Frost & Sullivan: Capital expenditure of Chinese cloud service providers still far below that of their American AI peers.

Furui released a research report stating that Chinese cloud service providers (CSPs) saw their capital expenditures rise sharply by 105% year-on-year and 95% quarter-on-quarter in the second quarter of this year, driven by strong demand for high-performance computing and opportunities to purchase NVIDIA Corporation (NVDA.US) H200 chips. Over the past four quarters, capital expenditures for Chinese CSPs only increased by 30% year-on-year, while US CSPs rose by 76%. Despite this one-time surge, the capital expenditure to sales ratio for Chinese CSPs in the second quarter was only 25%, compared to 33% for US CSPs. The bank is further concerned that the gap between US CSP capital expenditures and cloud business revenues continues to widen, even though the US belongs to a closed-source AI ecosystem. The bank indicated that BABA-W (09988), TENCENT (00700), and BIDU-W (09888) (collectively referred to as BAT) saw their capital expenditures increase by 75%, 176%, and 55% year-on-year for the second quarter, respectively, while quarter-on-quarter they rose by 152%, 65%, and decreased by 1%. BAT's capital expenditures in the second quarter rose by 105% to 126 billion RMB (approximately 19 billion USD), surpassing the 88% capital expenditure growth of their US counterparts (AWS, GCP, and Azure). The bank estimates that a significant portion of the approximately 9 billion USD increase quarter-on-quarter came from the purchase of H200; assuming China purchased 200,000 H200 chips (equivalent to 25,000 HGXH200 servers) in the second quarter, the cost would be around 8 to 9 billion USD, of which BAT might account for about 5 to 6 billion USD, equivalent to a quarter-on-quarter increase of 55% to 65%, with the remaining 3 to 4 billion USD used for local chips, with Huawei likely being the biggest beneficiary. The bank pointed out that comparing capital expenditures to cloud business revenues is more meaningful. In the second quarter, capital expenditures for Chinese CSPs were equivalent to 176% of cloud business revenues, while their US counterparts were at 130%; however, over the past four quarters, the ratio for China was 111%, which is 8 percentage points lower than the 119% for US counterparts. The bank generally expressed concerns about this ratio being above 100% and continuing to rise but believes that the risks for US CSPs are greater, as nearly all US AI models are closed-source and require deployment in the cloud; even with this advantage, US CSP capital expenditures in the second quarter still exceeded cloud business revenues by 30% and are steadily increasing. In China, this ratio may have been elevated by Tencent (which reached 271% over the past four quarters) as it downplays its cloud business but continues to invest heavily in AI for internal use.