China International Capital Corporation (CICC) has upgraded its revenue and adjusted EBITDA forecasts for Kingsoft Cloud (KC, Financial) for 2024 and 2025. This is due to faster-than-expected investments in AI infrastructure and higher demand levels. The valuation for Kingsoft Cloud is set to improve, supported by strong growth expectations. Consequently, CICC has raised its price target by 71% to $6, indicating a potential 47% upside. Currently, the stock is trading at an attractive valuation of 0.9x 2025 P/S, compared to the new target of 1.3x.
Kingsoft Cloud has benefited significantly from its partnerships with Xiaomi and the Kingsoft ecosystem. Over the past two years, as demand from major external clients decreased, the company shifted its focus to servicing its ecosystem clients. In the second half of 2023, Xiaomi reemerged as Kingsoft Cloud's largest customer. During the first half of 2024, Xiaomi and Kingsoft Group combined accounted for 19% of Kingsoft Cloud's total revenue, with Xiaomi alone contributing around 15%. As the sole strategic computing power service platform within this ecosystem, Kingsoft Cloud is poised to benefit from increased demand stemming from AI business initiatives.
The company's fundamentals show signs of stabilization. In the second quarter of 2024, Kingsoft Cloud's CDN business revenue ratio fell below 20%, mitigating the adverse effects of CDN business optimization. Additionally, the adjusted gross profit margin improved to 17%, marking its eighth consecutive quarterly improvement. The adjusted EBITDA margin, which turned positive in the first quarter of 2024, continued to improve, reaching 3% in the current quarter.
Kingsoft Cloud remains committed to investing in AI computing power, with ongoing support from diverse financing sources. Recently, the company entered into a finance lease agreement with CITIC Financial Leasing, securing a loan of RMB 250 million at an annual interest rate of 4.35% for three years. This financial arrangement will bolster AI infrastructure investments in upcoming quarters. It is estimated that, over the year since the third quarter of 2023, the company has invested over RMB 3.6 billion, primarily aimed at enhancing AI capabilities.
