Investment thesis
Kingsoft Cloud (NASDAQ:KC) ranks amongst the top 5 largest cloud players in China, providing Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) offerings to customers across a multitude of sectors. It is a pure play proxy to the long growth runway ahead for China's cloud industry, given the low rates of adoption currently.
After a strong start post its IPO on 8 May 2020, the share price has corrected sharply on worries over a new bill (for the Holding Foreign Companies Accountable Act) that has just passed the US Senate, which may require US-listed Chinese companies to delist in 3 years or so if this act is eventually signed into law. It still needs to be approved by the House and the President.
My view is that the worries over the new regulations are overdone, as the option of a secondary listing 'backdoor' exists, and the current selloff creates a good buying opportunity in KC US. My back-of-the-envelope DCF and exit multiple valuations yield a target price range of US$30-50, indicating the shares are substantially undervalued at this point. BUY.
Note: this article may also be of interest to holders of Kingsoft Cloud's parent company, Kingsoft Corporation (OTCPK:KSFTF) (KGFTY).
Why Kingsoft Cloud is a long-term secular winner
- Under-penetration of cloud in China
- Ability for multiple cloud vendors to co-exist. Increasing adoption of multi-cloud strategies means this is not a winner takes all sector
- Market share gains to be had from US cloud providers
Point #1: There is a long growth runway ahead due to low adoption rates currently. China remains a laggard in terms of cloud adoption, with cloud accounting for less than 8% of IT spend, versus about 15% in the US, according to Gartner.
However, China's growth rate in cloud spending is one
