20210525-招银国际-Riding_on_multi-cloud_adoption_31页_2mb

Summary of Kingsoft Cloud (KC US) Equity Research Coverage Initiation

Core Content

Kingsoft Cloud (KC US), a cloud service pure-play in China, was founded in 2012 and listed on Nasdaq in May 2020. It holds a 3% market share in the Chinese public cloud market (3Q20, IDC), with ByteDance as its largest single customer, contributing 28% of FY20 revenue. KC is positioned to benefit from the rising adoption of multi-cloud strategies by both internet companies and traditional enterprises.

Main Points

• Growth Drivers:

  • Multi-cloud adoption by internet companies to reduce reliance on single cloud providers.
  • Expansion into enterprise cloud solutions for sectors requiring higher security and autonomy.

• Revenue Growth:

  • KC is projected to achieve a 42% CAGR in revenue from FY20 to FY23E, reaching RMB18.7bn by FY23E.
  • Public cloud revenue is expected to grow at 36% CAGR, reaching RMB13.1bn by FY23E.
  • Enterprise cloud revenue is forecasted to grow at 59% CAGR, reaching RMB5.5bn by FY23E.

• Customer Base Diversification:

  • KC has been reducing its reliance on Kingsoft Group, with related-party revenue dropping from 34% in FY17 to 12% in FY20.
  • The company has attracted numerous high-growth internet customers, including Zhihu, Agora, Huya, Bigo, and Sogou, which helped reduce ByteDance's revenue contribution to 28% in FY20 from 31% in FY19.

• Market Position:

  • KC focuses on specific verticals such as game, video, and financial services, which are experiencing rapid growth.
  • It is a key player in the public cloud market, with a strategic emphasis on premium customers and high-growth industries.

• Valuation:

  • The research initiates coverage with a BUY rating and a target price of US$49.08, based on a 5x FY22E P/S multiple.
  • This target price represents a 10% discount to global peers with similar IaaS exposure, considering KC's smaller revenue size and higher growth potential.

Key Information

• Market Share: KC holds 3% of the public cloud market in China (3Q20, IDC).
• Revenue Structure: In FY20, KC generated RMB5.2bn from public cloud services (79% of total) and RMB1.4bn from enterprise cloud services (21% of total).
• Premium Customers: KC had 191 premium customers in FY20 for public cloud and 124 for enterprise cloud, with an average revenue per customer of RMB26.4mn and RMB11.0mn respectively.
• Growth Projections:
  • Public cloud revenue CAGR: 36% (FY20-23E), reaching RMB13.1bn.
  • Enterprise cloud revenue CAGR: 59% (FY20-23E), reaching RMB5.5bn.
• Financial Highlights:
  • Revenue CAGR: 75% in 2017-2020.
  • EBITDA margin improved significantly, from -1.8% in FY20 to an estimated 15-25% in FY20-23E.
  • Net dollar retention rate for premium customers is high at 147%.
• Valuation Metrics:
  • P/S ratio: 13.1 (FY19A), 7.9 (FY20A), 5.4 (FY21E), 3.7 (FY22E), 2.8 (FY23E).
  • ROE: -33% (FY19A), -12% (FY20A), -13% (FY21E), -9% (FY22E), 3% (FY23E).
• Competitive Landscape:
  • AliCloud dominates the market with a 42% IaaS + PaaS market share (3Q20, IDC).
  • KC's strategy of targeting high-growth verticals and premium customers explains its strong revenue growth.
  • KC's enterprise cloud market share is expected to rise from 2% in FY20 to 5% in FY23E.

Investment Thesis

• Cloud Service Pure-Play: KC is a rare pure-play cloud service provider in China, focusing on IaaS and PaaS.
• Multi-Cloud Strategy: KC benefits from the multi-cloud adoption trend among internet companies.
• Enterprise Cloud Expansion: KC is expanding into enterprise cloud solutions, capturing private/hybrid cloud opportunities in traditional industries.
• Diversified Customer Base: KC is reducing dependence on Kingsoft Group, with a growing list of premium customers.
• BUY Rating: Initiated with a BUY rating and a target price of US$49.08, based on a 5x FY22E P/S multiple.

Risks

• Market Competition: Strong competition from AliCloud and other cloud providers.
• Regulatory Environment: Restrictions on foreign cloud providers in China.
• Customer Concentration: Despite diversification, ByteDance remains a significant customer.
• Growth Sustainability: Maintaining high growth rates in the long term may be challenging.

Appendix Highlights

• Management Background: KC is part of the Kingsoft Group, which includes Kingsoft Group (3888 HK), Xiaomi (1810 HK), and Cheetah Group (CMCM US).
• Cloud Basics:
  • Public cloud services are offered by KC, including IaaS and PaaS.
  • The Chinese cloud market is growing, with public cloud expected to grow at 33% CAGR from RMB99bn in 2020 to RMB231bn in 2023E.
  • Private cloud is expected to grow at 15% CAGR, reaching RMB114.8bn in 2023E.

Conclusion

KC is well-positioned to capitalize on the growing multi-cloud adoption trend in China. Its strategic focus on high-growth verticals and premium customers, combined with a diversified customer base, supports its strong revenue growth. Despite being a smaller player compared to global peers, its higher growth potential and improving margins justify the BUY rating and target price of US$49.08.