AI cloud revenue sustains rapid growth, with Kingsoft Cloud's revenue and margins expected to improve simultaneously in the second half

Overview

This report reviews Kingsoft Cloud's second-quarter 2026 results and assesses subsequent operating trends in terms of AI cloud demand, PCS and ECS growth, cost and expense control, chip procurement, and capital expenditure. Citi believes that the AI business will continue to drive revenue growth, while an improving business mix and operating leverage are expected to drive sequential margin improvement. It therefore maintains its Buy rating and US$18 target price.

Core views

Kingsoft Cloud's second-quarter 2026 results were better than expected overall. Revenue increased 31% year over year to RMB 30.7 hundred million, slightly above the Bloomberg consensus expectation of RMB 30.4 hundred million; PCS revenue increased 45% year over year, while ECS revenue declined 1% year over year. PCS growth was primarily driven by the AI cloud business, whose total billings increased 82% year over year. Supported by a seasonal recovery in gross margin and good expense discipline, gross margin increased from 13.0% in the first quarter of 2026 to 15.4%, while adjusted operating margin improved from -4% to 3%. Adjusted loss was RMB 6000 ten thousand, significantly better than the Bloomberg consensus expectation of an RMB 1.5 hundred million loss; revenue, adjusted EBITDA, and adjusted loss all beat market expectations. PCS remains the core growth driver for the second half. AI revenue as a percentage of PCS revenue increased from 51% in the first quarter of 2026 to 56% in the second quarter. Although MaaS revenue remains small at present, the business is scaling rapidly, driven by rising demand for domestic large models, and delivers relatively good margins. AI demand from the parent company ecosystem has slowed slightly recently, but Citi expects it may gradually recover; meanwhile, momentum in AI demand from external customers is expected to remain strong. Based on these factors, Citi expects PCS revenue to increase 48% year over year in the second half of 2026. ECS revenue declined slightly year over year in the second quarter due to seasonality and slower enterprise procurement. Citi believes that ECS's year-over-year performance will gradually recover as more projects are delivered in the second half and expects ECS revenue to increase 2% year over year in the second half of 2026. Therefore, sustained high PCS growth combined with ECS stabilizing after weakness will accelerate the company's total revenue growth in the second half. Margin improvement is being driven by revenue scale, business mix, and expense control. As higher-margin businesses account for a larger share of revenue, Citi expects gross margin to continue improving gradually. The company has demonstrated good operating expense control, so operating leverage from revenue growth is expected to drive sequential improvement in adjusted operating margin during the second half of 2026. Citi's new forecasts show non-GAAP gross margins of 15.2%, 16.7%, and 17.7% for 2026—2028, respectively, and non-GAAP EBITDA margins of 33.7%, 36.5%, and 38.3%, respectively. Non-GAAP earnings are expected to be RMB -2.99 hundred million, 2.46 hundred million, and 6.15 hundred million, respectively, corresponding to net margins of -2.3%, 1.6%, and 3.4%, implying that earnings are expected to turn positive in 2027. Strong AI demand prompted Citi to raise its 2026, 2027, and 2028 revenue forecasts by 3%, 6%, and 6%, respectively, to RMB 128.03 hundred million, 156.61 hundred million, and 181.48 hundred million; the corresponding revenue growth rates are 33.9%, 22.3%, and 15.9%. Compared with its previous forecasts, non-GAAP earnings for 2026—2028 were raised from RMB -4.81 hundred million, 1.44 hundred million, and 3.66 hundred million to RMB -2.99 hundred million, 2.46 hundred million, and 6.15 hundred million. Cash flow forecasts also show improvement, with free cash flow to equity expected to shift from RMB -30.43 hundred million in 2024 and RMB -8.26 hundred million in 2025 to RMB 16.76 hundred million in 2026, RMB 20.03 hundred million in 2027, and RMB 25.90 hundred million in 2028. Chip supply remains an important constraint on business expansion. Management stated that chip shortages have become the industry's new normal and that the company is broadening its range of chip suppliers and strengthening cooperation with domestic suppliers. The company invested RMB 62 hundred million in capital expenditure in the first half of 2026 but maintained its full-year guidance of RMB 150 hundred million, indicating that it still has substantial investment plans for the second half to support demand for AI computing power and business expansion. Citi rolled its valuation benchmark forward to 2027, with its US$18 target price based on 2.5 times expected 2027 price-to-sales; the previous valuation benchmark was 3 times expected 2026 price-to-sales. The 2.5 times multiple is consistent with Kingsoft Cloud's historical average, and Citi believes this valuation strikes a balance between the positive outlook for AI-related computing demand and the current peer valuation environment. Based on the US$11.42 price on 2026年8月20日, the target price implies an expected share price return of 57.6%. The report's scenario framework uses revenue and margins as key variables: the upside scenario assumes faster-than-expected revenue growth and margin improvement; the base case assumptions include a 24% revenue CAGR from 2024—2027 and an increase in the 2026 non-GAAP EBITDA margin to approximately 34%; the downside scenario assumes slower-than-expected revenue growth and margin improvement. Citi maintains its Buy rating, believing that the optimization of low-margin businesses may have been completed, that the company's fundamentals may have bottomed, and that it could achieve moderate revenue growth and sustained EBITDA margin improvement going forward. In addition to AI cloud demand, the large-scale rollout of WPS AI products and the launch of Xiaomi electric vehicles could also generate incremental demand. However, the main downside risks remain weaker-than-expected margin improvement, public cloud customer attrition causing revenue to fall short of expectations, and intensified competition slowing enterprise cloud revenue growth.

Analysis framework

Citi first compares second-quarter revenue, segment growth, margins, and losses with the previous quarter and Bloomberg consensus expectations. It then separately analyzes demand and delivery trends for PCS, AI cloud, MaaS, and ECS, before projecting second-half margins based on business mix, expense control, and operating leverage. The report also examines whether chip supply and capital expenditure can support computing capacity expansion, raises its 2026—2028 financial forecasts accordingly, and finally rolls the valuation benchmark forward to 2027, calibrating the target price using the historical average price-to-sales multiple and the peer valuation environment.

Methodology notes

• Valuation MethodPS valuation

  Forward Price-to-Sales Valuation

  The report values Kingsoft Cloud at 2.5 times expected 2027 price-to-sales and derives a US$18 target price by referencing the company's historical average and current peer valuations.

• Company Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Operating Leverage from Revenue Growth

  The report believes that PCS growth, ECS recovery, and a rising share of higher-margin businesses, combined with good expense control, will allow revenue growth to translate more rapidly into operating margin improvement.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Segment Revenue Growth Decomposition

  The report breaks total revenue down into PCS and ECS and further examines AI cloud revenue contribution and total billings growth to identify which businesses are driving overall growth.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Kingsoft Cloud Holdings Ltd (KC.O)

  Growth in AI cloud demand, PCS expansion, recovery in ECS projects, and operating leverage constitute the primary positive drivers described in the report.

  Strengths

  PCS revenue is growing strongly, total AI cloud billings increased 82% year over year, and AI revenue as a percentage of PCS rose to 56%; expense control and margin improvement were both better than previously expected.

  Weaknesses

  ECS revenue declined 1% year over year in the second quarter amid slower enterprise procurement; the company remains loss-making and requires high capital expenditure to support computing capacity expansion.

  Comparison

  The US$18 target price uses 2.5 times expected 2027 price-to-sales, consistent with the company's historical average and determined with reference to the current peer valuation environment.

  Risks

  Weaker-than-expected margin improvement, public cloud customer attrition, and intensified competition slowing enterprise cloud growth.

Key data

• Second-Quarter 2026 RevenueRMB 30.7 hundred millionUp 31% year over year, slightly above the Bloomberg consensus expectation of RMB 30.4 hundred million
• PCS and ECS Revenue Growth+45% / -1%Year-over-year growth rates for the second quarter of 2026
• AI Cloud Total Billings Growth82%Year-over-year growth in the second quarter of 2026
• AI Revenue as a Percentage of PCS56%Up from 51% in the first quarter of 2026
• Second-Quarter Gross Margin15.4%13.0% in the first quarter of 2026
• Second-Quarter Adjusted Operating Margin3%-4% in the first quarter of 2026
• Second-Quarter Adjusted LossRMB 6000 ten thousandBetter than the Bloomberg consensus expectation of an RMB 1.5 hundred million loss
• Segment Revenue Forecast for the Second Half of 2026PCS +48%; ECS +2%Citi's year-over-year growth forecasts
• 2026—2028 Revenue ForecastsRMB 128.03 hundred million / 156.61 hundred million / 181.48 hundred millionRaised by 3% / 6% / 6%, respectively
• 2026—2028 Non-GAAP EBITDA Margins33.7% / 36.5% / 38.3%Reflecting operating leverage and business mix improvement
• 2026—2028 Non-GAAP EarningsRMB -2.99 hundred million / 2.46 hundred million / 6.15 hundred millionExpected to turn positive in 2027
• Capital ExpenditureRMB 62 hundred million in the first half of 2026; full-year guidance of RMB 150 hundred millionManagement maintained its full-year guidance
• Target Price Valuation2.5 times expected 2027 price-to-salesTarget price US$18; valuation benchmark rolled forward to 2027 from the previous 3 times expected 2026 price-to-sales
• Current Price and Expected ReturnUS$11.42 / 57.6%Price as of 2026年8月20日16:00; target price US$18.00
• Market CapitalizationUS$3,450MMarket value stated in the report

Impact & implications

The report believes that AI cloud demand is offsetting the impact of slower enterprise procurement and making PCS the primary driver of Kingsoft Cloud's revenue growth. If external customers' AI demand remains strong, ECS projects are delivered as planned, and expense discipline continues, accelerating revenue and a rising share of higher-margin businesses will jointly drive gross margin and operating margin improvement. Financial forecasts indicate that both non-GAAP earnings and free cash flow are expected to turn positive, although high capital expenditure, chip shortages, and enterprise cloud competition will continue to affect the pace of improvement.

Risks

• Margin improvement may be weaker than expected.
• The loss of some customers may cause public cloud revenue to fall short of expectations.
• Intensified competition may cause enterprise cloud revenue to grow more slowly than expected.

What to watch

• Whether AI demand from external customers can remain strong and whether AI demand from the parent company ecosystem can gradually recover.
• Whether the MaaS business can scale rapidly from a small revenue base while maintaining good margins.
• The delivery progress and revenue recovery of ECS projects in the second half of 2026.
• Sequential changes in the share of higher-margin businesses, gross margin, and adjusted operating margin.
• Chip supply constraints and progress in expanding cooperation with domestic chip suppliers.
• Execution of the full-year RMB 150 hundred million capital expenditure plan after RMB 62 hundred million was spent in the first half.