Kingsoft Cloud (3896.HK / KC.US) Investment Analysis: The High-Risk Battle of AI Frontier Transformation

Part 1: Summary and Investment Thesis

Overview

This report aims to provide a comprehensive and in-depth evaluation of the investment value of Kingsoft Cloud Holdings Limited (hereinafter referred to as "Kingsoft Cloud"). The analysis indicates that Kingsoft Cloud is undergoing a remarkable yet high-risk transformation story. After facing intense competition and marginalization in the general cloud computing market, the company decisively executed a strategic pivot, shifting its focus entirely to the high-growth, high-margin field of intelligent computing ("AI Computing"). Recently, driven by explosive growth in AI-related revenue and a symbiotic relationship with Xiaomi's ecosystem, the company achieved its first-ever adjusted operating profit turnaround, marking a fundamental shift in its financial trajectory.

Core Investment Thesis

We initiate coverage of Kingsoft Cloud with a "Speculative Buy" rating. The core investment logic lies in the market's current undervaluation of the immense potential of its AI-driven growth engine. Kingsoft Cloud's transformation is not merely an adjustment in business direction but a complete overhaul of its business model—from low-margin scale competition to high-value-added technology enablement. This investment essentially bets on the company's ability to carve out a stable niche as an AI infrastructure provider in a market dominated by industry giants, leveraging its unique ecosystem advantages and focused vertical industry solutions. Despite fierce competition and execution risks, its strong growth momentum in the AI sector and significant financial improvement offer attractive potential returns for investors with higher risk tolerance.

Part 2: The Chinese Cloud Computing Arena: A Battlefield of Giants

To accurately assess Kingsoft Cloud's investment value, it is essential to first understand the macro market environment in which it operates. The Chinese cloud computing market is a dynamic yet fiercely competitive field, and its unique market structure and competitive landscape provide critical context for understanding the necessity of Kingsoft Cloud's strategic transformation.

2.1 Market Dynamics: A Rapidly Growing Market with Unique Structure

The Chinese cloud computing market is experiencing astonishing expansion. In 2022, the market size reached RMB 455 billion, a year-on-year increase of 40.91%, far exceeding the global market's 19% growth rate during the same period. Authoritative institutions predict that by 2025, the market size will surpass the RMB 1 trillion mark ¹. This rapid growth is driven by the digital economy, enterprise cloud adoption, and the "New Infrastructure" policy ².

However, the structure of the Chinese market differs significantly from the global market. In the global public cloud market, Software-as-a-Service (SaaS) dominates with a 60%-70% share, while the Chinese market is uniquely characterized by Infrastructure-as-a-Service (IaaS) accounting for over half of the market ³. This IaaS-heavy structure reflects robust domestic infrastructure development and strong demand for basic computing and storage resources but also sows the seeds of market competition. IaaS products, such as virtual machines and cloud storage, are inherently standardized resource services with limited technological differentiation, making them more prone to homogenized competition. This market structure is the root cause of frequent price wars and compressed profit margins, creating a highly challenging environment for smaller players without scale advantages.

2.2 Competitive Landscape: Fierce Competition in an Oligopolistic Market

The Chinese cloud computing market is highly concentrated, exhibiting an oligopolistic structure. According to 2024 market data, Alibaba Cloud holds an absolute lead with approximately one-third of the market share, followed by Huawei Cloud (~16%), China Telecom Cloud (~15%), and Tencent Cloud (~13%) ³. In the more segmented AI IaaS market, Alibaba Cloud's lead is even more pronounced, with a 23% market share compared to Huawei Cloud's 10% ⁶. Kingsoft Cloud is conspicuously absent from the list of leading players, clearly indicating its position as a second-tier or lower participant in terms of overall market share ⁶.

Notably, a new competitive force is reshaping the market landscape—"carrier clouds" represented by telecom operators. Financial reports show that in 2022, the revenue growth rates of China Telecom Cloud, China Mobile Cloud, and China Unicom Cloud all exceeded 100%, far above the industry average ¹. China Telecom Cloud, in particular, has rapidly ascended to the top three in the market by leveraging its strong government and state-owned enterprise client relationships, nationwide network infrastructure, and inherent advantages in the "Xinchuang" (Information Technology Application Innovation) sector ³. The rise of carrier clouds means that independent cloud providers like Kingsoft Cloud must not only contend with pressure from internet giants but also compete with powerful state-backed rivals, further squeezing the survival space in the general cloud services market.

2.3 Price Wars and Their Impact on Niche Players

The market's structural characteristics and intense multi-party competition have inevitably led to brutal price wars. Starting in April 2023, Alibaba Cloud initiated a large-scale industry-wide price reduction, with Tencent Cloud, China Mobile Cloud, and other giants quickly following suit. Core cloud product prices were slashed by 15% to 50%, with some products seeing cuts as high as 60% ⁸.

The essence of this price war is the giants leveraging their economies of scale and substantial capital to cleanse the market and consolidate their shares. For smaller players like Kingsoft Cloud, this form of competition is devastating. Matching price cuts in the general IaaS space would entail significant profit losses, potentially leading to sustained losses; not matching them risks customer attrition and market share erosion. This drastic deterioration in the external environment is the most direct and urgent catalyst for Kingsoft Cloud's strategic transformation. Continuing to battle giants in the "red ocean" of general cloud services is no longer viable; finding a differentiated, high-value-added "blue ocean" is its only path to survival and growth.

Part 3: Deconstructing Kingsoft Cloud: From Independence to AI Symbiosis

Kingsoft Cloud's identity, strategic evolution, and deepening relationships with key ecosystem partners are central to its investment narrative. Understanding how it has transformed from an independent cloud service provider to a critical player in the AI ecosystem is crucial for assessing its future potential.

3.1 Company Profile and Strategic Evolution

Founded in 2012, Kingsoft Cloud entered the market as an "independent cloud provider," drawing on Kingsoft Group's 30+ years of enterprise service experience ⁹. The term "independent" refers to its core business being solely cloud computing, unlike Alibaba Cloud or Tencent Cloud, which are business units of larger internet conglomerates. This identity gives it a unique "neutral" advantage in the market, attracting clients wary of potential conflicts of interest (e.g., e-commerce platforms reluctant to use Alibaba Cloud), as Kingsoft Cloud pledges not to access customer business data ¹⁰.

The company's development history clearly reflects its adaptability to market changes. Early on, Kingsoft Cloud gained a foothold by pioneering in verticals like gaming and video cloud services, once becoming one of China's largest gaming cloud providers ¹⁰. As its business expanded, its product lines grew to cover public cloud, enterprise cloud, and AIoT, offering over 150 products and services ⁹. The company went public on NASDAQ in May 2020 and completed a dual primary listing on the Hong Kong Stock Exchange in December 2022, gaining access to both international and domestic capital markets ¹⁴. Facing the market challenges described in Part 2, Kingsoft Cloud once again adjusted its course, proposing a new strategy of "fully embracing AI" and upgrading its AI computing service system, aiming to become an infrastructure enabler in the AI era ¹⁰.

3.2 The Xiaomi Ecosystem: From Double-Edged Sword to Strategic Asset

Kingsoft Cloud's relationship with Xiaomi Group and its ecosystem is the most complex and critical factor in its development history. This relationship has evolved profoundly from a "dependency risk" to a "strategic symbiosis," forming the core of Kingsoft Cloud's current competitive advantage.

In its early days, Kingsoft Cloud's business was highly dependent on Xiaomi. In 2014, revenue from Xiaomi accounted for over 80% of its total revenue ⁹. Such high concentration from a single client was undoubtedly a significant operational risk and a major concern for capital markets. As Kingsoft Cloud diversified its client base, this proportion dropped sharply to 11.79% in the first half of 2020 ⁹.

However, in the AI era, this relationship has taken on a new strategic dimension. It is no longer a simple client-supplier model but has evolved into a deeply integrated AI strategic symbiosis. The latest financial data shows that revenue from the "Xiaomi and Kingsoft ecosystem" rebounded to 26.8% in Q2 2025, with the revenue scale growing 69.5% year-on-year ¹⁵. Behind this change is a fundamental upgrade in the collaboration model. Kingsoft Cloud is no longer just providing cloud storage for Xiaomi phones but has become the core cloud platform for Xiaomi's ambitious AI strategy.

This symbiotic relationship provides Kingsoft Cloud with unique advantages that are difficult to replicate:

Access to Scarce Computing Resources: Xiaomi is building a powerful computing cluster with tens of thousands of GPUs, already possessing over 6,500 GPU resources in the early stages ¹⁶. Through deep collaboration with Xiaomi, Kingsoft Cloud can directly utilize these valuable and expensive computing resources, providing a solid foundation for its AI computing business.

Access to Large-Scale Application Scenarios: Xiaomi's vast AIoT device ecosystem, smart home platform, and future smart electric vehicle business provide Kingsoft Cloud's AI technology with real, massive, and cutting-edge application and training scenarios ¹⁶. This not only brings stable revenue streams but also helps refine and optimize its AI platform and solutions.

Stable Growth Expectations: The collaboration is long-term and deepening. According to agreements, the cap on related-party transactions is expected to increase significantly from RMB 2.31 billion in 2025 to RMB 4.035 billion in 2027 ¹⁶.

In summary, what was once seen as its biggest risk—customer concentration—has, in the AI wave, been cleverly transformed into one of Kingsoft Cloud's strongest moats. This unique ecosystem provides a valuable strategic fulcrum in the capital- and resource-intensive AI race.

Part 4: AI Transformation: Kingsoft Cloud's Bet on Intelligent Computing

Kingsoft Cloud's investment value largely hinges on the success of its strategic pivot to AI and intelligent computing. This transformation is both an inevitable response to market pressures and the core driver of its future growth. This section delves into the composition of its AI strategy, financial impact, and differentiated advantages.

4.1 "AI Computing" Strategy: Becoming the "Pick and Shovel" of the AI Era

Facing the "red ocean" of general cloud computing and the vast capital gap with giants in developing large foundational models, Kingsoft Cloud has adopted a pragmatic and intelligent strategic positioning: not to be a "gold miner" but a "seller of picks and shovels." Its goal is to become an enabler of the AI ecosystem, providing stable, efficient, and user-friendly full-stack intelligent computing services for model developers and enterprise applications ¹⁰.

This full-stack service system primarily consists of three layers:

Infrastructure Layer: Building high-performance computing, storage, and network infrastructure. This includes not only traditional IDCs but also AI computing centers tailored for AI workloads, such as the Qinghai AI Computing Center, which leverages the province's abundant green electricity and cool climate ¹⁶. Through integrated hardware and software solutions, the company continuously enhances computing, storage, and network performance to meet the demanding requirements of large model training and inference ¹⁸.

Platform Layer: This is the core of its AI strategy. The company has launched two key platforms: the "Xingliu" training and inference platform and the "Hanhai" MaaS (Model-as-a-Service) platform.

Xingliu Platform focuses on solving technical challenges in large model training, offering capabilities like efficient resource pool management, GPU fault self-healing, and RoCE network observability to ensure the stability and efficiency of large-scale distributed training ¹⁹.

Hanhai Platform aims to bridge the "last mile" of large model deployment, providing one-stop model development, deployment, and application-building services to help enterprise clients quickly and cost-effectively integrate AI capabilities into their businesses ¹⁸.

Application Layer: Leveraging its deep industry expertise, Kingsoft Cloud has introduced industry-specific models and solutions for targeted scenarios, such as the "Qingzhou Xiaofa" application for government and legal sectors, as well as customized models for finance, healthcare, and other industries, helping clients achieve both quality and efficiency gains ¹⁰.

This "AI Foundry" positioning allows it to broadly benefit from the booming AI industry without staking the company's fate on the success or failure of any single foundational model—a path that is undoubtedly more certain and capital-efficient for a company of Kingsoft Cloud's size.

4.2 Quantifying AI Impact: The Roar of the Transformation Engine

Kingsoft Cloud's AI strategy is not just conceptual; its financial impact has been swift and significant, becoming the core engine driving the company's performance turnaround.

Q4 2024: AI-related billing revenue reached RMB 474 million, surging nearly 500% year-on-year, accounting for 34% of public cloud revenue ¹⁹.

Q2 2025: AI business revenue continued its rapid growth, increasing over 120% year-on-year to RMB 730 million ²⁰.

These figures irrefutably demonstrate the success of the AI transformation. Triple-digit year-on-year growth rates have fundamentally reshaped the company's revenue structure, bringing higher-quality, higher-margin income streams. Behind this growth is Kingsoft Cloud's successful servicing of leading large model enterprises like DeepSeek, proving that its technology platform and service capabilities have earned top-tier market recognition ¹⁹.

4.3 Differentiated Competitive Advantages in AI

In the AI field, Kingsoft Cloud also faces competition from giants like Alibaba Cloud and Huawei Cloud. Its differentiated advantages are primarily reflected in the following areas:

Ecosystem Advantage: Deep integration with the Xiaomi and Kingsoft ecosystems is its most core moat. This ecosystem not only provides stable AI computing demand but also offers unique, large-scale application scenarios in AIoT, smart vehicles, office software, and other fields—something other independent cloud providers lack ¹⁶.

Vertical Industry Expertise: The company has long-standing service experience and deep industry understanding in gaming, video, government, healthcare, and other sectors ¹⁰. This industry know-how enables it to provide AI solutions more tailored to business needs than general cloud providers, thereby building customer stickiness.

Neutrality and Flexibility: As an "independent" cloud provider, it can attract clients sensitive to data sovereignty and business competition. At the same time, compared to giants, its organizational structure is more flexible, allowing for faster and more tailored services for clients.

In summary, Kingsoft Cloud's AI strategy is not about confronting giants head-on but about building differentiated competitive advantages in the niche of AI infrastructure and platform services by combining ecosystem strengths and industry expertise. The successful execution of this strategy is the key to the fundamental turnaround in the company's financial health.

Part 5: Financial Deep Dive: The Anatomy of Transformation

Financial data is the most objective yardstick for measuring the success of corporate strategy. A comparative analysis of Kingsoft Cloud's key financial metrics before and after its transformation reveals a profound, AI-driven business restructuring and value resurgence.

5.1 Pre-Transformation Performance: Stagnant Growth and Sustained Losses

Before fully pivoting to its AI strategy, Kingsoft Cloud's financial performance reflected its struggles in the competitive general cloud computing market. A review of financial data from 2021 to 2023 shows a clear trend: revenue growth slowed, even declining year-on-year in some quarters, while operating losses persisted at significant levels ²¹. For example, in Q3 2021, the company's operating loss reached RMB 327 million ²¹. This period's financial condition provided the most compelling rationale for the company's strategic transformation—change or perish. It vividly illustrates the immense financial pressure faced by companies without scale advantages in a low-margin, homogenized market.

5.2 Transformation Period (Q4 2024–Present): A Dramatic Inflection Point

Starting in the second half of 2024, as the AI strategy was implemented and bore fruit, Kingsoft Cloud's financial data saw a dramatic inflection point. The company's performance showed strong recovery and growth momentum, with all key metrics improving.

Q4 2024: This was a landmark quarter. Total revenue grew 29.6% year-on-year to RMB 2.23 billion, surpassing industry average rates. More importantly, profitability improved significantly, with adjusted gross margin reaching a record 19.2%, and adjusted operating profit turning positive for the first time in history ¹⁹.

Q1 2025: The company maintained its growth momentum, achieving revenue of RMB 1.97 billion, demonstrating business resilience ²².

Q2 2025: Growth accelerated further. Total revenue reached RMB 2.35 billion, up 24.2% year-on-year and 19.3% quarter-on-quarter. Profitability reached new heights, with adjusted EBITDA soaring 570.1% year-on-year to RMB 410 million, and adjusted EBITDA margin hitting 17.3% ²⁰.

This series of data points clearly outlines a "V-shaped" recovery curve from the quagmire of losses to healthy growth. The simultaneous occurrence of revenue growth and margin expansion reflects a profound optimization of the business structure. The company's "high-quality sustainable development strategy" is not about simple cost-cutting but an active "replacing the old with the new": strategically scaling back or abandoning low-margin general cloud businesses in price wars while fully investing resources into high-margin AI businesses represented by intelligent computing services. It is this fundamental improvement in revenue quality, rather than one-time cost controls, that has driven this sustainable financial transformation.

To visually illustrate this transformation process, the table below summarizes key quarterly financial metrics:

Table 1: Kingsoft Cloud's Key Financial Transformation Metrics by Quarter

Source: ¹⁹. Note: Some historical adjusted data is not fully disclosed; the table is compiled based on available information.

This table clearly reveals that the transformation inflection point occurred in Q4 2024, coinciding precisely with the explosive growth of AI revenue. This proves that the AI business is not just a new growth story for the company but the lifeline for achieving profitability and healthy development.

Part 6: Valuation Analysis: Pricing the High-Growth Transformation

Valuing Kingsoft Cloud is a complex task, as it is in the midst of a fundamental transformation in its business model and financial condition. Traditional valuation methods may not fully capture its future growth potential. This section explores appropriate valuation frameworks and assesses whether the current stock price reasonably reflects its intrinsic value.

6.1 Market Views and Key Statistics

Kingsoft Cloud's stock performance fully reflects the high risk and high uncertainty of its transformation story. Taking its Hong Kong-listed stock (3896.HK) as an example, its 52-week price range has been extremely volatile, with a low of HKD 1.380 and a high of HKD 11.400 ²⁶. As of recently, the company's market capitalization was approximately HKD 36.29 billion ²⁶. Such extreme volatility is typical of companies in transition, indicating significant market divergence over its future prospects. However, the average one-year target price from multiple analysts is around HKD 9.71, suggesting considerable upside potential from the current price, indicating that professional investors generally recognize its transformation value ²⁸.

6.2 Relative Valuation: The Applicability of Price-to-Sales (P/S)

For high-growth tech companies like Kingsoft Cloud that have just achieved adjusted profitability but have not yet entered a steady net income phase, traditional price-to-earnings (P/E) valuation is not applicable. In such cases, the price-to-sales ratio (P/S), which compares total market capitalization to core business income, is a more commonly used and reasonable valuation tool ²⁹.

However, when evaluating Kingsoft Cloud, using a simple trailing twelve-month (TTM) P/S can be seriously misleading. Because its revenue over the past twelve months includes performance from the pre-transformation period of low or even negative growth, this "old" revenue cannot represent the company's current business momentum and future growth potential. Using a historically derived, lower-quality revenue as the denominator to calculate a forward-looking valuation inevitably results in an inflated and unattractive figure.

The core investment thesis for Kingsoft Cloud lies in the market gradually recognizing the transformation in its business nature and shifting from historical P/S valuation to a more forward-looking forward P/S to price it. As the company delivers consecutive quarters of 20%+ high growth driven by AI, its "new identity" as a high-growth AI infrastructure provider will be cemented. At that point, the market will be willing to assign it a higher valuation multiple that matches AI concepts and high growth. This shift in valuation logic will be the core catalyst for stock price appreciation.

To provide valuation context, the table below compares Kingsoft Cloud with some domestic and international peers in cloud services and AI infrastructure.

Table 2: Cloud Computing and AI Infrastructure Peer Valuation Matrix

Source: Public market data, company financial reports, and market analysis. Note: Some data are estimates based on public information and are for reference only.

The table shows that, compared to slowing-growth domestic cloud giants, Kingsoft Cloud's expected revenue growth is higher. And compared to pure-play AI computing leasing leaders like CoreWeave, its valuation multiples are much lower. Considering the ultra-high growth rate of its AI business, the growth potential of its overall business, and room for margin improvement, the current forward P/S level appears relatively reasonable, leaving room for future valuation re-rating. If the company can continue to prove the effectiveness of its AI strategy, its valuation multiples have the potential to move closer to those of more pure-play AI infrastructure players.

Part 7: Key Investment Risks

Any investment decision must be based on a clear understanding of potential risks. Although Kingsoft Cloud's transformation story is compelling, investors must be vigilant about the following key risks that could undermine the investment thesis:

7.1 Intense and Escalating Competition

The Chinese cloud computing market remains a "battlefield of giants." Although Kingsoft Cloud has pivoted to the AI computing track, its main competitors, such as Alibaba Cloud, Huawei Cloud, and Tencent Cloud, are also investing heavily in AI and have larger capital, R&D, and customer bases. These giants may launch more competitive AI products or initiate new price wars, limiting Kingsoft Cloud's market share growth and profit margins. Additionally, the strong influence of carrier clouds in the government and enterprise markets may continue to pressure its industry cloud business.

7.2 Execution Risks of the AI Strategy

The current bullish investment thesis is almost entirely built on the company's continued successful execution of its AI strategy. This is a complex and technology-intensive field, and any missteps in technology R&D, platform stability, retention of key talent, or AI customer acquisition could significantly impact its growth and profit forecasts. If AI revenue growth falls short of expectations or high margins cannot be sustained, the company's financial transformation story will be hard to maintain.

7.3 Continued Dependence on the Xiaomi Ecosystem

Although the symbiotic relationship with the Xiaomi ecosystem is currently its core strategic advantage, the high revenue concentration of 26.8% (Q2 2025 data) still poses a potential risk. Any event affecting this relationship—such as a major setback in Xiaomi's own business, a change in its AI strategy direction, or a decision to introduce a second core cloud provider to diversify risk—would disproportionately impact Kingsoft Cloud's revenue and growth prospects.

7.4 Macroeconomic and Regulatory Environment

As a company primarily focused on China, Kingsoft Cloud is inevitably affected by macroeconomic fluctuations in China. A slowdown in corporate IT spending could impact overall demand for its cloud services. Additionally, China's regulatory policies for the technology, data security, and AI industries are still evolving. Any unexpected, stricter regulations could increase the company's compliance costs or limit its business development.

Part 8: Conclusion and Investment Recommendation

Comprehensive Analysis

After a comprehensive analysis of the market environment, company strategy, financial performance, and valuation, this report concludes that Kingsoft Cloud has successfully executed a timely and decisive strategic transformation, finding a new positioning in the fiercely competitive Chinese cloud computing market. The company has withdrawn from the "red ocean" of general cloud services and placed its bets on the high-growth track of AI computing, achieving significant results.

This transformation is not just talk but is supported by a series of compelling data: AI-related revenue has achieved triple-digit explosive growth, driving overall revenue back onto a recovery track; business structure optimization has led to significant margin expansion and, historically, the first-ever turnaround in adjusted operating profit. Its strategic symbiotic relationship with the Xiaomi ecosystem provides unique computing power, scenarios, and customer resources in the AI race, building a critical competitive moat.

Valuation and Recommendation

Although the stock price has rebounded significantly from historical lows, we believe the market has not yet fully priced in the depth of its business transformation and the sustainability of AI-driven growth. Forward P/S-based valuation analysis shows that, relative to its strong growth prospects and improving profitability, its current valuation remains within a reasonable range, with potential for further re-rating.

Of course, investing in Kingsoft Cloud is not without risks. Intense market competition, uncertainty in AI strategy execution, and high dependence on a single ecosystem are all challenges investors must face. The existence of these risks is precisely why we define its rating as "Speculative."

However, for investors with higher risk tolerance and a 12- to 18-month investment horizon, Kingsoft Cloud offers an attractive risk-reward profile. We believe that as the company continues to deliver on its AI business growth promises in the coming quarters, the market will gradually recognize its new identity as a leading AI infrastructure provider, driving its valuation multiples and stock price into an upward trajectory.

Final Recommendation

We reiterate our "Speculative Buy" rating on Kingsoft Cloud (3896.HK / KC.US). The continued successful execution of its AI strategy and further growth in high-margin AI revenue will be key catalysts for the stock's market re-rating.