The cloud computing arm of the Kingsoft Corporation (03888:HKEX) is arguably the most intriguing part of the Xiaomi-affiliated software citadel.
This article is a guidebook on Kingsoft Cloud’s (KC:NASDAQ) corporate strategy, market positioning and business performance.
Whales grow in oceans, not puddles
The cloud computing area has been in a fast-growing phase for a decade, and China will still stay at the early scaling stage in the 2020s.
Cloud services is a promising field, as digitalization is in progress worldwide and the trend seems set to last before the next ‘industrial revolution.’ Amid digitalization time, cloud services’ appearance lowers enterprises’ IT costs, provides flexibility and mobility and increased collaborations as well as other namable benefits – ‘Go Cloud’ (encourage to employ cloud services) is trending up in China.
Even with the development of cloud services industry riding on a tailwind, China’s domestic cloud services market fails to match with its economic scale. In 2019, China contributed over 16.7% to global GDP, but its IT expenses only accounted for around 4%. Except for the IT costs indicator, the penetration of the Software-as-a-Service (SaaS) market tells the same story.
The most digitally advanced industries in China are the financial, healthcare and the Internet sectors, with penetration rates fluctuating between 10% and 20%; the other sectors fall below 10%. Benchmarking the digital level in the United States, China’s digital market is yet to enjoy a boom – hence the burgeoning cloud services field.
In 2018, Chinese public cloud market size scaled to USD 7.2 billion, with a year-on-year (YOY) 66.8%. Forecasted by IDC, the CAGR of Chinese public cloud market could reach 39.91% in 2018-2022, and the market size will reach USD 27.5 billion.
In the Chinese public cloud market, Infrastructure-as-a-Service (IaaS) took the biggest chunk, with a market share of more than 60%, followed by Software-as-a-Service’ (SaaS) 25% and Platform-as-a-Service (PaaS) had the least portion. However, contrasting with China’s public cloud services market structure, in the US, SaaS occupied the largest public cloud services market share.
In a later stage of cloud services development, SaaS-represented cloud services should be the most dominant type in the market, then PaaS and IaaS. The Chinese cloud services market segment has the chance to transition to one that resembles the US’s current cloud structure in 5 – 10 years.
Knowing that the US’s cloud services market size was valued at USD 246.8 billion, Chinese cloud services sector has the potential to grow to a size matching that of the US – along with the Made in China 2025 strategy and similar favorable policies and the core needs of enterprises’ digital development.
Serving tech giants’ competitors
In the global public IaaS cloud services market, AWS, Azure, Alibaba Cloud, Google Cloud and IBM acquired shares of 47.8%%, 15.5%, 7.7%. 4.0% and 1.8% respectively, totaling a CR5 over 75%. Meanwhile, China’s IaaS market is predominated by domestic IaaS providers: Alibaba Cloud, Tencent Cloud, China Telecom (CHA:NYSE, 00728:HKEX); Kingsoft Cloud and AWS took 45.5%, 10.3%, 7.6%, 6.5% and 5.4%.
Alibaba (BABA:NYSE) and Tencent (00700:HKEX) are head-to-head competitors in Chinese Internet sectors: their competition ranges from financial services, e-commerce to cloud services and they both built their own featured ecosystems. Somehow, their ecosystems are exclusive from each other: from corporate strategic investments, one can find that Tencent-invested companies lack Alibaba-side investors and vice versa.
Among the top five cloud services providers in China, China Telecom and Kingsoft Cloud are ‘neutral’ in the Internet world. This identity yields a benefit to them: companies that do not want to be involved in the Alibaba-Tencent game or become competitors to larger entities prefer to choose neutral parties’ cloud services. Displayed on Kingsoft Cloud’s official site, its key clients include Douyin (TikTok’s counterpart in China), Bilibili (BILI:NASDAQ), iQIYI (IQ:NASDAQ), Kingdee (00268:HKEX) and other nameable companies.
Cloud services’ infrastructural development – like data centers, bandwidth and storage facilities – are tremendously costly at the beginning. By looking at the red ink on Kingsoft Cloud’s financials, the company’s infrastructure construction will still be in progress as it stays at the early period of scaling. At the end of 2019, Kingsoft had built around 40 data centers and CDN nodes, with over 7,300 servers. In contrast, Alibaba Cloud has over 2,300 CDN nodes in China and 500 nodes in other regions. The difference in the number of CDN nodes implies the potential growth of Kingsoft Cloud in infrastructural development.
Kingsoft Cloud reported CNY 3.95 billion revenue in 2019, a YOY growth 78%. We expect the growth will be sustained at the same level for the coming year. The first-mover advantage is well-explained in the cloud services sector. Taking AWS as the case, till now, the cloud giant’s revenue as recorded in 2019 grew 37% from 2018; Alibaba Cloud’s revenue in 2019 increased 62% from 2018. Early birds maintain high-speed growth, but latecomers are breaking out: UCloud (688158:SH) grew slower than those in the front. As Alibaba Cloud kept growing at 62% in 2019-2020, UCloud grew at 28% for the reporting period.
Till December 31, 2019, Kingsoft Cloud had 243 premium customers, and each averagely contributed CNY 15.9 million to the company; in 2017, there were only 113 premium accounts and they paid CNY 10.3 million on average for Kingsoft Cloud products and services. Those key clients are responsible for over 97% of the revenue and hence Kingsoft Cloud is driven to develop more premium customers, which will bring the company a notable revenue increase.
Long bets for the long run
With an IPO price of USD 17 per share in May 2020, Kingsoft Cloud’s stock price was pumped up to more than USD 40 in early July. The company has shown no sign of reaching the breakeven point in the short term, but the overall Chinese market performance affected Chinese companies’ stock performances on the other side of the Pacific – even forming a ‘bull’ market under the pandemic influence.
Nevertheless, COVID-19 changed people’s lives as well as the way they work. Remote working patterns boost the cloud services business – this working style will be a norm in the digital era. Cloud services companies may henceforth record their most anticipated earnings – in the second quarter of the year. Kingsoft Cloud’s performance might have another round of peaks coming.
China is the first country that has started to recover from the pandemic. However, all governments adjusted or say lowered their forecasts on their domestic economy. A ‘bull’ market cannot reflect a real economic downturn. On the contrary, the bubble is here and Kingsoft Cloud is indeed overvalued at the moment, but the confidence in cloud market development can also support an upward slope of growth.