20210803-招银国际-M_A_and_new_customer_win_enhance_visibility_9页_1mb

CMB International Securities | Equity Research | Company Update Summary

Core Content

Kingsoft Cloud (KC US) is a leading Chinese cloud service provider, with a focus on public and enterprise cloud services. The report highlights recent developments in KC's business, including the acquisition of Camelot and new customer wins in the public cloud segment, which are expected to enhance its visibility and growth prospects.

Main Points

• Acquisition of Camelot:

  • KC acquired Camelot, a financial IT service company, through the issuance of shares.
  • The total consideration was estimated at approximately US$422 million (RMB2.7 billion).
  • Camelot has a high recurring revenue ratio of 94% and a RMB3.8 billion revenue backlog as of 31 Jul 2021.
  • The acquisition is expected to close by the end of 2021, subject to regulatory approval.

• New Customer Win:

  • Meituan became a new customer of KC's public cloud services in June 2021.
  • This, along with previous wins (Zhihu, Agora, Huya, Bigo, Sogou), indicates the ongoing trend of multi-cloud adoption.
  • KC's multi-cloud strategy supports network stability and flexibility, benefiting third-party cloud providers.

• Financial Performance:

  • For FY2Q21E, KC is expected to report revenue of RMB2,183 million (+42% YoY), in line with prior guidance.
  • Public cloud revenue is projected to grow by 22% YoY to RMB1,564 million, while enterprise cloud revenue is expected to increase by 147% YoY to RMB608 million.
  • Adjusted EBITDA margin is expected to decline slightly to -2.4% YoY due to revenue recognition timing and a one-time benefit in FY2Q20.

• Earnings and Valuation:

  • The report maintains a BUY recommendation for KC.
  • The target price was trimmed to US$43.85 (from US$45.26) due to sector de-rating and policy uncertainty.
  • The valuation is based on a 4.5x FY22E P/S multiple, down from the prior 5x.
  • KC's P/S ratio has been declining over time, from 11.2x in FY19A to 3.2x in FY22E.

• Revenue Mix and Growth:

  • Public cloud services have been the dominant revenue source, accounting for 97% of total revenue in FY17 and 67% in FY21E.
  • Enterprise cloud services are growing rapidly, from 1% in FY17 to 33% in FY21E.
  • Revenue CAGR is expected to be 42% for FY20–FY23E.

• Key Operating Metrics:

  • KC has a growing number of premium customers in public cloud, with an average revenue per customer increasing over the years.
  • The net dollar retention rate of premium customers has been stable, indicating strong client retention.
  • Cost of sales is dominated by IDC costs, which have been decreasing as a percentage of total revenue.

Key Information

• Shareholding Structure:

  • Kingsoft Group holds 43.6%, Xiaomi holds 13.8%, and Jun Lei holds 13.8%.

• Stock Performance:

  • KC has seen a decline in share price over the past 12 months, with a 12-month price performance of -46.5% absolute and -51.2% relative to the market.

• Valuation Comparison:

  • KC's P/S ratio is lower than that of its peers, including Alibaba, Tencent, and Amazon, indicating potential undervaluation.
  • The report compares KC's financial metrics with those of other companies in the industry, such as Agora, Tuya, and Glodon, highlighting its competitive position.

• Financial Summary:

  • KC has shown a pattern of declining net income, but the report expects a positive net profit in FY23E.
  • Cash flow from operations has been negative in recent years but is expected to improve in FY23E.

Conclusion

The acquisition of Camelot and continued customer wins in the public cloud sector are seen as positive developments for KC. Despite a slight decline in adjusted EBITDA margin for FY2Q21E, the company is expected to maintain a BUY rating due to its strong growth prospects and strategic positioning in the multi-cloud market. The report also highlights the potential for improved financial performance in the coming years.