Jefferies: The capital expenditure of Chinese cloud service providers is still far lower than that of the US AI peers

The Zhitong Finance App learned that Jefferies released a research report saying that China's cloud service provider (CSP) capital expenditure for the second quarter of this year surged 105% and 95%, respectively, and is expected to be driven by strong reasoning demand and opportunities to purchase Nvidia (NVDA.US) H200 chips. In the past four quarters, China's CSP capital expenditure increased only 30% year over year, while US CSP increased 76%. Despite a one-time jump, the second-quarter capital expenditure ratio of Chinese CSP to sales was only 25%, compared to 33% for US CSP. The bank is even more concerned that the extent to which US CSP capital expenditure exceeds cloud business revenue will continue to expand, even if the US is a closed source AI ecosystem.

According to the bank, capital expenditure for the second quarter of Alibaba-W (09988), Tencent Holdings (00700) and Baidu Group-W (09888) (collectively known as BAT) increased 75%, 176%, and 55% year-on-year respectively, and increased 152 percent, 65 percent and 1 percent, respectively, on a quarterly basis. BAT's second-quarter capital expenditure rose 105% year over year to 126 billion yuan (approximately US$19 billion), surpassing the 88% increase in capital expenditure of its US peers (AWS, GCP and Azure). The bank estimates that a large portion of the quarterly increase of about 9 billion US dollars may come from the purchase of H200; assuming that China purchased 200,000 H200s in the second quarter (equivalent to 25,000 HGXH200 servers), the cost is about 8 billion to 9 billion US dollars, of which BAT may account for about 5 billion to 6 billion US dollars, which is equivalent to 55% to 65% of the quarterly capital expenditure increase. The remaining 3 billion to 4 billion US dollars will be used for local chips. Huawei is expected to be the biggest beneficiary.

According to the bank, capital expenditure is more meaningful compared to cloud business revenue. China's CSP capital expenditure in the second quarter was equivalent to 176% of cloud business revenue and 130% of its US peers; however, in the past four quarters, China was 111%, 8 percentage points lower than 119% of its US peers. The bank is generally concerned that this ratio is above 100% and continues to rise, but it believes that the US CSP risk is greater. Since the US AI model is almost entirely closed source, it must be deployed in the cloud; even with this advantage, the US CSP capital expenditure in the second quarter still exceeded cloud business revenue by 30% and rose steadily. On the Chinese side, this ratio may have been raised by Tencent (271% in the past four quarters), as it downplayed the cloud business but still heavily invested in AI for internal use.