Shares of Kingsoft Cloud (NASDAQ:KC) surged about 9% on Friday after Nomura upgraded the stock to Buy from Neutral citing AI and Xiaomi (OTCPK:XIACF) (OTCPK:XIACY) ecosystem demand.

The firm also raised the price target to $6.70 from $2.30 on the Chinese company's stock.

The analysts said Kingsoft Cloud's third quarter results underpin the company's business growth and margin expansion, steered by increased AI revenue and buoyant demand from Xiaomi and Kingsoft for cloud consumption related to EVs, autonomous driving, and large language model, or LLM, training.

The analysts added that the company has proposed an annual cap on related-party transactions with Xiaomi and Kingsoft in 2025/26/27 (i.e., it has significantly increased the cap for cloud services from Xiaomi to CNY2.3B/3.1B/4B, from CNY868M).

The analysts believe Xiaomi and Kingsoft's cloud service demand bodes well for the company's top-line expansion, while its rising AI exposure and scaling back of low-margin business (i.e. content delivery network) will steer margin expansion even more.

Kingsoft has largely benefited from the strong demand for AI training in the past few quarters. Its AI-related revenue more than doubled from the first quarter to CNY362M in the third quarter (accounted for 31% of its public cloud revenue), the analysts added.

The analysts think both training and inference demand will continue to grow meaningfully, and the company has continued to ramp up AI chip/server capacity from leading global suppliers. Specifically, they believe Xiaomi's LLM training, autonomous driving demand, and Kingsoft Office's WPS AI inference demand will be the cornerstones for the company's AI business expansion.