Rush to go public, is Kingsoft Cloud ready for the future?

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Beware of it becoming the second Luckin Coffee.

On May 8, Kingsoft Cloud was officially listed for trading on NASDAQ in the United States under the stock symbol “KC”. On the first day of listing, Kingsoft Cloud stock was traded actively, changing hands reached 7.56%, with a turnover of 15.14 million shares which valued US $327 million. Shares rosed 40.24 percent to $23.84, with a market capitalization of about $4.8 billion.

This company is the fourth listed company among enterprises founded by Chinese entrepreneur Lei Jun.

Previously, Xiaomi (1810.HK), Kingsoft (3888.HK), and Kingsoft Office (688111), founded by Lei Jun, were listed on the Hong Kong Stock Exchange and China’s Science and Technology Innovation Board respectively.

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But compared with its dazzling share price, Kingsoft Cloud is not as well-known as its competitors in China’s public cloud market.

If you are a Chinese developer, when you choose cloud services, you may first consider about Aliyun and Tencent Cloud, and if you have a special preference for certain artificial intelligence services, you may choose Baidu Cloud.

In addition, there are independent Chinese cloud service companies that compete with those giants by offering lower price and more personalized services, such as UClod, QingCloud, QiniuCloud, etc..

However, Kingsoft Cloud is not within the vision of ordinary developers.

Kingsoft Cloud was founded in 2012. Its predecessor is a cloud disk business for individual or enterprise users. After transforming into a public cloud service, during a long period, its primary customers mainly came from other companies founded by its founder Lei Jun, such as Kingsoft, Kingsoft Office, and Xiaomi.

Kingsoft Cloud successfully listed on NASDAQ and became the only independent Chinese Cloud Service provider in US stocks. This independent identity not only brings it some advantages but also indicates some hidden dangers.

According to the Frost&Sullivan report cited in Kingsoft Cloud`s prospectus, the company is the third-largest Internet Cloud Service provider in China. According to IaaS and PaaS service revenue, Kingsoft Cloud’s market share reached 5.4% in 2019, but it ranks seventh or lower among Chinese cloud service providers according to IDC’s calculating method.

via IDC1 & IDC2

According to a data report released by IDC, the top five Chinese Cloud Service providers accounted for 74% of the market in the first half of 2019. They were Aliyun, Tencent Cloud, AWS, China Telecom, and Huawei, while Kingsoft Cloud ranked only seventh.

What was worse, in the follow-up report, the market share of Chinese Cloud Service providers exceeded 77.5% in the second half of 2019. Kingsoft Cloud, Inspur, and JD Cloud were no longer shown in the chart and counted into “other.”

Specifically, the revenue of Kingsoft Cloud seems to over rely on major clients.

In the past three years, the company’s total revenue from senior customers accounted for 93.7%, 95.3%, and 97.4% of the total during the same period, respectively.

Although the number of advanced clients increased from 113 in 2017 to 154 in 2018 and further increased to 243 in 2019, the company’s top three clients have still consistently generated more than 50% of the total revenue in the last three years.

According to official documents, Kingsoft Cloud’s revenue from its top three clients accounted for 27%, 19% and 10% of the total in 2017, 25%, 24% and 11% in 2018, and 31%, 14% and 12% in 2019, respectively.

Among the top three clients, Kingsoft Cloud only published the exact name of Xiaomi. Xiaomi was the largest revenue stream of Kingsoft Cloud in 2017 and 2018 and the second largest revenue stream in 2019.

We receive a substantial portion of our revenues from a limited number of customers, and the loss of, or a significant reduction in usage by, one or more of our Premium Customers would result in lower revenues and could harm our business.

Kingsoft Cloud Holdings Limited FORM F-1 REGISTRATION STATEMENT

This passage is written in the risk factors section of the Kingsoft Cloud F-1 document, yet for non-Chinese investors, it actually lacks a further explanation.

Kingsoft cloud did not directly give the names of the other Top 3 customers, even though the revenue from the largest customer was much higher Xiaomi in 2019.

According to the analysis, this core client, which accounted for 31% of Kingsoft’s revenue in 2019, is likely to be ByteDance – another major Chinese Internet company.

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Kingsoft Cloud’s F-1 file also described Bytedance as its high-profile customer many times.

Bytedance is the most promising Internet company in China in recent years. It is the holder of Tiktok and Douyin, and has more than 1.5 billion daily active users worldwide.

ByteDance has always been famous for its strong technology in China’s Internet industry. This means that the company relies very little on the PaaS of cloud service providers and mainly needs IaaS (servers, bandwidth, CDN, etc.), which is also in line with the business structure of Kingsoft Cloud.

This means that the current Bytedance has brought huge revenue for Kingsoft Cloud, but it is a ticking time bomb buried in Kingsoft Cloud business.

Because when a Internet company is big enough, they may not continue to use another company’s cloud services. It’s not hard to understand that Google never or rarely uses Amazon’s AWS, and Amazon also has same attitude on Google’s Google Cloud.

Among the three companies in the second tier of Chinese Internet companies (Bytedance, Meituan, and Didi), Meituan and Didi have launched their own public cloud services. It is not hard to understand that for large Internet companies, infrastructures such as data centers are the company’s security baseline.

As mentioned earlier, Kingsoft Cloud is also the product of this strategy to some extent. Kingsoft Cloud was founded in 2012 to meet the needs of different companies founded by Lei Jun for cloud services.

Bytedance quietly acquired the Bytecloud.com domain name in February, suggesting that it might plan to launch its own public cloud service.

Bytedance entered the online enterprise services market with its Feishu App during the outbreak of COVID-19, which might signify that the company would enter the enterprise services market in a very short time.

Once the Bytedance establishes its own cloud service business, it may widely stop using other companies’ cloud services, such as Kingsoft Cloud.

Therefore, if this hypothesis was true, Kingsoft Cloud would instantly lost 30% of its revenue stream and a major client.

In China’s Internet industry, there is another hidden rule: when a company grows to a certain extent, it will face the need of picking sides.

After a startup has grown to medium size, if it wants to accept investment from Alibaba or Tencent, it may need to enter the business ecology of Alibaba or Tencent. This makes them have to choose between Aliyun or Tencent Cloud rather than third-party cloud services such as Kingsoft Cloud.

In addition, most of the second and third-tier companies in China’s Internet industry have already built their own cloud services or finished which side they take.

This means that if Kingsoft Cloud loses Bytedance as a major customer, it will be much more difficult to find similar one with the same scale.

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