KC - Kingsoft Cloud: Spotlight On Key Metrics And Insider Buying

2023-08-04 06:31:23 ET

Summary

• An evaluation of Kingsoft Cloud's key metrics suggests that the company's short-term financial performance might be weak.
• On the flip side, KC's recent insider buying provides support for the company's view that its long-term growth prospects are intact.
• I continue to have a mixed opinion of Kingsoft Cloud stock as a potential investment candidate, which explains my Hold rating for KC.

Elevator Pitch

My rating for Kingsoft Cloud Holdings Limited ( KC ) [3896:HK] stock stays as a Hold.

In my prior February 27, 2023 article for KC, I touched on the factors contributing to Kingsoft Cloud's disappointing share price performance following its public listing on Nasdaq since May 2020. Kingsoft Cloud's last done stock price of $6.73 as of August 3, 2023 is still -60% lower than its $17 IPO price .

With the current update, my focus is on KC's key metrics and insider buying activity. On one hand, a review of the company's key metrics implies that Kingsoft Cloud's financial performance for the rest of 2023 is most probably going to be lackluster. On the other hand, the recent purchase of shares by KC's CEO indicates that the company's long-term future remains bright. Considering both the positives and negatives associated with the stock, I stick with my existing Hold rating for KC.

KC's Key Metrics

Kingsoft Cloud is expected to announce the company's financial results for the second quarter of 2023 in late August as per the timing of past earnings releases, even though KC hasn't officially confirmed the exact date.

An analysis of Kingsoft Cloud's key metrics suggests that KC's financial performance in the near term is likely to have been weak.

The company guided for a Q2 2023 top line in the RMB1,850-2,000 million range when it reported its Q1 2023 financial results on May 23. The mid-point of KC's second quarter revenue guidance was RMB1,925 million which translated into a marginal +1% YoY sales expansion. Prior to its first quarter earnings announcement, the sell-side analysts were anticipating that Kingsoft Cloud's top line could potentially grow by +5% YoY as per S&P Capital IQ's consensus data.

Kingsoft Cloud's Q2 2023 top line growth guidance was poor in absolute terms and also turned out to be weaker than what the market had expected.

KC's disappointing second quarter financial guidance came on the back of the company's below-expectations Q1 financial performance. Revenue for Kingsoft Cloud decreased by -14% YoY to RMB1,864 million in Q1 2023, and this was -7% below the sell-side's consensus first quarter top line estimate of RMB2,010 million (source: S&P Capital IQ ). In addition, KC's actual Q1 2023 normalized EBITDA loss of -RMB131 million was much worse than the analysts' consensus quarterly EBITDA loss forecast of -RMB35 million.

It is also worth noting that the market's consensus full-year fiscal 2023 revenue projection for Kingsoft Cloud was revised downwards by -17% from RMB10,070 million at the beginning of the year to RMB8,330 million now. This also implies that the sell-side analysts see KC's top line increasing by a modest +2% in local currency or RMB terms for the current year.

Seeking Alpha News recently reported on August 3, 2023 that the July 2023 "Caixin China General Composite PMI" fell to the lowest it has been in the past half-year period. It is inevitable that the weakness in the Chinese economy will have a negative impact on Kingsoft Cloud's business performance.

In a nutshell, I have a negative view of Kingsoft Cloud's short term prospects based on my evaluation of the company's key metrics.

Insider Buying For Kingsoft Cloud

Earlier on June 9, 2023, Kingsoft Cloud disclosed that its Vice Chairman and CEO, Zou Tao, had bought "two million ordinary (Hong Kong-listed) shares of the Company at a weighted average price of HK$2.625 on the open market." KC's shares are listed on both the NASDAQ and the Hong Kong Stock Exchange, and each ADS (American Depositary Share) is equivalent to 15 of its ordinary shares listed in Hong Kong as indicated in the company's 20-F filing .

In other words, that KC's CEO spent approximately $670,000 buying the company's shares at a per ADS equivalent price of around $5.04. Investors in general had a positive view of Kingsoft Cloud's recent insider buying activity as evidenced by KC's share price performance following this June 9, 2023 announcement. KC's shares closed at $4.79 as of June 8, 2023, and the company's stock price rose by +7.8%, +9.9%, and +19.1% on the subsequent three trading days, respectively. Kingsoft Cloud's shares last traded at $6.73 as of August 3, 2023, which is +41% above KC's stock price prior to the June 9 insider buying activity announcement.

In the June 9, 2023 announcement, Kingsoft Cloud's CEO, Zou Tao, highlighted that he is "fully confident in the Company's strategy, execution and long-term prospects", and indicated that he "may further purchase shares of the Company from time to time."

As I mentioned in the preceding section, KC's short term business outlook doesn't seem to be good. But there might be good reasons for Kingsoft Cloud's CEO to be optimistic about the company's growth potential in the long run.

According to consensus data obtained from S&P Capital IQ , Kingsoft Cloud's revenue growth (in RMB terms) is projected to accelerate from +10.8% for FY 2024 and +13.4% for FY 2025 to +23.5% and +23.3% for FY 2026 and FY 2027, respectively. The analysts also see KC turning EBITDA positive in FY 2025 and generating positive net income by FY 2027. At its Q1 2023 results call , Kingsoft Cloud emphasized that the positive effects of its "ongoing strategy initiatives and the new business opportunities" will be seen in its "financial results in the mid to long-term." Separately, BofA ( BAC ) views KC as a play on growing "public cloud spending in China" as noted in a July 7, 2023 Seeking Alpha News article .

Concluding Thoughts

The recent insider buying announcement had provided a big boost to Kingsoft Cloud's share price. KC's CEO could have bought the company's shares in view of the favorable outlook for the business in the long run and the stock's undemanding valuations. However, I have an unfavorable opinion of Kingsoft Cloud's short term prospects, so KC's positive share price momentum is unlikely to be sustained. As such, I keep my Hold rating for Kingsoft Cloud unchanged.

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