Kingsoft Cloud Holdings (KC) has begun its effort to raise investment from U.S. investors in an IPO of its ADSs representing ordinary shares, according to an F-1 registration statement.

The firm provides Internet and public cloud services to enterprises in Asia.

KC has grown topline revenue quickly but is only at gross profit breakeven, is losing money and burning cash at a high rate.

Kingsoft is a spinoff from Hong Kong-listed Kingsoft Corporation (HK:3888).

Management is led by Chief Executive Officer Mr. Yulin Wang, who has been with the firm since 2012 and was previously EVP at Phoenix New Media Limited and COO at CNEC.

Below is a brief overview video of the Kingsoft Cloud antivirus system:

Source: languy99

The company’s primary offerings include the following modules:

  • Compute
  • Networking
  • Storage & CDN
  • Database
  • Data Analysis
  • Security

Kingsoft has received at least $1 billion from investors including parent firm Kingsoft, Xiaomi  (XIACF)  and FutureX.

KC is the largest independent cloud service provider in China and lists its efforts by industry vertical:

  • Gaming
  • Video
  • Financial Services

The firm seeks to enter new verticals via top initial customers to be able to demonstrate its capabilities and market more efficiently to other prospects in the vertical.

Selling and marketing expenses as a percentage of total revenue have been dropping as revenues have increased and were at just 8.0% at the end of 2019.

The Selling and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling and marketing spend, was a very strong 5.3x in the most recent reporting period.

According to a 2020 market research report by Allied Market Research, the market for cloud services of all types reached a value of $264 billion in 2019 and is expected to reach $927 billion by 2027.

This represents a forecast 16.4% CAGR (Compound Annual Growth Rate) from 2020 to 2027.

The main drivers for this expected growth include the continued transition by enterprises worldwide from on-premises systems to cloud environments and ongoing innovation in cloud system offerings by service providers.

A Frost & Sullivan report commissioned by Kingsoft shows the expected growth of various sectors in China the firm is focused on as shown in the chart below:

Source: Frost & Sullivan

Source: Frost & Sullivan

Kingsoft’s recent financial results can be summarized as follows:

  • Sharply growing topline revenue
  • Little gross profit and low gross margin
  • Large operating losses
  • High cash used in operations

The firm's recent financial results are shown below:

Source: Kingsoft Cloud Holdings F-1 Filing

Source: Kingsoft Cloud Holdings F-1 Filing

As of December 31, 2019, Kingsoft had $290.6 million in cash and $358.2 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2019, was a negative ($206.6 million).

Kingsoft intends to raise $100 million in gross proceeds from an IPO of its ADSs representing ordinary shares, although the final amount may differ.

Management says it will use the net proceeds from the IPO to invest in its infrastructure (50%), product development (25%), international expansion (15%) and general corporate purposes (10%).

Management’s presentation of the company roadshow is not yet available.

Listed bookrunners of the IPO are J.P. Morgan, UBS Investment Bank, Credit Suisse and CICC.

Commentary

Kingsoft is seeking U.S. public investment after likely reaching the limit of its investment opportunities with its parent firm and major partner Xiaomi.

The company’s financials indicate the firm is growing topline revenue quickly but producing very little gross profit and generating large losses and cash burn.

Selling and marketing expenses as a percentage of total revenue are low and dropping as revenues increase; its Selling and marketing efficiency rate is 5.3x, a strong multiple, so the firm’s selling & market efforts appear to be quite efficient.

The overall market opportunity in Asia for providing a suite of cloud services to enterprises is large and expected to grow markedly in the year ahead, as businesses continue a historic transition from on-premises systems to the cloud, so the firm has strong market tailwinds in its favor.

While I wait for management’s proposed terms for the IPO, the financials are a significant sticking point, especially with such low gross profit.

High growth U.S. technology firms can at least produce strong gross profit results, so the lack of gross profit makes me concerned about KC’s ability to forge a path toward profitability any time soon.

I’ll provide a final opinion when we learn more IPO details from the company.

Expected IPO Pricing Date: To be announced.