Leading video Public cloud vendor Kingsoft Cloud (KC) had 5.4% share in 2019 China IaaS + PaaS market with ByteDance being top customer. KC delivered strong growth (Rev +78% YoY in 2019), thanks to 1) internet customers adopting multi-cloud strategy, 2) increasing number of premium customers (+58% YoY to 243 in 2019) and 3) higher ASP per premium customer (+16% YoY to RMB15.9mn) on product cross-selling. Lower revenue from Kingsoft Group and continuous margin expansion are re-rating catalysts.
- Robust growth as internet customers adopting multi-cloud strategy. Kingsoft Cloud (KC) is a leading cloud service provider in China with 5.4% market share in 2019 (IaaS + PaaS). KC is well-positioned to capture the growing cloud market (28.3% CAGR in 2019-2024 to reach a size of RMB563.3bn in China). Although Alibaba is a leader in China public cloud market, KC is able to achieve robust growth (79% revenue CAGR in 2017-2019) as internet companies (e.g. game/ video verticals) are adopting multi-cloud strategy to lower reliance on single cloud provider. Among KC’s new customers, around 80% are deployed on multi-cloud. According to Frost & Sullivan, 26% of enterprises with over 1,000 employees in China are using cloud adopted multi-cloud strategy, compared with 85% in the US.
- Improving customer mix with less dependence on Kingsoft Group. KC is gradually reducing dependency on Kingsoft Group, and revenue from related parties (Kingsoft Group + Xiaomi + Cheetah Group) declined from 34% in 2017 to only 12% in 1H20. This proves KC’s cloud technology and R&D capabilities to attract new customers. KC has 1,150 R&D engineers and spent 15% of revenue (RMB595mn) on R&D in 2019.
- Continuous margin expansion with scale benefits. KC delivered continuous margin expansion on larger scale, higher efficiency and bandwidth utilization. Cost of revenue mainly consists of IDC costs (bandwidth + rack) and depreciation of servers. IDC costs as % of revenue was at 66% in 3Q20 (vs. 71% in 3Q19) while that of depreciation was at 10% (vs. 16% in 3Q19). KC gross margin turned positive since 3Q19 and reached 6.5% in 3Q20. Management expects gross margin to improve at +5 pct pts YoY in 2021E.
- Rare independent IaaS provider. KC is a rare IaaS pure play in the market and is trading at 9.2x consensus FY21E P/S. Along the cloud service supply chain, companies with IaaS exposure are trading at 7.3x but with lower growth (avg. FY19-22E sales CAGR 24% vs. 61% for KC) while capex-light SaaS + PaaS companies are trading at 30x FY21E P/S.
