Stop nitpicking! Kuaishou is going crazy and "changing its destiny" in an incredible way.

After the Hong Kong stock market closed on November 21st, $ 快手-W(01024.HK) released its 2023 third-quarter earnings report, which can objectively be considered a pretty impressive performance. Compared to the preview a month ago, the highlight of the earnings report is mainly the better-than-expected profitability.

The better-than-expected profitability is mainly due to optimization on the expenditure side. Specifically, this includes changes in the business structure (an increase in the contribution of high-gross-margin light advertising), as well as optimization of bandwidth costs and the impact of layoffs.

In addition, Dolphin Research is once again impressed by the performance on the traffic side. Despite the expansion of traffic, user stickiness remains strong. This solid traffic ecosystem is the core foundation for Kuaishou to quickly monetize.

Specifically:

1. Better-than-expected profitability: After achieving a real turnaround and making a profit of 1.5 billion in the previous quarter, Kuaishou once again achieved better-than-expected profitability in the third quarter, with a net profit of 2.2 billion. Excluding some non-core revenue, the core operating profit reached 1.65 billion, with a core operating profit margin of 6%.

Looking at the three aspects of revenue, costs, and expenses, in addition to the increased contribution of higher gross-margin advertising and e-commerce revenue, the impact of layoffs and salary reductions on profit release continues to expand: employee compensation in the third quarter decreased by 18% YoY.

2. E-commerce dividends are still being enjoyed: Although the third quarter is a slow season for transactions, Kuaishou's e-commerce GMV still grew by 30%, reaching 290.2 billion in a single quarter, surpassing the second quarter with the 618 Shopping Festival. It is evident that Kuaishou's e-commerce has not reached its ceiling yet. In addition to live-streaming e-commerce, since the second quarter of this year, Kuaishou's main focus has been on shelf e-commerce, and the GMV contribution of shelf e-commerce in the third quarter has reached nearly 20%.

However, the commission rate for e-commerce was significantly increased in the third quarter of last year, resulting in a higher base. In the third quarter of this year, the commission rate only increased by a slight 0.06 percentage points YoY, while overall e-commerce and other revenue increased by 35% YoY, showing a significant slowdown compared to the second quarter.

3. Recovery in external advertising: If we assume that the growth rate of external advertising is 40% higher than the GMV growth rate of internal advertising, then the growth rate of external advertising can reach around 10%. This shows a significant recovery trend compared to the low single-digit growth rate in the second quarter. The fastest-growing sectors in terms of advertising spending include entertainment and education. In addition, the platform's traffic has further increased due to the popularity of the Asian Games, which is also a major factor driving the growth of external advertising.

4. Live-streaming: Since June, Kuaishou has carried out special rectification measures for the chaos in live-streaming on the platform, and the market has anticipated the pressure in the second half of the year. However, in the third quarter, Kuaishou signed more guild anchors, which drove a 30% YoY increase in the average daily live-streaming market and an 8.6% YoY increase in overall tipping revenue, performing better than expected.

5. Asian Games + peak season, continued expansion of user base. In the third quarter, the number of users on Kuaishou reached 685 million, with a net increase of 12 million compared to the previous quarter. However, the third quarter itself was the peak season of summer vacation, and with the boost from the Asian Games, the expansion of traffic was expected. However, the market did not anticipate that the overall scale would approach 700 million, with an additional 12 million users in a single quarter.

In addition, the stickiness of users, measured by DAU/MAU, also increased compared to the previous quarter, indicating that the new users who joined in the past two quarters quickly adapted to the community atmosphere or content of Kuaishou. Dolphin Research believes that in addition to the popularity brought by the Asian Games, this may also be related to Kuaishou's rich short drama content and blockbuster entertainment content during the summer vacation.

However, at present, despite the competition from Video Account and Xiaohongshu, Kuaishou has maintained stable ecological traffic without increasing customer acquisition investment, relying on high-quality content, and even continues to penetrate at a considerable rate. This actual performance deviates from the market's consistent understanding to some extent.

6. Detailed financial report data

Dolphin Research's viewpoint

In the third quarter, Kuaishou continued to soar. Although the preview a month ago had already revealed most of the performance, Kuaishou's development momentum is even stronger than we expected. Last quarter, we said that with the dividend of live e-commerce and its own traffic advantage, Kuaishou can simultaneously pursue the seemingly contradictory goals of "Growth" and "Profitability".

Obviously, Kuaishou's fundamentals are "very good", but the negative news on the market (such as Su Hua's resignation, regulation, fake orders, Tencent's sell-off, etc.) has made the already uncertain long-term logic and short-term valuation rebound more volatile, causing Kuaishou's stock price to be under pressure for several consecutive months.

Dolphin Research has learned that some investors have two main concerns about Kuaishou in the short term: one is the sustainability of the dividend period, its own growth space, and whether live e-commerce will face new regulations; the other is the expectation of Tencent's sell-off.

In the past month, these two concerns have weakened: last month, the rumors of regulation on live e-commerce were implemented, and the actual regulatory impact was smaller than expected (refer to Dolphin Research's community review "After JD.com's Attack on Li Jiaqi, Live E-commerce Faces Regulation"). And the expectation of Tencent's sell-off also temporarily subsided after Tencent's third-quarter earnings conference last week.

Since then, Kuaishou's stock price has indeed rebounded, but we believe that the strength of the rebound is relatively weak compared to its current performance and the valuation space it should have. Therefore, the market's scrutiny seems to have returned to the fundamentals, specifically, the sustainability of good results (achieving growth and profitability). From the Double 11 sales report (with a 50% YoY increase in order volume and an expected GMV growth rate of over 50%), Kuaishou's performance is impressive. It can even be considered excellent compared to its peers, and there are no signs of its growth momentum rapidly weakening. At the same time, Kuaishou is also expanding into areas such as shelf e-commerce and local services. Although these two businesses present greater challenges, Kuaishou can learn from Douyin's experience and benefit from its success.

Overall, Kuaishou is currently in a phase of "flourishing in its core business and aggressively attacking new businesses." However, in terms of valuation, it is currently only valued at 2x PS based on the projected revenue for 2023. If the adjusted net profit margin can stabilize at 15% over the next three years, the profit growth rate CAGR for the next three years could reach 30-40%. Therefore, the current valuation is clearly undervalued. As Kuaishou's business flywheel is already able to turn independently, we still believe that, excluding the suppressive factors of market sentiment expectations, Kuaishou is still worth $40 billion (excluding net cash of $3 billion).

The following is a detailed analysis:

1.Peak season + Asian Games popularity, unexpected expansion of traffic

Kuaishou's user base reached 685 million in the third quarter, with a net increase of 12 million MoM. Although the third quarter is the peak season and there was the popularity of the Asian Games, the speed of adding over 10 million users in a single quarter still exceeded market expectations for a platform that already has nearly 700 million users.

Dolphin Research believes that the user growth in the third quarter may also be related to the blockbuster entertainment content (variety shows, short dramas, celebrity activities, etc.) launched successively in June. However, it is worth noting that the significant increase in new users for two consecutive quarters did not reduce user stickiness. The DAU/MAU ratio has increased to 56.5%, and the average daily usage time has increased to 130 minutes/day MoM. This indicates that new users quickly adapt to Kuaishou's content and community atmosphere, and the platform's ecosystem is relatively healthy.

However, when comparing with competitors, it seems that Douyin's traffic trend is even more aggressive. Despite the recovery of offline entertainment after the pandemic, the magic of short videos continues to penetrate the last batch of remaining internet users.

Looking ahead to the fourth quarter, Dolphin Research believes that the Double 11 and Double 12 e-commerce festivals, as well as the recent popularity of short dramas, may help Kuaishou continue to expand its traffic during the off-season. As long as new traffic continues to pour in, it will contribute to the continued recovery of external advertising.

2. E-commerce flywheel continues to "spin" in the off-season.

The growth of the three major businesses in the third quarter still relies on the penetration of e-commerce transactions. The GMV growth reached 290.4 billion, a year-on-year increase of 30%, significantly exceeding the 61.8 billion in the second quarter. It is worth noting that the third quarter is the off-season for e-commerce, and not only traditional e-commerce, even the online retail data disclosed by official sources is also bleak. However, it is already very good for Kuaishou to achieve a 30% growth under a high base.

In addition to Kuaishou's consistent brand support strategy, the recently launched shelf-based e-commerce business also contributed some incremental growth, with GMV accounting for 20% in the third quarter. Overall, the number of Kuaishou e-commerce buyers in the third quarter approached 120 million, more than the 110 million in the second quarter. On the basis of achieving a GMV of 10 trillion yuan per year, the high growth rate that makes traditional platforms envious indicates that the ceiling for Kuaishou e-commerce has not yet been reached.

Commission income is directly monetized in e-commerce transactions, and it achieved a growth of 36.5% in the third quarter. In addition to the driving force of high GMV growth, there is also the reason for the increase in take rate commission rate. However, the increase in commission rate in the third quarter is not significant, so in terms of revenue, compared with the 61.5% growth rate in the second quarter, there does appear to be a noticeable slowdown, but this is due to fluctuations caused by different base periods, and there is no significant problem in terms of trend.

During the epidemic last year and the period just after the resumption of offline activities, we mentioned that Kuaishou was an excellent channel for merchants to sell off inventory and quickly reduce stock. Therefore, Kuaishou had a dividend period. Now that the epidemic has been lifted for three quarters, the demand for clearing inventory has gradually weakened, and more merchants have resumed normal production and promotion of new products. At this time, the channels of Douyin and Kuaishou are still highly favored by merchants.

In other words, when the e-commerce GMV of Douyin and Kuaishou approaches 25 trillion yuan and 12 trillion yuan respectively this year, the logic of selling off inventory and clearing stock is obviously no longer applicable. Dolphin Research discussed this in the previous earnings report: For some small and medium-sized brands, live-streaming e-commerce platforms are no longer limited to brand promotion, but are likely to be regarded as important channels for sales volume due to changes in user consumption habits and mindset. The traffic advantage of short video platforms has been transformed into a sharp sword, firmly piercing the waist of traditional e-commerce platforms. Therefore, as the Double 11 shopping festival approaches and negative news about livestreaming hosts promoting products becomes more prominent, concerns about potential regulation have arisen in the market, given the past regulatory patterns in the industry. Although the final regulations turned out to be softer than expected by the market, there are still signs of gradual standardization. This is perhaps why some funds have chosen to leave as a precautionary measure.

Looking ahead to the whole year, with the foundation of the Double 11 sales performance (a 50% YoY increase in order volume), there is hope of achieving the annual GMV target of 1.2 trillion yuan (implying a YoY growth of over 34% in GMV for the fourth quarter). However, even if this target is not met, it is not a big problem. The key is to look at the outlook for next year (pay attention to the performance conference call). If the guidance given by the management still follows a normal growth trend, rather than relying solely on the boost from this year and lacking momentum for next year, then the market's biggest concern about sustainability will be resolved.

3. External advertising is accelerating its recovery.

In the third quarter, advertising revenue basically met expectations, with a YoY growth of 26.8%, reaching 14.69 billion yuan. Compared to the second quarter, the growth rate has slowed down slightly, mainly due to the slowdown in internal advertising, which has fallen in sync with the growth rate of e-commerce GMV.

Assuming that internal e-commerce advertising grows at a pace higher than the GMV growth rate (30%), such as 40% YoY, then we can calculate that external advertising is showing signs of accelerating recovery (around 10%, compared to low single digits in the previous quarter). In addition to the impact of a low base, this is also due to the rebound in the growth rate of time-based traffic (+6.9%, compared to 1.3% in the previous quarter) and the improvement in conversion of investment flow.

The conversion of investment flow specifically refers to the fact that Kuaishou has identified high-value user groups among its user base, tapped into their consumption needs, and then provided them to the corresponding clients for advertising conversion. This has increased the advertising budgets of some industries, such as entertainment and education.

Looking at the third quarter alone, Kuaishou's performance has exceeded the industry average. According to QM data, the growth rate of online advertising in the third quarter quickly slowed to low single digits as retail growth slowed down.

4. Livestreaming is under pressure, but still exceeds expectations after "making a desperate effort".

In the third quarter, livestreaming revenue from tips amounted to 9.72 billion yuan, with a YoY growth of 8.6%, significantly slower than in the first half of the year.

In June, Kuaishou started to rectify its live streaming platform, so the growth rate in the second half of the year was under pressure, which was within expectations. However, Kuaishou also took measures in the third quarter to reduce the impact of the rectification. It accelerated the introduction of guild anchors (with a 40% YoY increase in quantity) and increased the popularity of live streaming (with a 30% YoY increase in daily viewing time). At the same time, it further expanded the live streaming scenes. In addition to the successful momentum of Kuaipin (job recruitment) and Ideal Home (real estate), in September, Kuaishou launched the National Art Heritage Program, giving more traffic to fields such as traditional Chinese storytelling, folk music, and folk crafts.

The growth of Kuaipin (job recruitment) and Ideal Home (real estate) in the third quarter:

The daily number of resumes posted on Kuaipin increased by 200% YoY (compared to a 290% YoY growth rate in the previous quarter), maintaining a high growth momentum.

Ideal Home has expanded its business to more than 120 cities nationwide. Compared to the addition of more than 30 cities in the second quarter, the cumulative transaction volume in the third quarter exceeded 14 billion yuan, a 40% QoQ increase compared to the 10 billion yuan in the second quarter.

5. Continue to reduce costs and increase efficiency, with greater-than-expected efforts

In the third quarter, Kuaishou achieved a GAAP net profit of 2.2 billion yuan, with a profit margin of 7.8%, continuing to accelerate the release of profits based on the first profitable second quarter. The non-GAAP net profit was 3.17 billion yuan (mainly adding back the stock-based compensation expenses), and the profit margin was close to 11.4%.

In comparison, the decrease in stock-based compensation expenses is significant. Generally speaking, stock-based compensation is closely related to personnel, so the reduction in SBC is directly caused by layoffs. Correspondingly, employee welfare expenses in the third quarter decreased by 17.6% YoY, showing a greater contraction compared to the -6.52% in the second quarter.

In addition, the cost of bandwidth and server hosting also decreased by 18.8% YoY, resulting in a gross profit margin of 51.7% in the third quarter, an increase of 5.4 percentage points compared to the same period last year, and an improvement of nearly 1.5 percentage points QoQ.

However, because Kuaishou's net profit includes some gains (government subsidies, financial income, etc.), if we only look at the performance of its core business, Dolphin Research usually focuses on the core operating profit indicator (revenue - cost - operating expenses).

In the third quarter, the core operating profit reached 1.65 billion yuan, with a profit margin of 6%, significantly exceeding market expectations (around 1.01 billion yuan). The difference of 600 million yuan can be divided into three parts: revenue exceeded by 200 million yuan (from the live streaming business), cost optimization of 200 million yuan, and a reduction of 200 million yuan in research and development expenses.

Looking at different regions (domestic and overseas), the domestic market is the main source of profit, and the losses in the overseas market have also significantly decreased. However, if we compare it with the increase in total operating profit (9.2 billion), the main change in the third quarter is actually the reduction in unallocated cost (expenditure of the headquarters department).

Therefore, if we look at the core driving force behind the increase in profit margin on a MoM basis, the main factor in the third quarter is actually the reduction in costs and the increase in efficiency, rather than the optimization of the profit model in the business. Although this is a slight drawback, the macro environment in the third quarter was not good either. By taking this opportunity to improve the overall operational efficiency of the company and reduce resource waste, Kuaishou is also beneficial in the long run.

In addition, regarding the doubts about Kuaishou's continuous spending on acquiring users, Kuaishou can respond to this by highlighting the "three consecutive quarters of unchanged marketing expenses" and the "continuously growing user ecosystem".

Dolphin Research "Kuaishou" Historical Reports (Past Year):

Earnings Reports

August 23, 2023 Conference Call: "Advancing Shelf E-commerce as a New Growth Point for E-commerce Business (Kuaishou 2Q23 Conference Call Summary)"

August 22, 2023 Earnings Review: "Kuaishou's "Mutation": From Bleeding to Huge Profits, Can It Dispel Capital Bias?"

May 22, 2023 Conference Call: "Advertising Recovery, Striving for Further Increase in E-commerce Market Share (Kuaishou 1Q23 Conference Call Summary)"

May 22, 2023 Earnings Review: "Is Kuaishou's Desperation Still Worth It?"

March 29, 2023 Conference Call: "Kuaishou: Good Growth Expectations, No Intention to Subsidize Internal Consumption, More Focused on Internal Improvement (4Q22 Conference Call Summary)" March 29, 2023 Earnings Report Review: "Kuaishou: Can it break the prejudice with a running-style loss reduction?" (Invite Code:)

November 23, 2022 Conference Call: "Kuaishou: Short-term advertising weakness repaired, cost reduction and efficiency improvement continue to advance" (3Q22 Conference Call) (Invite Code:)

November 22, 2022 Earnings Report Review: "With annual revenue of hundreds of billions and struggling profits, can Kuaishou turn the tide?" (Invite Code:)

August 23, 2022 Conference Call: "The pandemic brought benefits to businesses, and post-pandemic brings rational benefits to consumers" (Kuaishou Conference Call Summary) (Channel: nlwi)

August 23, 2022 Earnings Report Review: "First glimpse of profitability, Kuaishou races on the road to monetization" (Channel: nlwi)

May 24, 2022 Conference Call: "First-quarter performance already reflects some impact of the pandemic" (Kuaishou Conference Call Summary) (Invite Code: FRQWBJ)

May 24, 2022 Earnings Report Review: "Against the current, Kuaishou submits a 'no-nonsense' answer sheet"

March 30, 2022 Conference Call: "In addition to cost reduction and efficiency improvement, Kuaishou also has ambitions to 'carry many industries'" (Conference Call Summary) (Channel: t2211658) (Invite Code: FRQWBJ)

March 29, 2022 Earnings Report Review: "Kuaishou: The era of 'making money countdown' for the iron buddies begins"

In-depth Analysis

June 15, 2022: "Both are 'bleeding' giant baby diseases, can Kuaishou and Bilibili both recover?" (Invite Code:) February 24, 2021 "Kuaishou: A Critique of Its Value" (https://longbridgeapp.com/topics/669532?invite-code=032064)

January 26, 2021 "Dolphin Research: The Undervalued Iron and Steel Economy, Kuaishou's Potential Market Value of 100 Billion" (https://longbridgeapp.com/news/28335815)

January 15, 2021 "Dolphin Research: Does Kuaishou Have Original Sin?" (https://longbridgeapp.com/news/27745588)

Risk disclosure and statement for this article: Dolphin Research Disclaimer and General Disclosure (https://support.longbridge.global/topics/misc/dolphin-disclaimer)