Kuaishou "Blooms in All Seasons," Yet Remains Overlooked by the Market

After the Hong Kong stock market closed on March 20th Beijing time, Kuaishou-W.HK released its financial report for the fourth quarter of 2023. While the revenue this time basically met expectations, the profit once again significantly exceeded market expectations due to the decrease in bandwidth costs and optimization of influencer commission ratios. As a result, the operating profit margin under GAAP has reached 11%.

Key points of the financial report:

1. Profit Keeps Growing: In the fourth quarter, Kuaishou-W's profit margin once again significantly beat expectations, mainly due to further improvement in gross profit margin (driven by the decrease in bandwidth costs, adjustment of influencer commission ratios, and decline in low-margin live streaming revenue). Not only the adjusted net profit, but also the operating profit and net profit under GAAP have shown a trend of sequential quarterly growth. The operating profit margin in the fourth quarter has reached 11%, with the potential to further improve the overall platform's monetization efficiency in the medium to long term driven by e-commerce and advertising.

2. Decrease in Usage Time, but Ecosystem Remains Stable: Kuaishou-W's monthly active users exceeded 700 million in the fourth quarter, with a net increase of 15 million compared to the third quarter. Daily active users also increased to 383 million, with the goal still set at 400 million DAU for the year.

However, due to the average daily usage time of 125 minutes, which decreased year-on-year, the total user time in the fourth quarter also slightly declined. However, there is no need to worry excessively for now, as the high base effect from the previous year's World Cup has had an impact.

Kuaishou-W's e-commerce attributes are becoming more prominent now, so changes in user activity are more consistent with the seasonal variations in e-commerce activity, rather than the stronger entertainment attributes in the past when user activity varied with summer and winter vacations. In addition, marketing and promotion expenses in the fourth quarter have started to increase again, likely due to more promotional activities to acquire customers in conjunction with e-commerce festivals.

At present, despite the accelerated competition from platforms like Douyin and Xiaohongshu, Kuaishou-W has maintained the stability of its ecosystem by slightly increasing customer acquisition efforts on the basis of the existing large user base, relying on high-quality content. It can even continue to penetrate with a considerable degree. Such actual performance deviates to some extent from the market's consistent understanding and third-party data monitoring.

3. Revenue Relies on E-commerce, Advertising Outlook Exceeds Expectations: The total revenue in the fourth quarter met market expectations, with the main growth drivers still being e-commerce, including domestic advertising revenue and commission income.

(1) E-commerce GMV grew by 29% year-on-year in the fourth quarter, reaching 11.8 trillion for the whole year, in line with expectations. However, the increase in take rate year-on-year led to a 37% growth in overall commission income, faster than the GMV growth rate.

(2) The high growth in e-commerce naturally drove a significant increase in domestic advertising, but through analysis, it was found that external advertising accelerated significantly in the fourth quarter, with a growth of approximately 15% year-on-yearApart from industries that were affected by the epidemic and had regulatory impacts in the same period last year, the competition for buying traffic may also be related to the popular short dramas, "Dream Star" and "Egg Party".

(3) The live streaming business remained flat year-on-year in the fourth quarter due to the company's efforts to govern the chaos in live streaming starting from June, which was basically within expectations. The increasing trend in quarterly growth rates indicates the strengthening of internal adjustments within the company, with the company guiding for a high single-digit year-on-year decline this year.

(4) During the conference call, the management outlook for the first quarter and full year of 2024 was slightly better than market expectations, especially for the advertising business. In terms of business expansion, the main strategies this year are pan-shelf e-commerce and local life. The company hopes that the GMV share of pan-shelf e-commerce can increase from 20% in the fourth quarter to 25%-30%.

With the increase in the share of pan-shelf e-commerce, the corresponding decrease in the share of top influencers' self-operated sales will lead to a change in the structure of this segmented business, which will benefit KUAISHOU-W in capturing more profit distribution in the entire industry chain (by reducing influencer commissions in pan-shelf e-commerce), ultimately reflecting an increase in commission rates.

4. Detailed Financial Data Overview

Dolphin's Viewpoint

Last year, KUAISHOU-W's performance repeatedly exceeded expectations, especially since February when it actually turned a profit, indicating a clear demonstration of its monetization potential. However, judging from the stock price trend after today's results, it seems that the market is still not fully convinced of the outperformance guidance. Even based on the profit margin level in the fourth quarter (npm 10%), combined with the expectations for 2024, the current implied PE ratio is 15x. However, it is evident that KUAISHOU-W has just begun to turn profitable in these two years, and it is expected to enter a window of releasing operating leverage. Such valuation clearly does not match the strong fundamentals.

Dolphin speculates that perhaps the market's core concerns still revolve around two repeatedly mentioned issues: (1) the sustainability of high growth in performance? (2) the potential for Tencent to sell off?

The issue of sustainability may have a greater impact. Questioning sustainability essentially questions the issue of competitive barriers, or in other words, the "faith divide" in whether KUAISHOU-W can successfully cope with competition. The leading short video platform Douyin is very strong, actively expanding into lower-tier markets, while the well-funded third-place video platform Video Number is relying on its parent company to directly feed traffic, causing many investors to lack long-term faith in KUAISHOU-W. Therefore, it is uncertain when the performance will peak and decline.

As for the second issue, the short-term possibility seems low for now, but as seen from Tencent's performance yesterday, the business is facing significant challenges, especially in gaming. This is why they significantly raised the buyback expectations to reduce shareholder dissatisfaction. Suddenly needing an extra 50 billion may also affect Tencent's cash flow adequacy. If, in addition to the main business operations/investments, they also need to meet substantial shareholder returns, they may consider selling off some assets to raise funds or simply distribute physical dividendsDolphin believes that, based on the current valuation, the "bias" against KUAISHOU-W in the short to medium term has not been eliminated by the market. Whether it is the relatively clear guidance given by the company or the decent performance of KUAISHOU-W's e-commerce during this year's New Year Festival and International Women's Day, the platform has shown strength. In terms of external advertising, although there is still a big gap compared to the industry leader, and new platforms like Xiaohongshu and Bilibili are eager to try, from the perspective of market share, KUAISHOU-W is still taking away market share from other traditional platforms with shrinking traffic and lower ROI.

Detailed Analysis Below

1. E-commerce Season Increases Promotion and Customer Acquisition

KUAISHOU-W's monthly active users exceeded 700 million in the fourth quarter, with a net increase of 15 million compared to the third quarter. Daily active users also increased to 383 million, with management revealing that the target for this year is still 400 million DAU.

However, the average time spent per user in the fourth quarter dropped to 125 minutes, mainly due to the off-season for entertainment, while the year-on-year decline was due to the high base generated by the previous year's World Cup.

Now, KUAISHOU-W's e-commerce attributes are becoming more prominent, so the changes in user activity are more consistent with the seasonal changes in e-commerce (higher user growth in the second and fourth quarters), rather than in previous years when user activity fluctuated with summer and winter vacations. In addition, marketing and promotion expenses in the fourth quarter have also started to increase, presumably to carry out more promotional activities to acquire customers during the e-commerce festival.

However, at present, despite the competition accelerating with platforms like Video Number and Xiaohongshu, KUAISHOU-W is still slightly increasing its customer acquisition investment on the basis of the existing large user base, relying on high-quality content to maintain stable ecosystem traffic, and even continuing to penetrate with a considerable magnitude. Such actual performance deviates to some extent from the market's consistent perception and third-party data monitoring.

Looking ahead to the first quarter, due to the peak season of the Spring Festival itself, coupled with the popularity of New Year Festival and short dramas, the platform ecosystem is expected to continue to maintain stability.**2. E-commerce meets standards, with good growth prospects

The growth of the three major businesses in the fourth quarter still relies on the penetration of e-commerce transactions—GMV reached 403.9 billion, a year-on-year increase of 29%, in line with market expectations.

In addition to the brand support strategy consistently adopted by KUAISHOU-W, the pan-category e-commerce that has been continuously promoted this year is expected to contribute significantly to the growth. In the fourth quarter, the GMV share of pan-category e-commerce accounted for 20%, and the company's target for this year is to increase it to 25% to 30%. With major e-commerce promotions in the fourth quarter and enriched pan-category scenarios, the monthly active buyers reached 130 million, an increase of 10 million compared to the previous period, and the number of active buyers in 2023 is expected to reach 285 million, an increase of 34 million compared to last year, achieving a penetration rate on the platform of 14%.

The direct realization of e-commerce transactions is through commission income, which achieved a growth of 36% in the fourth quarter. In addition to the boost from high GMV growth, there is also a reason for the increase in the Take rate commission rate.

Looking ahead to Q1, according to research, the transaction data of KUAISHOU-W during the Chinese New Year and International Women's Day are good, which is expected to support stable growth in e-commerce transactions in the first quarter. The company's full-year guidance is also relatively positive, with the expectation that the full-year GMV can still maintain a growth of over 20%.

3. External circulation advertising accelerates recovery

The advertising revenue in the fourth quarter basically met expectations, with a year-on-year growth of 20.6%, reaching 18.2 billion yuan. Due to the high base number, the growth rate compared to the third quarter has slowed down to a certain extent. However, if we separate internal circulation advertising (55% share) from external circulation advertising and look at them separately, according to Dolphin Jun's estimation, the growth rate of external circulation advertising may have already approached 15%, further accelerating compared to the third quarter.

Due to the year-on-year decline of 2.8% in the growth rate of time-based traffic, Dolphin Jun believes that the rebound of external circulation advertising may reflect that KUAISHOU-W proactively increased its advertising inventory in the fourth quarter. At the same time, with high user shopping willingness in the fourth quarter, KUAISHOU-W, as the second largest short video platform, may also have the motivation for merchants to pay higher advertising prices eCPM. Of course, the increase in unit price essentially represents that KUAISHOU-W has a relative advantage over other platforms, both in terms of user volume and conversion rateIn addition, the popularity of short dramas and the showdown between "Dream Star" and "Egg Party" have also boosted the earnings of Douyin and KUAISHOU-W.

Looking at the fourth quarter alone, KUAISHOU-W's performance has exceeded the overall online advertising industry. According to QM data, although there has been a rebound in online advertising growth in the fourth quarter, KUAISHOU-W still significantly outperforms the industry.

IV. Further Reflection of Live Streaming Governance Impact

In the fourth quarter, live streaming tipping revenue reached 10.05 billion, flat year-on-year, clearly showing the deepening impact of live streaming governance.

In June, KUAISHOU-W initiated live streaming rectification, so the growth pressure in the second half of the year was basically within expectations. Of course, KUAISHOU-W is also taking measures to reduce the impact of rectification. By accelerating the introduction of guild anchors (a 40% increase in quantity year-on-year), increasing live streaming popularity (a 30% year-on-year increase in daily average duration). Furthermore, they are further expanding live streaming scenes, in addition to the successful traffic momentum of Kuai Pin (recruitment) and Ideal Home (real estate), in September they launched the National Art Heritage Plan, starting to tilt traffic towards traditional Chinese arts, folk music, and folk crafts.

Growth situation of Kuai Pin (job recruitment agency) and Ideal Home (real estate agency) in the fourth quarter:

Kuai Pin's daily resume submission frequency increased by 200% year-on-year (the same growth rate as the previous quarter), maintaining a strong growth momentum.
Ideal Home's business accumulated transaction volume exceeded 16 billion in the fourth quarter, up 15% from the 14 billion in the second quarter.

V. Continued Cost Optimization, E-commerce Promotions Increase Marketing Expenses

In the fourth quarter, KUAISHOU-W achieved a GAAP net profit of 3.6 billion, still in the early stage of rapid profit growth, with a profit margin of 11.1%. Non-GAAP net profit was 4.36 billion (mainly adding back SBC equity compensation expenses of 650 million), with a profit margin of 13.4%.

The improvement in profit margin mainly comes from the decrease in bandwidth costs on the cost side. Additionally, internal adjustments in live streaming and a decrease in influencer commission rates in e-commerce (increase in general merchandise shelf proportion) have led to a significant compression in revenue sharing costs in the fourth quarter, shifting from a 16% year-on-year growth in the third quarter to a 3% year-on-year decline in the fourth quarter. The optimization of these costs has led to a nearly 8% year-on-year increase in gross profit margin in the fourth quarter, with a 1.5% improvement quarter-on-quarterCost optimization includes layoffs and increased sales from seasonal promotions. The continued quarter-on-quarter decrease in equity incentive expenses indicates that the company is still improving efficiency through layoffs. The most direct employee welfare expenses decreased by 21% year-on-year in the fourth quarter, showing a significant streamlining trend throughout the year. KUAISHOU-W has been undergoing organizational restructuring for the past two years, tending to flatten the group's business structure and reduce intermediate links to enhance efficiency.

However, since KUAISHOU-W's net profit includes some non-operating income (government subsidies, financial income, etc.), Dolphin Jun usually focuses on core operating profit indicators (revenue - costs - operating expenses) when looking at the performance of its main business.

In the fourth quarter, the core operating profit reached 3.05 billion, with a profit margin of 9.4%, significantly exceeding market expectations (around 2.34 billion). The 600 million difference from expectations mainly came from cost optimization.

Looking at different regions (domestic and overseas), the domestic market is the main profit driver, while losses in the overseas market have also significantly decreased. Compared to the third quarter, the improvement in profits in the fourth quarter mainly came from the improvement in the profitability of business departments, while the role of resource integration from the headquarters' middle platform management departments has slowed down, reflecting that the flattening adjustment of the organizational structure in the fourth quarter is nearing completion. The subsequent improvement in profits will be more based on the efficiency improvement at the business levelAugust 23, 2023 Conference Call "Advancing Shelf E-commerce as a New Growth Point for E-commerce Business (KUAISHOU-W 2Q23 Conference Call Summary)"

August 22, 2023 Financial Report Review "Mutation KUAISHOU-W: From Blood Loss to Instant Profit, Can it Dispel Capital Bias?"

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

May 22, 2023 Financial Report Review "Is the Desperate KUAISHOU-W Still Mediocre?"

March 29, 2023 Conference Call "KUAISHOU-W: Good Growth Expectations, Focus on Improving Internal Strength Instead of Subsidizing (4Q22 Conference Call Summary)"

March 29, 2023 Financial Report Review "KUAISHOU-W: Running Towards Reduced Losses, Can it Break Prejudices?"

November 23, 2022 Conference Call "KUAISHOU-W: Short-term Advertising Weakness Repaired, Cost Reduction and Efficiency Improvement Continues (3Q22 Conference Call)"

November 22, 2022 Financial Report Review "With Annual Revenue of Hundreds of Billions, Struggling Profits, Can KUAISHOU-W's Story Come Full Circle?"

August 23, 2022 Conference Call "Business Bonuses During the Pandemic, Rational Consumer Bonuses Post-Pandemic (KUAISHOU-W Conference Call Summary)"2022 年 8 月 23 日财报点评"First Profit, KUAISHOU-W Gallops on the Road to Monetization" (https://longbridgeapp.com/topics/3360327?channel=nlwi)

2022 年 5 月 24 日电话会"First Quarter Performance Already Reflecting Some Impact of the Epidemic (KUAISHOU-W Conference Call Summary)" (https://longbridgeapp.com/topics/2651855?invite-code=FRQWBJ)

2022 年 5 月 24 日财报点评"Against the Current, KUAISHOU-W Hands in a 'No Nonsense' Paper" (https://longbridgeapp.com/topics/2651139)

2022 年 3 月 30 日电话会"Ambitious Beyond Cost Reduction and Efficiency Improvement, KUAISHOU-W Aims to 'Carry Many Industries' (Conference Call Summary)" (https://longbridgeapp.com/topics/2211658?channel=t2211658&invite-code=FRQWBJ)

2022 年 3 月 29 日财报点评"KUAISHOU-W: Iron Economy Starts the 'Countdown to Making Money'" (https://longbridgeapp.com/topics/2209652?channel=t2209652&invite-code=FRQWBJ)

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