KC Cloud infrastructure · AI cloud · China tech · Related-party demand · Thesis updated August 23, 2026

AI growth is real, and margins are recovering

Written by Finn ResearchReviewed by Shivam BharukaReviewed August 23, 2026

AI cloud gross billings jumped 82 percent year over year to RMB 1.33 billion in Q2 2026.
AI services accounted for 56 percent of public cloud revenue in Q2 2026.
Adjusted gross margin improved to 15.4 percent in Q2 2026 as the company successfully passed along upstream costs.
Operating profit turned positive in Q2 2026, reaching a 4.0 percent margin.
Management continues to target a RMB 15 billion CapEx base case for 2026, dealing with chronic supply chain limits.

01 Running thesis

AI demand, hard math, recovering margins

Kingsoft Cloud is successfully transitioning to a higher-value AI and enterprise cloud model. The shift is working on the top line. In Q2 2026, AI cloud billings jumped 82 percent year over year to RMB 1.33 billion. AI now accounts for 56 percent of public cloud revenue.

More importantly, management delivered on its margin recovery promise. The company passed through upstream costs, driving adjusted gross margin up to 15.4 percent in Q2 2026. Operating profit also turned positive with a 4.0 percent margin.

The biggest open question is funding and execution. The 2026 CapEx base case remains RMB 15 billion, which requires navigating chronic supply chain limits. Management calls these constraints a new norm and is pushing toward domestic Chinese chips to keep building capacity.

The bull case is simple. AI inference, token services, model APIs, and agent tools keep growing, and profitability holds as costs are passed through. The bear case focuses on the extreme capital intensity, the reliance on the Xiaomi and Kingsoft ecosystem, and the risk that enterprise cloud deal delays persist.

Aug 2026▲Q2 2026 showed adjusted gross margins recovering to 15.4 percent and operating margins turning positive at 4.0 percent. AI cloud billings grew 82 percent year over year.

May 2026→Q1 2026 strengthened both sides of the thesis. AI cloud billings rose 90.1 percent year over year, but adjusted gross margin fell to 13 percent.

Apr 2026▼The 2025 Form 20-F showed full-year revenue up 22.8 percent, helped by AI and enterprise cloud demand. Gross margin fell from 17.2 percent to 15.7 percent.

Mar 2026▲Q4 2025 showed AI billings at 49 percent of public cloud and two straight quarters of adjusted operating profit.

Nov 2025▲Q3 2025 showed AI staying at 45 percent of public cloud revenue and the first adjusted operating profit.

Aug 2025→Q2 2025 kept the AI pivot on track, with AI gross billings at 45 percent of public cloud revenue.

May 2025→Q1 2025 showed AI gross billings at 39 percent of public cloud and ecosystem revenue at 25 percent of total revenue.

02 Business model

Renting scarce AI compute

Kingsoft Cloud makes money by selling cloud capacity and services to companies and public-sector customers. Public cloud includes compute, storage, AI cloud, and CDN. Enterprise cloud includes private and hybrid cloud projects for areas such as e-government and healthcare.

The newer model is built around AI compute. Customers need large amounts of processing power to train models, run inference, call model APIs, and deploy AI agents. In the Model-as-a-Service space, KC uses a neutral position. The company does not build proprietary models, which lets its sales team flexibly sell the most popular open-source or third-party models.

Xiaomi and Kingsoft are central to this plan. Their ecosystem demand gives Kingsoft Cloud a clear base of customers, and transaction caps for 2026 and 2027 were recently raised to RMB 10 billion. This helps growth but creates concentration risk.

To reduce the cash strain, management expects to fund heavy AI infrastructure buildouts through strategic customer prepayments. This aims to minimize upfront capital encumbrance. The company is also using flexible contract periods and price hikes to pass upstream cost increases to customers.

03 Product portfolio

What KC sells

Growth engine

AI cloud compute

This is the main growth driver. AI cloud gross billings reached RMB 1.33 billion in Q2 2026 and represent 56 percent of public cloud revenue.

Option

Model API services

These services let customers call and manage AI models through software interfaces. The goal is to capture higher-margin inference and token usage over time.

Option

AgentKit and Agent Engine

These tools help customers build, deploy, and evaluate production-grade AI agents, offering secure sandboxes and memory management.

Growth engine

Public cloud

Public cloud generated the vast majority of revenue in Q2 2026. AI demand is now the key reason this segment is growing.

Steady

Enterprise cloud

Enterprise cloud serves public services, e-government cloud, healthcare, and similar projects. It generated RMB 714 million in Q2 2026, down 1 percent year over year.

Cash cow

CDN

KC has bifurcated its CDN offering into standard lower-margin CDN and higher-margin advanced CDN for live broadcasting and dynamic acceleration.

04 Business segments

Q2 2026 mix

Public Cloud77%growing fast

Enterprise Cloud23%flat

The segment mix uses estimated Q2 2026 revenue, driven by RMB 714 million from Enterprise Cloud and roughly RMB 2.37 billion from Public Cloud. Xiaomi and Kingsoft are not a separate segment, but they contributed 26 percent of total revenue in the quarter.

05 Risk factors

What could break

CapEx funding gap

High impact · Medium odds

Management guided 2026 CapEx at a base of RMB 15 billion. It wants customer prepayments to cover about half of CapEx, but that still leaves a large financing need. If prepayments fall short, shareholders could face dilution or the balance sheet could take on more risk.

We watchCustomer prepayment levels, cash flow, new debt, and any equity issuance.

Ecosystem concentration

High impact · Medium odds

The company relies heavily on Xiaomi and Kingsoft. Demand from these related parties is central to the story, with transaction caps recently raised to RMB 10 billion. A slowdown or contract change inside that ecosystem would hit growth fast.

We watchXiaomi and Kingsoft ecosystem revenue as a percent of total revenue.

Chip and server supply squeeze

High impact · High odds

AI cloud needs advanced servers, and management views chip supply constraints as a new norm. The company is actively diversifying suppliers and increasing compatibility with domestic Chinese chips to handle the U.S. export restrictions.

We watchManagement comments on server availability, domestic chip substitution, and delays in AI capacity delivery.

Enterprise cloud delays

Medium impact · Medium odds

Enterprise cloud revenue dropped 1 percent year over year in Q2 2026 to RMB 714 million. Upstream price hikes have started to pressure public sector and state-owned enterprise budgets, slightly delaying enterprise deal cycles.

We watchEnterprise cloud revenue growth in the second half of 2026 and state-owned enterprise budget adjustments.

06 Quick answers

In one breath

What does Kingsoft Cloud do?

Kingsoft Cloud sells public cloud, enterprise cloud, CDN, and AI cloud services in China. Its fastest-growing area is AI cloud compute for customers that need large amounts of processing power.

Why is AI important for KC?

AI is now the center of the growth story. In Q2 2026, AI cloud billings grew 82 percent year over year to reach 56 percent of public cloud revenue.

Why are investors worried about KC?

AI cloud growth needs expensive servers, and the company plans up to RMB 15 billion in 2026 CapEx. Investors need to see how the company funds this without major dilution or added leverage.

How tied is KC to Xiaomi and Kingsoft?

Very tied. Xiaomi and Kingsoft ecosystem demand is a major driver, and the companies recently raised their transaction caps for 2026 and 2027 to RMB 10 billion.

07 Research standards

Sources and research notes

This page combines Finn's company research with public filings and other cited materials. The thesis is reviewed when material company information changes; Finn Scores use the latest available scoring data.

Thesis reviewed: August 23, 2026
Score data: September 27, 2026
Reviewed by: Shivam Bharuka

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