How does Kingsoft Cloud's margin performance and cash flow outlook compare to peers in the Chinese cloud market?
Fundamentals & Margin Outlook
Kingsoft Cloud’s Q2‑2025 release shows a modest improvement in gross margin (≈ 38% vs. 35% in Q1) as the company leverages its “AI‑plus‑cloud” pricing mix and scales its data‑center footprint in Tier‑1 cities. However, the operating margin remains thin—still in the low‑single‑digit range—because SG&A and R&D spend still exceed 30% of revenue. By contrast, Alibaba Cloud and Tencent Cloud have been reporting operating margins in the high‑single‑digit to low‑double‑digit band (≈ 12‑15% and ≈ 10‑13% respectively) thanks of their larger scale, deeper cross‑selling ecosystems and more diversified enterprise client bases. Huawei Cloud, while still operating at a loss, is narrowing its margin gap faster than Kingsoft, posting a 2‑point improvement in gross margin YoY and a 4‑point lift in operating margin in its latest interim filing.
Cash‑Flow Outlook & Peer Comparison
Kingsoft’s cash‑conversion cycle has tightened: the Q2 cash‑flow statement shows a positive operating cash flow of CNY 1.2 bn, up from a negative CNY 0.4 bn in Q1, driven by better receivables collection and a modest reduction in cap‑ex intensity. Nonetheless, free‑cash‑flow generation remains modest (≈ CNY 0.3 bn) and is still well below the cash‑burn levels of Baidu Cloud and Huawei Cloud, which continue to post negative free‑cash‑flow due to aggressive network roll‑outs. Alibaba Cloud and Tencent Cloud are already cash‑flow positive, with free‑cash‑flow yields of ≈ CNY 3‑4 bn per quarter, underscoring their superior scale and higher net‑retention rates.
Trading Implications
* Relative valuation: Kingsoft’s tighter margins and still‑negative free‑cash‑flow place it at a discount to the “big‑three” peers (Alibaba, Tencent, Huawei). The current price‑to‑sales multiple (~ 4×) is higher than the sector average (~ 3×) given the margin gap, suggesting limited upside unless the margin trajectory accelerates.
* Positioning: For a short‑term play, consider a light‑short or reduction of exposure if the stock price is near the upper end of its recent 200‑day range (≈ HK $2.8). Conversely, a long‑only stance could be justified only if you anticipate a catalyst—e.g., a partnership that expands AI‑driven workloads or a clear roadmap to lift operating margin into double‑digit territory.
* Risk management: Keep a stop‑loss around 8–10% below the entry price, as any surprise in margin expansion (e.g., a new AI‑cloud contract) could trigger a rapid rally, while the broader Chinese cloud market remains sensitive to macro‑policy and data‑center cap‑ex cycles.