporting the growth of the industry. First, the penetration rate of smartphones has increased greatly over the past few years due to affordable prices for customers. With the evolving global 4G connection, thousands of smartphone users can make electronic payment conveniently. Besides, the adoption rate of mobile payments in emerging market is huge. Particularly, consumers in china embrace mobile payments at a faster rate than rest of the world According to a PWC report, the current share of Chinese Internet users making mobile digital payments is about 68 % compared to that of the US ( about 15% ). Chinese consumers appreciate the convenience from mobile payment and don`t concern its data privacy & security issue as the American consumers do. The explosive growth of global e-commerce business helps promote the use of mobile payment as well. Not only online retail, it is expected that mobile payment will increase its penetration rate towards other areas of our daily life such as financial and healthcare area. According to Allied Market Research, the global mobile payments market reached $601.3 billion in 2016, and is expected to reach $4,573.8 billion by 2023, registering a CAGR of 33.8% from 2017 to 2023. Recommend to buy at USD 48, target price USD 56, cut loss if drop below USD 46.

Kingsoft(3888.HK) - Strong growth in cloud services; New mobile games may resume the growth in gaming

Investment Summary

Kingsoft is a leading Internet company in China, engaging into three major business segments: games, cloud computing and office software. The new mobile games are launched, which could help resume the growth in gaming revenue. Besides, the growth in cloud services was stronger than expected, becoming the major growth driver for the Group. We derived a TP of HK$21.24, and maintain a ¡§Buy¡¨ rating, with a potential upside of 22.8%.(Closing price at 3 Jul 2019)

First quarter results

The Group announced its first quarter results for 2019, where revenue was RMB 1.73 billion, a YoY increase of 37%, but a QoQ decline of 2%. Among them, the gaming revenue was RMB 600 million, down 5.2%; cloud service revenue was RMB 840 million, doubled YoY; while Office software and services and others were 290 million yuan, an increase of 35%. Gross profit margin decreased by 10.6% to 38.1%, mainly due to the increase in the proportion of businesses with lower gross profit margins.

New mobile games launched, resuming the growth in gaming

JX Online III mobile game was officially launched in June. According to¤C³Á¼Æ¾Ú, as of July 3, the cumulative download volume of IOS and Android platforms has reached 7 million. Although the ranking of the game on each platform has fallen, we believe that it is normal for the ranking to fall after the player's introduction period in the first week. We believe that with the huge number of players in JX Online III PC, we believe that the performance of the JX Online III mobile game will also be good. In addition, the JX Online II mobile game is also expected to be launched in the third or fourth quarter of 2019, which will drive the revenue of mobile gaming in the second half. In relation to PC gaming, the group introduced the professional league club for JX Online III PC to enhance the attribution of an e-sport and the group also began to enter Tencent wegame. We estimate that the revenue of PC gaming will remain stable. Due to the influence of the gaming industry policy, the Group's gaming revenue has declined in 2018 and the first quarter of 2019, but we believe that under the launch of new mobile games, gaming revenue is expected to rebound slightly in 2019.

Stronger than expected growth in cloud services

With the rapid growth of mobile video and the government customers, cloud services have grown strongly, surpassing the annual growth guidance from management, indicating that the new annual growth guidance has been raised from 60% to 70%. In addition, the management also indicated that the net loss of the cloud business has been improved better than expected, and the operating profit margin in the first quarter has risen. Kingsoft Cloud has also cooperated with China Construction Bank and China Merchants Bank to develop financial services. We expect cloud business to maintain rapid growth and become the major growth driver of the Group.

WPS may be listed on STAR board

WPS revenue fell by 23% QoQ, but management explained that this was mainly due to seasonal factors and it is believed that the growth will resume in the next quarter. The Group launched WPS Office 2019 for Linux Professional and WPS office for Mac in March and April respectively, which is expected to further target more users. At present, WPS has successfully transformed into subscription model, and about 75% of its revenue comes from subscription. We believe that this model will bring stable cash flow. The Group is also preparing to list WPS on Sci-Tech innovation board (STAR), which will help to reflect the value of this business more realistically.


Based on a P/E ratio of 35x (the average of the past forward P/E plus a standard deviation) in 2020, we derived a TP of HK$21.24 and maintain a ¡§Buy¡¨ rating , with a potential upside of 22.8%. (HKD/CNY=0.88)


1.Bad response from new mobile games

2.Lower than expected growth in cloud services

3.Lower than expected growth in the number of user in WPS


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Recommendation on 5-7-2019
Price on Recommendation Date$ 17.300
Suggested purchase priceN/A
Target Price$ 21.240
Writer Info
Terry Li
(Research Analyst)
Tel: +852 2277 6527

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