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Analysis EO
Analysis · 2
report
Analysis EO
Jul 24, 2020 09:55 am ·

The Story of Kingsoft, a ‘Chinese Microsoft’

In the early years, the software industry’s prosperity relied on the penetration rate of personal computers (PCs). While Apple started to sell PCs in the United States during the 1970s, PCs only appeared almost a decade later in China. Prior to the 1980s, there was no software development for PCs in mainland China. Though PCs were as expensive as one Chinese household’s annual earnings in the late 1980s, the presence of the devices precipitated the birth of the software industry there. In 1988, Kingsoft was founded in Shenzhen. As one of the oldest software companies in China, Kingsoft (03888:HKEX) plays a key role in software development in the PRC. The company made its name known to the public through the office software Word Processing System 1.0 (WPS 1.0), developed by the founder Qiu Bojun (求伯君) in 1989. After thirty years, Kingsoft has grown to a giant family composed of different types of software companies: Cheetah Mobile (CMCM:NYSE), Kingsoft Office (688111:SH), Seasun Entertainment and Kingsoft Cloud (KC:NASDAQ). Below, we describe key phases of the company’s development, touching on its corporate strategy shift. Qiu’s time, WPS’ era: 1989 – 1998 Crowned the Chinese No.1 Programmer, Qiu Bojun is the father of WPS 1.0, which upgraded to WPS Office (Word, Presentation, Spreadsheet). There is a legendary story saying that he coded the whole of WPS 1.0 in a Shenzhen hotel within a year ­– a well-known anecdote in the Chinese IT world. Undeniably, he set a solid foundation for Kingsoft in China. Qiu served as CEO at Kingsoft for the first ten years of the company. The company was originally an echo of Hong Kong Kingsun company in mainland China. Kingsun was a PC manufacturing company owned by Zhang Xuanlong, namely the Godfather of Zhongguancun. While Hong Kong Kingsun was merged with Founder Group (00418:HKEX) in 1994, Kingsoft became independent and set the headquarters in Beijing, which is a Hong Kong-listed entity. Before Microsoft Office (MSO) broke into China’s market, Kingsoft-developed WPS (Word Processing System) had swallowed 90% of the market share in China during the early 1990s. Prior to WPS, China’s virtual world development had lagged behind the West and document processing software in the Chinese language was a blank. WPS filled the empty space and made Kingsoft a great success. Hit by Microsoft Office and software piracy As the software market grew rapidly in the 1990s, the importance of protecting intellectual properties failed to catch up with the industry development. Software piracy had nearly crushed the budding software industry in China when floppy disks and CDs made the piracy market available. This piracy caused great losses to software developers and urged them to speed up development to run ahead of pirated products. Plus, with Microsoft Office’s presence in China, WPS’ market share sharply shrank, and revenue during the mid-1990s slumped. Lei Jun, who was later the CEO and currently the Chairman of Kingsoft Software and Xiaomi Group (01810:HKEX), joined Kingsoft in 1992 and he led most Kingsoft projects at the time. Shortly after his joining, MSO bundled with Windows 95 started to take over the text processing market and Kingsoft and other China’s software companies were forced to compete with Microsoft face-to-face. Overshadowed by the aggressive competitor, Kingsoft bet on its Pango Office kit heavily and released the product in 1996 to fight against MSO. However, the product failed to meet the target – Kingsoft fell in a muddy puddle and struggled towards what seemed to be a last breath. Three years of development, millions of yuan burned (at the time, CNY 200,000 could buy a 2B1B apartment in Beijing), the massive input dragged Kingsoft to the edge of bankruptcy – Pango sold fewer than 10,000 kits. In Lei’s biography, he described the dark period, “In a year, I lost my dreams.” To improve the situation, Kingsoft successively developed a series of products, from tool software to PC games: dictionary product iciba, antivirus software Kingsoft Antivirus, game Sword Heroes Fate series and so on. Meanwhile, WPS as a flagship product was upgraded to WPS 97. However, the product gained some market share – but it was far from its peak. Adding the damage from pirated software, the product release failed to bring the company back to its former heights. At the same time, Qiu had gradually eased away from the manager role of Kingsoft during the late 1990s, and Lei Jun stepped up to be the general manager. Lei’s time, product matrix formed: Post-1998 In 1998, Lenovo invested USD 4.5 million in Kingsoft. At the same time, Lei Jun was assigned the general manager, and Qiu intended to leave the power center. Lei transited from a software development engineer to a corporate management role and started his service until Kingsoft’s IPO in Hong King Exchange. Qiu set WPS as the foundation of Kingsoft’s business and Lei diversified the tone of the foundation – office software, gaming and cloud services. In 1999, Lei launched the Red Genuine Storm (RGS) strategy, advocating for using genuine software product, and created joyo.com, one of the earliest e-commerce marketplaces in China. Late 1990s: Red Genuine Storm (RGS) The RGS served for the purpose to strike software piracy market. In 1998, PC’s penetration rate in China was 8.9 per 1,000 people, while the US the number is 568.6. Given such a low PC penetration rate, the prevalence of pirated software severely crashed China’s software companies’ profitability. From an interview with Lei, he disclosed that there were over 5 million iciba dictionary users but the company had sold only 60 thousand genuine copies in the 1990s. Propagandizing RGS, Kingsoft lowered its software price by more than 80% and the marketing event brought the company a sales record. Nevertheless, software piracy and MSO’s presence continuously squeezed Kingsoft’s market share. 1999 – 2004: Joyo.com Spun off from Kingsoft, Joyo.com was the most successful e-commerce platform in China before Taobao’s rise. Joyo.com started by mimicking Amazon: limited varieties of SKUs but best sellers with a price advantage featured. The strategy succeeded initially but it was easy for followers to copy. At the time, other China’s e-commerce companies like 8848 and Dangdang (DANG:NY) swiftly adopted similar strategy and the competition turned white-hot. In the early days, China’s Internet scalers were money-eating machines: if you want to scale, burn cash. The money burning game did not last long. Joyo.com became the M&A target of Amazon when the American e-commerce giant touched down in the Chinese market in 2004. The site was acquired by Amazon at USD 75 million for 80% of shares in 2004, one year prior to the release of Kingsoft’s flagship product WPS 2005. Flagship product: WPS WPS has been upgraded four times – WPS 2005 was an early milestone in its development. Lei led the re-launch of WPS and WPS 2005 was selected in China’s National 863 Program (see FT’s coverage on the Program). The new version of WPS has a similar user interface to MSO, which lowers the conversion cost for users to switch between WPS and MSO. Instead of targeting the individual market, WPS initially eyed enterprises, government and overseas clients and then extended its reach to consumer markets. In the same year WPS 2005 released, Kingsoft established the overseas joint venture Kingsoft Japan and started to promote WPS’ Japanese version. Comparing MSO’s price, WPS is in an advantageous position, since it can satisfy document processing needs. Along with the publication of free versions for individual users, WPS started to regain its Chinese market share and the scale yielded a foundation for Kingsoft Office (688111:SH) to spin off and go public in 2019. New pillar: Gaming The iconic gaming series Sword Heroes Fate (SHF) series has contributed significantly to Kingsoft’s revenue. Created in 1995, SHF series has been upgraded from a standalone RPG (role play game) to an online MMORPG (massively multiplayer online role-playing game) and mobile game. If the launch of War of Warcraft represents a watershed moment for MMOPRG and the Western gaming world, JX Online 3 (the latest online PC game of SHF series) tells the best Chinese MMOPRG wuxia story. The first online version of SHF was launched in 2003 and the popularity brought its footprint to Southeast Asia, where Kingsoft set up its Malaysian arm in 2008. SHF to Chinese resembles Final Fantasy to Americans, and the game series even fostered a subculture of its own. The game’s massive fan foundation led to good-looking financials for Seasun, the owner of SHF, and for the parent company Kingsoft. In 2018, the gaming industry in China was impacted by the ‘Green Channel’ regulation, as the regulator halted new game approvals and pre-existing games’ situation was exacerbated as well. The gaming segment of Kingsoft, Seasun’s revenue declined immediately to CNY 2.6 billion in 2018 from its peak CNY 3.1 billion in 2017 and recovered slightly in the following year – but 2017 is still the best year of Seasun. Post-IPO: More IPOs company after serving as the CEO for nine years. Fu Sheng (傅盛), the successor of Lei replaced Lei’s role and he opened up the mobile world for Kingsoft. Fu Sheng led the establishment of Cheetah Mobile in 2010. As the name suggests, Cheetah Mobile targeted the mobile phone application market. Cheetah Mobile has developed a matrix of products, mostly for Android users: Clean Masters, Security Masters, CM Launcher and so on. In 2014, Cheetah Mobile was listed on the New York exchange and, two years later, Kingsoft stopped consolidating Cheetah Mobile’s financials. Lei returned to Kingsoft in 2011 while chairing the newly established Xiaomi Group. In the 2010s, Kingsoft started to yield more power to its subsidiaries and joint ventures as well as promoting the young blood. Kingsoft descended Kingsoft Office in 2011, which went public on Shanghai’s Star Market in 2019; Seasun was spun off in 2012 and its Gen-Y CEO Guo Weiwei now serves as the SVP of Kingsoft; Kingsoft Cloud was derived in 2012 and it is currently listed on Nasdaq. From the recent ‘Kingsoft family’ members’ IPOs, cloud and Software-as-a-Service seem to be the new directions for the ‘Chinese Microsoft.’ However, compared to Microsoft, Kingsoft has a larger presence in some of the promising areas of its business map. For one, Kingsoft’s Seasun, which many call the ‘Chinese Blizzard,’ has lately been boosting its capabilities in online gaming, stealing users from the likes of Tencent and NetEase. “Unlike Tencent’s one-story-centric games, Seasun’s products provide a dive into the Chinese Kungfu universe,” a frequent mobile game user from Beijing told EqualOcean. “I’m feeling fully engaged.”

Analysis EO
Analysis · 2
report
Analysis EO
May 20, 2020 08:20 am ·

Kingsoft Office: A Growing High-Flyer in Office Software Market

► A large run-up on MAUs and favorable financial performances in year 2019 and Q1 2020. ► A significant increase in market recognition in China came through advanced cloud services in WPS office tools. Kingsoft’s online office business has become a bright spot during the pandemic as telecommuting demand plummets. The monthly active users (MAU) on WPS, the main product of the company, had a year-over-year run-up of 36.28%, to the amount of 447 million. Created three decades ago with setbacks and struggles endured along the way, Kingsoft Office finally found its developing approach in this oligopolistic market.  In general, Kingsoft Office is on the right track and is expected to have an encouraging growth spurt in both the near and farther future. Kingsoft Office provides Office tools and services both through PC and Cloud, in which the cloud will be the main developing emphasis with the function of cloud storage and collaborative office. Profits come from the subscription from institutions and individuals, customized services and advertisement promotion. The business model for institutions is the combination of subscription and licensing, and for individuals, which is the main user base for Kingsoft Office, it is the advertisement and subscription model, with most of the basic functions complimentary but payment needed for advanced features.  Competitiveness With decades of experiences in the office field, Kingsoft Office has the compatibility on multi-resolution with 13 core technologies held by WPS. First introduced in 1989, WPS Office has deep understanding on local markets and competitive technology benefits. Here is what Kingsoft can provide in meeting modern office needs.   First, WPS can support all the main operating systems, including Windows, IOS, Linux – and even Chinese homebred operating systems. This deep adaption outperforms that of competitors, especially compared with MS Office and Google Docs. The integrated compatibility works perfectly with Chinese government offices and public institutions, and provide high-level protection on information safety. Second, with the early action and insight on the mobile office market, Kingsoft Office started its strategic distribution in 2011, with a focus on analyzing customers’ demands and application scenarios. It successfully and rapidly launched the mobile series for WPS. MS Office entered the market 2 years later with a market share still lower than Kingsoft Office.  Third, Kingsoft Office has built its own protection within the industry. With the combination of all four units that haven’t been achieved by either MS or Google, the high recognition in China, AI application, differentiation based on the users’ needs and the cooperation with up and downstream industries via useful functions such as e-signatures, Kingsoft Office is maintaining its position, and also challenging for the leadership in the industry simultaneously.  Fourth, WPS has better adaption on the domestic office market from in-depth research on local users, and lower costs but more resources and advanced models available online compared with MS Office and Google Docs. Furthermore, Kingsoft developed multiple customized solutions for companies with different sizes and industries.  With the increase in total numbers and adhesiveness of users, coupled with the expansion of the office market, subscriptions to WPS are expected to contribute more to revenues.  Business map Kingsoft Office is focusing its future developments on four dimensions: upgrades on WPS office software, AI applications, cloud services and globalization, among which the cloud services will be the key driver for future expansion.  Cloud services The cloud services provided by WPS Office consist of cloud storage, shared-editing, privatization deployment and advanced cloud resources and models. The cloud will be the top developing direction for Kingsoft, which intends to provide well-rounded cloud solutions on Office tools and services.  Currently, the Chinese cloud market is led by Alibaba Cloud and Tencent Cloud, with Baidu and JD struggling to catch up. But when narrowing to the cloud application in the office field, Kingsoft has its own superiority. The value chain of Xiaomi, one of China’s leading electronics and software firms, is also a good model for Kingsoft Cloud to follow, building vertical solutions for enterprise customers. This year, the pandemic will be an opportunity for Kingsoft to explore the public cloud service market. With the office closed, people starting to work from home, the cloud storage and the shared-editing functions became necessary. Also, the increase in the number of devices people is using, including mobile phones, PC, tablet computer, etc., speeds up the file synchronization needs, which reflects a large potential in the private cloud services market.  In this dimension, Kingsoft is transforming itself into a service-provider from being a tool-provider, through its office software cloud services research project and Internet value-added services project.  WPS office software  Not only equipped with this cost-efficient way on customer attraction, but Kingsoft Office never stops to polish its products to create customer stickiness, in which context it is taking more and more market with MAU sharply runs up. When compared with its largest competitor, MS Office, WPS has almost same functions equipped that sufficient for most of the users, but easier to share and synchronize online.  With the increasing complexity in data and contents, the demands form office user is rising and diversifying, which required a high level on collaboration and compatibility. The C-side upgrade project is intended to solve all these problems, significantly improve the efficiency for users and explore the potential market further.  Another project under this direction, the safety upgrade project, is becoming more and more important with the society’s emphasis on the information security nowadays. Kingsoft will keep strive to work on risk averse in software industry.   Globalization 46 languages have versions of WPS Office with more than 220 countries and regions covered, and the MAU for overseas terminals exceeded 100 million at the end of 2019. In exploring the overseas market, Kingsoft has three main emphases: 1) Targeting an increasing MAU, the company earns profits through advertisements and paid membership in terms of emerging markets such as India and Indonesia. 2) Choosing some advanced C-side services, such as switching between PDF and Word in the Western market where users have higher acceptance rates in subscriptions. 3) Focusing on marketing on the B-side in the Belt and Road countries.  AI application AI has been applied in multiple industries, especially for software, which can significantly improve the efficiency by collaborating the man and the machine. With the intention of transformation to a diversified service provider, Kingsoft Office is investing in the AI field to better meet customized demands, which will ultimately bring more paying users. Financials  In the first quarter in 2020, Kingsoft Office reported a 30.9% increase in revenue and a 130.9% surge in net income, to CNY 110 million. The operating cash flow soared to CNY 132 million from the same period last year of negative CNY 2.93 billion. Though it experienced a drop in licensing business, the company had a run-up on subscriptions. The MAU reached 447 million, which is an equivalence to the 35.64% increase of the growth for entire year of 2019. Though the large part of the jumps in profit and MAU were driven by the telecommuting under the pandemic, Kingsoft can still benefit from this since more users had experienced the products, thus leading to a higher customer adhesiveness.  Getting rid of the unrecurring success in Q1 2020 due to the telecommuting under the pandemic, Kingsoft Office handed over a satisfying answer in 2019. The revenue soared 39.92% to CNY 311 million and gross profit soared 37.99% to CNY 1.35 billion compared to 2018. Net income attributed to listed shareholders is also increasing steadily, with a year-over-year jump of 28.9% to CNY 401 million. The MAU rate of main products had a year-on-year run-up of 32.6%, to the amount of 411 million. Among the three main business lines, the subscriptions, licensing and promotion, the subscriptions are expected to contribute more to the total sales.  In terms of the reason for the relatively slow growth in net income compared to the growth of revenue, this comes from the emphasis in research and development with a R&D expense ratio of 37.91%, thus producing a lag in cash-out. The SG&A ratio is 8.59% in 2019, remaining constant with last year. R&D expenditure was concluded in SG&A only before 2016. In general, the expense is controlled and stable.  The return on Equity and return on Invested Capital of Kingsoft Office increased steady through 2016 to 2018 but run down in 2019, which was mainly because of the capital raised from IPO diluted by the ROE and ROIC.  Challenges Though Kingsoft Office has been vigorously developing in recent years, MS Office still dominates the market, with a high user-stickiness. Coupled with the intense competition in Office software market, with new entrants such as Shimo, Youdao and Tencent, how to maintain its position and even break out is becoming the top challenge for Kingsoft.  Currently Kingsoft Office is seeking a transformation on the C-side, from advertising-driven revenue to being subscription-driven. However, based on the consumption habits and low acceptance rates on paid services in the Chinese market, the growth from subscription users may underachieve in the near future.