An Overview of Cheetah Mobile Inc.
Cheetah Mobile Inc. (NYSE:CMCM) will be spun-out of Kingsoft Corporation (HK: 3888) through a listing in New York on May 8th, 2014. The company provides internet security and efficiency-enhancement applications to its users, enhancing the system performance of their mobile phones and protecting them from security threats. The IPO is expected to be priced at a range of $12.5-$14.5 per American Depositary Share (ADS), with a maximum deal size of $200 million (reduced from the previously announced $300 million). This deal is supported by a concurrent private placement from Baidu ($20 million USD), Kingsoft ($20 million USD), and Xiaomi ($10 million USD) at IPO price; the shares obtained by these three companies will be locked up for a period of 180 days. CMCM is the only company in China with three internet giants as shareholders, unlike its competitor Qihoo 360 (NYSE:QIHU), who is well known to be an adversary to Tencent (HK: 700) and Baidu (NYSE: BIDU).
What makes Cheetah Mobile attractive? As a starting point, CMCM's applications are well known globally. Popular names include: "Clean Master" (4th ranked app on Google Play excluding games), "Battery Doctor" (5th ranked productivity app on Google Play), "CM Security" (2nd ranked tool app on Google Play), and Photo Grid (1st ranked photography app on Google Play in the US). Furthermore, the company is the second largest PC internet security provider in China, behind Qihoo 360. The CEO of Cheetah Mobile previously led the development launch of Qihoo's 360 Safeguard, and has valuable experience in the area of internet security.
What are the growth prospects for CMCM? Cheetah Mobile recorded a MAU of 340 million in February 2014, which is almost the double of that recorded in December 2012. For its mobile applications, MAU reached 220 million in March 2014 (63% of which was from the overseas markets). In addition, one of its top applications "Clean Master" alone, recorded a MAU of 140 million in 2014, and had the highest app rating of 4.7/5 (based on 8 million reviews) among apps with at least 1 million reviews. CMCM is starting to focus on end user experience and requirements by expanding its R&D team, which currently accounts for more than 70% of total employees. The company is one of the early movers to develop and launch a pure cloud-based analytics engine for mobile applications; this engine is capable of collecting information regarding user behavior, analyzing users' interest based on different dimensions, and creating a unified cross-platform marketing experience, which can enhance marketing efficiency. For the above reasons, Cheetah Mobile is likely to continue experiencing strong growth.
Is Cheetah Mobile the next Qihoo? Qihoo 360's relatively high valuation sparked investors' interest in Kingsoft. Since Qihoo 360's Secure Browser has been very successful, Kingsoft's spin-off of its internet security business is a justified move. Listing the company on the NYSE will make Cheetah Mobile more comparable to Qihoo 360, both in terms of business model and in terms of valuation. Similar to Qihoo, CMCM's future growth is expected to be driven by mobile growth and international business expansion. However, it appears that Cheetah Mobile is ahead of Qihoo 360 in terms of international expansion, as more than 60% of mobile MAUs are from overseas in March 2014, whereas Qihoo's main user-base is still PC users in China. CMCM is still at its early stage of monetization (revenue per MAU is $0.13 vs. $0.47 for Qihoo in 4Q13); thus, it appears that it has superior growth potential.
What are some investor concerns? Investors are worried about Cheetah Mobile's ability to grow its mobile and overseas revenues and its ability to develop more popular and "hit" applications in the future. The following is a list of points to address the aforementioned concerns:
- Cheetah mobile only started monetizing its mobile traffic in 3Q12; hence, there is still plenty of room for the company to find avenues to monetize
- Through its R&D, the company will develop more effective marketing and mobile ads to attract and retain customers
- Internet security and productivity-enhancing apps, although not used as often as social media apps, have a highly sticky user base
- International expansion (including the establishment of overseas operations, acquiring talents from overseas markets, and co-operating with overseas distributors) will help the company expand its global presence and market share
- CMCM will continue to invest in and acquire new apps that can complement its current business model and that have the potential to become "hit" apps in the future
Why did Kingsoft's stock price drop recently? The debate regarding the valuation and growth prospects of new economy companies remains and has hurt sentiment in the space. On April 28, 2014, Cheetah Mobile announced the price range of its IPO offering. The mid-price, $13.5, translates into 20x 2015 P/E (compared to Kingsoft, which is priced at 21.4x 2015 P/E). The market sees Cheetah Mobile as more cheaply valued than Kingsoft and, at the same time, is not convinced of Kingsoft's growth prospects ex-Cheetah Mobile. Following the release of CMCM's prospectus, Kingsoft experienced a three-day cumulative decline of 13.4%.
Going forward. Cheetah Mobile continues to gain market share overseas due to the popularity and demand of its top applications: Clean Master, Battery Doctor, CM Security, and Photogrid. In addition, its cloud analytics engine is an important driver for future growth. Given Cheetah Mobile's early stage of monetization and large network of international users, revenue could grow CAGR 80%-90% from 2014-2016. This makes valuations quite compelling circa 20x 2015 P/E. A successful business model combined with strategic partnerships, excellent execution records, and attractive valuations make Cheetah Mobile a worthwhile investment.
Disclosure: I am long QIHU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Business relationship disclosure: The article has been written by a senior analyst at Central Asset Investments. Central Asset Investments is not receiving compensation for it (other than from Seeking Alpha). Central Asset Investments has no business relationship with any company whose stock is mentioned in this article. This article provides general information only. It does not constitute an offer to sell or the solicitation of an offer to buy any interests in any securities, investment product or fund. Investor should consult their own financial advisors prior to making any investment decisions and should not rely solely on these statements or any information presented in order to make such investment decision. Investors should verify the accuracy of any information mentioned in this article. CAI may or may not have an interest in the companies mentioned in this article.