With the inexorable rise of cloud computing all over the world, “moving to the cloud” was likely one of the most uttered phrases for corporates globally last year.
That’s because the demands of storing the exponential increases in data creation can only be met by deploying more cloud computing capabilities.
In the US, this has seen the trifecta of Amazon.com Inc (NASDAQ: AZMN), Microsoft Corporation (NASDAQ: MSFT) and Alphabet Holdings Inc (NASDAQ: GOOGL) dominate the space.
Meanwhile in China, Tencent Holdings Ltd (SEHK: 700) and Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988) reign supreme.
However, with recent regulatory action against the two Chinese tech giants, it’s also worth considering the supporting players in the fast-growing Chinese cloud computing market.
To many investors’ surprise, there are actually quite a few companies operating in the space. Here are two Chinese cloud computing stocks that investors can consider buying for the long term.
1. Kingsoft Cloud
Kingsoft Cloud Holdings (NASDAQ: KC) is actually one of the top three cloud computing service providers in China – behind the big two.
In fact, Kingsoft touts itself as the “number one independent cloud service provider in China”. Even though there’s no official definition of “independent”, it’s clear it means they’re not part of a large Chinese tech conglomerate.
With the crackdown on the large platform tech firms in China, that’s a positive and should help Kingsoft over the long term to further grow its business.
Kingsoft’s latest fourth-quarter results saw revenue up 64% year-on-year to RMB 1.92 billion (US$294 million) although its 4.9% gross margin missed estimates.
However, as it grows and scales, Kingsoft should enjoy further benefits related to its size and the company is expecting to grow revenue in the region of 55-65% in 2021.
2. GDS Holdings
GDS Holdings Ltd (NASDAQ: GDS) (SEHK: 9698) is a vertically-integrated provider of data centre and IT infrastructure services in China. It currently focuses on three verticals; Internet and cloud, financial services and large enterprises.
The great thing about GDS, as an operator of data centres, is that it benefits whoever comes out on top of the cloud computing provider market.
Indeed, Tencent and Alibaba are both big customers of the company. In the fourth quarter of 2020, GDS posted revenue of RMB 1.63 billion, which was up 38.4% year-on-year.
During the quarter it also successfully listed its shares on the Hong Kong stock exchange via a secondary offering, raising US$1.9 billion.
On the gross profit margin front, GDS is doing well with a gross profit margin of 53.5% in its latest quarter.
One thing to keep in mind is that GDS has a net debt position of RMB 6.7 billion as the company continues to spend heavily on capex to build out more data centres.
Long-term stories
It’s worth remembering for long-term investors that both Kingsoft Cloud and GDS are spending heavily to grow their businesses in the fast-growing China cloud market.
As with many high-growth companies, they’re also both still loss-making. However, for patient investors who have a long time horizon, both Kingsoft Cloud and GDS represent interesting ways to tap into the phenomenal growth of the Chinese cloud computing market.
Disclaimer: ProsperUs Head of Content Tim Phillips owns shares of Microsoft Corporation and Alibaba Group Holding Ltd.
