What is driving faster growth in the third quarter?

  • Goldman Sachs expects Kingsoft Cloud’s third-quarter 2026 revenue to reach 3.3 billion yuan, up 34% year on year and faster than the 31% growth in the second quarter, in line with Visible Alpha market consensus. AI cloud revenue is expected to grow 81% year on year.
  • The key incremental contribution comes from Xiaomi and Kingsoft group customers: their combined revenue growth is expected to rise from 28% year on year in the second quarter to 63%. Goldman believes improved high-end GPU supply makes it easier to turn customer demand into deliverable compute services.
  • This growth path also increases reliance on core customers. Goldman expects Xiaomi and the Kingsoft group’s share of revenue to rise from 27% in 2025 to 38% in 2028, making the strength of customers’ AI investment a direct influence on the delivery of growth.

Why is profit below consensus despite faster revenue growth?

  • Goldman expects third-quarter adjusted operating profit of 105 million yuan, 17% below market consensus, and the non-GAAP operating margin to fall to 3.2% from the previous quarter. This is because a credit-loss reversal occurred in the second quarter and general and administrative expenses return to normal in the third quarter, with an expected increase of 22% quarter on quarter.
  • Business choices also limit gross-margin upside: the company places greater emphasis on returns on capital from long-term GPU computing service contracts (GPUaaS) and relatively less on growth in model services (MaaS). Goldman expects a third-quarter non-GAAP gross margin of 15.3%, broadly flat quarter on quarter.
  • Medium-term profit improvement depends mainly on expenses growing more slowly than revenue. Goldman expects revenue to grow at a compound annual rate of 28% from 2025 to 2028, while operating expenses grow only 3%, supporting a rise in the non-GAAP operating margin from 2.6% in 2026 to 6%–7% in 2028.

How much will expansion cost, and where will the funding come from?

  • The company’s full-year guidance for capital expenditure and acquisition of leased assets is 15 billion yuan. Goldman expects the figure to reach 16 billion yuan in 2026. Third-quarter capital expenditure is expected to be 4.4 billion yuan, up 40% quarter on quarter, mainly for acquiring high-end GPUs.
  • The cash balance at the end of June 2026 was 4.7 billion yuan, and expansion is not funded solely by cash on hand. Goldman expects substantial investment to be supported by customer prepayments and GPU leasing. In 2025, leased GPUs accounted for approximately 40% of capital-expenditure-equivalent investment; this is the historical funding mix, not an additional amount already secured.
  • Cash flow remains under pressure: in Goldman’s model, 2026 operating cash flow is approximately 5.34 billion yuan, cash capital expenditure is 8.1 billion yuan, and free cash flow is approximately negative 2.76 billion yuan. Cash expenditure is lower than the investment amount including leased assets, making access to financing an important condition for expansion.

How much can DeepInfer improve profitability?

  • Goldman believes DeepInfer, DeepSeek’s open-source inference optimization software, can improve Kingsoft Cloud’s inference gross margin when running DeepSeek models by increasing throughput and reducing cost per token.
  • Assuming GPU rental of 4 US dollars per hour and utilization of 70%, Goldman estimates that the inference business’s gross margin could reach 85%. This scenario applies to the inference business. Over the long term, open-source software could also narrow Kingsoft Cloud’s model-tuning advantage over AI data-center operators, intensifying competition.

Why cut the target price while maintaining Buy?

  • Goldman has left its 2026–2028 revenue forecasts broadly unchanged and raised adjusted EBITDA forecasts by 1%–2%, but cut its 12-month target price from 18 US dollars to 15.5 US dollars. The main changes are in valuation inputs: the assumed risk-free rate rises to 5%, the weighted average cost of capital rises from 10.3% to 11.4%, and the perpetual growth rate remains at 3%.
  • The valuation basis for maintaining Buy is that the share price corresponds to a forward 12-month price-to-sales ratio of approximately 1 times, below the historical average of 2.2 times since July 2025. The operating growth outlook and the higher discount rate drove the rating and target price in different directions, respectively.