The decline of influencers, is Kuaishou also slowing down?

$KUAISHOU-W(01024.HK) Q2 performance initially appears to exceed expectations in terms of revenue and profit, but the overperformance is mainly attributed to live streaming rewards. However, it did not bring any surprises on key indicators that Dolphin Jun pays more attention to, instead confirming some of our concerns prior to the financial report.

Specifically:

1. Longest 618, but flat GMV performance?: The year-on-year growth rate of GMV in the second quarter was only 15%, lower than the 18% consensus expectation in the BBG market. Previously disclosed third-party data on live streaming e-commerce hinted at signs of weakening marginal growth in Kuaishou's GMV (due to factors such as fewer major influencers going live and market saturation), which some experts had also cautioned about. Despite the early start and late end of Kuaishou's 618 promotions in the second quarter, achieving only this GMV result is somewhat disappointing.

Of course, the recent downward pressure on the stock price trend may indicate that market expectations have already adjusted. Therefore, regarding the market's greater concern about "possible marginal weakening of GMV guidance in the third quarter," it is necessary to pay attention to the management's comments during the upcoming conference call, as this will have a greater impact on current market expectations.

2. Slow user growth, money no longer effective?: MAU continued to decline to 692 million in the second quarter, lower than the market's expected 699 million. However, sales expenses in the second quarter still amounted to 10 billion, exceeding the market's expectations by 2 billion.

Sales expenses mainly consist of promotional expenses at 9.4 billion, with a very small proportion allocated to actual sales personnel compensation. The market originally hoped that the highly sticky Kuaishou could gradually reduce the cost of acquiring customers through promotions, or improve customer acquisition efficiency. After all, Kuaishou's marketing expense ratio in this area is as high as 32%, while generally mature social platforms only range from 10% to 20%.

A relatively positive aspect is that DAU exceeded expectations, with one positive and one negative data point, reflecting a slight increase in platform stickiness among Kuaishou's existing users. At the same time, we expect that traffic will rebound slightly in the third quarter due to the Olympics.

3. Actively introducing guilds to offset the impact of live streaming rectification: The impact of proactive rectification of live content has been ongoing for nearly a year, and it is still within the impact cycle in the second quarter. Therefore, the market generally had low expectations, anticipating a decrease of 10%-15%. In reality, the year-on-year decline in live streaming reward income in the second quarter was only 6.7%, which significantly exceeded expectations. This was mainly due to Kuaishou actively introducing more live streaming guilds, with the number of signed guilds increasing by 50% and the number of influencers growing by 60% in the second quarter.

However, Dolphin Jun believes that it is necessary to further examine the types of newly introduced live streaming guilds and influencers, if they are primarily focused on e-commerce, it may inevitably fall into the negative impact of the current lack of momentum in live streaming e-commerce penetration. If entertainment is the primary focus, it can instead strengthen Kuaishou's position as a high-quality channel for content promotion

4. Strong growth in advertising, channel advantages with self-promotion of content: In the second quarter, advertising showed strong and steady growth, with a year-on-year increase of 22%, in line with market expectations.

On one hand, the peak season for e-commerce and intelligent marketing solutions are expected to perform well in internal circulation advertising. On the other hand, in external circulation advertising, apart from marketing product upgrades (UAX), industry developments, industry seasonality, and increased competition within industries are driving changes in vertical advertising such as entertainment, e-commerce, and local lifestyle. Especially in entertainment content (games & short dramas), coupled with the short video channel advantages of Kuaishou itself, Dolphin Jun expects double-digit growth in external circulation advertising, accelerating on a month-on-month basis.

5. Continued cost reduction, but efficiency improvement coming to an end?: The second quarter's adjusted profit exceeding expectations mainly stems from revenue surpassing expectations + gross profit margin exceeding expectations, indicating more significant cost optimization. This is mainly driven by the decline in revenue sharing, bandwidth depreciation, and amortization of intangible assets leading to a slight overperformance in gross profit margin.

Operating expenses mainly consist of high sales expenses as mentioned earlier, but both management expenses and research and development expenses are still declining year-on-year. Stock-based compensation (SBC) has significantly increased on a month-on-month basis, possibly due to year-end bonus payouts, although year-on-year it still reflects the improvement in operational efficiency due to the downsizing cycle.

6. Share buybacks have not increased: Share buybacks continued in the second quarter but the pace slowed down on a month-on-month basis. Looking at the trend of monthly changes, it seems that the increase or decrease in intensity is based on market value changes, but there has been no announcement of further significant actions to enhance shareholder returns. The buyback plan proposed last quarter was HKD 16 billion over 36 months, but due to the decrease in market value, shareholder returns have slightly increased from 2% in the previous quarter to 2.8%.

As of the end of the second quarter, Kuaishou had net cash of HKD 21.1 billion, which would total HKD 53.1 billion if short-term investment financial assets are included. Currently, the main business has been profitable and cash flow positive without consuming too much cash. Therefore, if the company can increase the buyback intensity, it can provide support when the stock price is under pressure due to negative market sentiment.

7. Detailed financial data overview

Dolphin Jun's Viewpoint

As a platform with entertainment as its facade and e-commerce as its core, Kuaishou may also be seen by the market as predominantly an e-commerce stock, essentially becoming a performance indicator based on GMV. In the earliest part of the second quarter, in April, due to frequent absences of major anchors like Simba, third-party data revealed a clear weakening trend in Kuaishou's live streaming GMV. While the company's communication indicated that the weakening was not as terrifying as portrayed by third-party platforms, the trend of marginal weakening cannot be denied.

At the same time, this year's e-commerce competition has intensified further, mainly reflected in traditional e-commerce platforms taking more aggressive initiatives — pursuing lower prices across the entire network, simplifying the process of discounts, optimizing recommendation algorithms, and providing traffic subsidies to merchants. As a result, the previous advantage of low prices is no longer exclusive, user penetration has stagnated, and KOL influencers with commission rates of 10%-20% are now seen as less cost-effective in the eyes of merchants.

From the platform's perspective, with the slowdown in overall market growth, there is more motivation to reduce the influence of top influencers and support brand store streamers, in order to divide the portion of commissions originally taken by the top influencers. Therefore, platforms highly reliant on live streaming e-commerce such as Kuaishou and Douyin have shifted their focus to shelf e-commerce since the second half of last year.

The two aforementioned logics point to a common trend: the penetration of live streaming e-commerce is slowing down. Although it is an industry-wide change, for Kuaishou which emphasizes private domains and live streaming, the negative impact may be relatively greater.

To hedge against the negative impact, it depends on the progress of Kuaishou's transformation into a shelf-based platform. However, the proportion of GMV from shelf-based e-commerce in the second quarter has increased slowly compared to the first quarter. Additionally, with Kuaishou actively introducing new live streaming guilds and streamers, some of whom are involved in product promotions, it means that in the short term, Kuaishou's reliance on live streaming e-commerce is difficult to reduce, making it even harder to escape the influence of industry trends.

Apart from GMV, another long-standing issue is the problem of "customer acquisition through spending & user growth," which essentially discusses whether there is still room for improvement in long-term profit margins.

The market hopes to see continued optimization of sales expenses or sales rates, while also not wanting to see user churn (although the slowdown in growth is already very apparent). However, Kuaishou has maintained a sales rate of around 30% for over a year, while the sales rates of other mature platforms mostly range from 10% to 20%, indicating visible areas where "expected" compression and optimization could occur. But if maintaining such a high marketing rate is necessary to stabilize the flow of traffic, it inevitably raises doubts about Kuaishou's advantages in "high private domain stickiness" and long-term profit growth confidence.

Overall, Dolphin Jun's feedback on the second-quarter report is not particularly positive. However, considering the current low valuation (the current market value of HKD 193.8 billion corresponds to an adjusted net profit in 2025 of less than 8 times), as well as the GMV and user numbers of Kuaishou, which have already been disclosed in high-frequency data by third-party platforms, it indirectly indicates that the market's latest expectations have already been adjusted to some extent. Therefore, the current market reaction to the financial report, the impact of the company's guidance may be higher. It is recommended to focus on the guidance for the second half of the year in the conference call, to see if it can increase confidence and dispel some doubts.

Detailed analysis is as follows:

I. Users: MAU growth slows down, is spending less effective?

In the second quarter, Kuaishou's monthly active users reached 692 million, continuing to lose 5 million users compared to the previous period, which is worse than market expectations. Although the second quarter is traditionally a low season for entertainment platforms, Kuaishou has a strong presence in e-commerce, with user fluctuations in the past few quarters more closely related to the seasonality of e-commerce. In fact, the 618 shopping festival did not bring in more new users for Kuaishou, with two consecutive quarters of weakening user growth, raising concerns about reaching saturation among users.

Although the traffic growth has stagnated, the activity of the remaining users on the platform continues to increase. This is mainly reflected in:

1) The average daily usage time has increased by 122 minutes/day year-on-year;

2) The DAU/MAU stickiness ratio has also improved month-on-month.

3) The calculated total user time per day has increased by 9.4% year-on-year, with a slight acceleration month-on-month.

Looking at it individually may not seem problematic, but when placing Kuaishou in the industry, it is still evident that there is a sign of intensified competition with Douyin, Shi Pin Hao, and Xiao Hong Shu on the basis of the existing large user base.

II. E-commerce: Longest 618, but average GMV performance?

In the second quarter, the year-on-year growth rate of e-commerce revenue was 21.3%, slightly lower than market expectations, with the main issue lying in GMV. The commission rate was 1.36%, with a slight decrease month-on-month, possibly due to subsidies to merchants during the 618 period.

The year-on-year growth rate of GMV in the second quarter was only 15%, lower than the 18% consensus expectation of the BBG market. Previously disclosed live streaming sales data from third-party platforms had already hinted at some signs of marginal weakening in Kuaishou's e-commerce GMV (reduction in major anchor live streams, industry penetration reaching its peak, etc.), and some experts had also sounded a note of caution. However, during the 618 period in the second quarter, Kuaishou started the earliest and ended the latest, so achieving this GMV result is somewhat unsatisfactory.

Of course, the recent pressure on the stock price trend indicates that market expectations have already adjusted. Therefore, regarding the market's greater concern about the " possibility of marginal weakening in GMV guidance for the third quarter", it is necessary to pay attention to the management's statements during the upcoming conference call, as this will have a greater impact on current market expectations.

To hedge against the negative impact of live streaming e-commerce, we need to look at the progress of Kuaishou's transformation into a general shelf. However, the GMV share of the general shelf in the second quarter "exceeded 25%" compared to the first quarter's "reaching 25%", showing a slow improvement. The company set a target at the end of last year to increase it to 25% to 30% this year. Although the current progress is within the planned pace of improvement, compared to its competitor Douyin which has already exceeded 40% in June, Kuaishou's transformation pace is clearly slower.

Whether this slowdown is intentional or objectively difficult to improve, this still needs observation and contemplation. Dolphin leans towards both, as the intentional slowdown may be for the purpose of emphasizing "differentiation", after all, Kuaishou's significant distinguishing features currently lie in its "private domain" and "live streaming", which set it apart from other social platforms. However, it is precisely these differentiated features that may also pose constraints.

Furthermore, considering that Kuaishou is actively introducing new live broadcast guilds and influencers, some of whom are involved in product sales, this means that in the short term, Kuaishou's reliance on live streaming e-commerce is difficult to reduce, making it even harder to break away from industry trends.

The short-term transformation pains have been discussed in detail by Dolphin in the previous quarter's review, so we will not elaborate on that here. The resulting question is whether deepening monetization (commissions + advertising) can alleviate the pressure on e-commerce revenue, which is crucial for the second half of the year.

If we estimate based on e-commerce advertising accounting for around 54% (slightly higher than the off-season in Q1), the comprehensive monetization rate of commissions + advertising is expected to reach 4.5%, an increase of 0.7 percentage points year-on-year, already reaching Kuaishou's stable target of 4.5%. Dolphin believes that the main reasons for Kuaishou gradually increasing its comprehensive e-commerce monetization rate are full-site promotion + reducing the burden on/assisting small and medium influencers + assisting brands in self-broadcasting. These three actions essentially shorten the profit chain between themselves and merchants, thereby sharing more profits from the industry chain.

In the face of industry competition, forcibly increasing the monetization rate is obviously a crude operation, but whether the sales agency model introduced by Kuaishou in April (especially targeting manufacturing businesses with weak sales links) can indirectly achieve the goal of increasing the take rate remains to be seen.

III. Advertising: Strong growth, mainly driven by channel advantages

The second-quarter advertising revenue basically met expectations, with a year-on-year growth of 22%, reaching 17.5 billion RMB, naturally slowing down on a quarter-on-quarter basis due to a high base. If we exclude e-commerce advertising (expected to grow by 25% to 30% year-on-year), Dolphin estimates that the growth rate of external circulation and alliance advertising revenue has also reached 15%. Compared to the first quarter, the growth continues to pick up.

The company attributes this to the launch of the intelligent marketing solution (UAX) specifically for external circulation advertising, providing advertisers with a more comprehensive marketing service. However, in vertical advertising, entertainment, e-commerce, and local life are driven by industry development, industry seasonality, and intensified competition within the industry. Especially in entertainment content (games & short dramas), coupled with Kuaishou's own short video channel advantages, Dolphin predicts that the growth rate of external circulation advertising will reach double digits, accelerating on a quarter-on-quarter basis.

Q2 total user daily time spent flow growth rate continues to rise to 9.4%, driven by both traffic year-on-year growth and the increase in average daily time spent, which is expected to provide some support for accelerating advertising growth.

Looking at the second quarter alone, Kuaishou's performance still exceeds the overall online advertising industry. According to QM data, online advertising growth rebounded in the second quarter, but Kuaishou still outperformed the industry. Similar to Tencent's logic, social platforms with e-commerce attributes and short video channels have stronger counter-cyclical capabilities.

IV. Actively introducing guilds to hedge the impact of live broadcast rectification

The impact of Kuaishou's proactive rectification of live content has been ongoing for nearly a year, and it is still within the impact cycle in the second quarter. Therefore, the market generally expects a lower impact, estimating a decrease of 10%-15%.

In fact, the second-quarter live broadcast tipping revenue reached 9.3 billion, only a 6.7% year-on-year decline, which significantly exceeded expectations. This is mainly due to Kuaishou actively introducing more live broadcast guilds, with the number of signed guilds increasing by 50% in the second quarter, and the number of anchors increasing by 60%.

In addition to accelerating the introduction of guilds, Kuaishou's growth in expanding live broadcast scenes (such as workplace recruitment, real estate intermediaries) in the second quarter is as follows:

1) The daily average resume posting frequency on Kuaipin increased by 130% year-on-year (compared to a 180% year-on-year growth rate in the previous quarter), maintaining a strong growth momentum.

2) The Ideal Home business is inevitably affected by the environment. In the second quarter, mainly due to the relaxation of housing policies in first-tier cities, Kuaishou may not necessarily benefit accurately. Therefore, the transaction volume of real estate was not disclosed this quarter, but it was mentioned that the daily average search volume increased by 9 times year-on-year.

It is also worth mentioning that it is necessary to further observe the new types of live broadcast guilds and anchors introduced. If the focus is on product sales, it may inevitably fall into the negative impact of the current lack of momentum in live broadcast e-commerce penetration. If entertainment is the focus, it can strengthen Kuaishou's position as a high-quality channel for content promotion.

V. Profit margin improvement slowing down? The most needed reduction has not been made

In the second quarter, Kuaishou achieved a GAAP net profit of 3.98 billion, a slight decrease from the previous quarter, indicating that the fastest growth phase has passed. The net profit margin is 12%, a 2 percentage point decrease from the previous quarter, mainly due to the increase in marketing expenses and management expense ratio. The non-GAAP net profit in the second quarter was 4.68 billion (mainly adding back SBC equity compensation expenses of 723 million), with a profit margin of 15.1%, showing a significant slowdown compared to the first quarter

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

In the second quarter, the core operating profit reached 3.5 billion, with a profit margin of 11.3%, slightly exceeding market expectations by over 200 million, mainly due to cost optimization.

Overall, the improvement in profit margin mainly comes from: cost optimization. The slight overperformance of gross profit margin is mainly driven by the decline in revenue sharing, bandwidth depreciation, and amortization of intangible assets.

Operating expenses are mainly driven by the previously mentioned high sales expenses, but both management expenses and R&D expenses are still declining year-on-year. SBC has significantly increased on a quarter-on-quarter basis, possibly due to year-end bonus distribution, but year-on-year it still reflects the improvement in operating efficiency due to the downsizing cycle.

However, the sales expenses that the market most hopes to optimize have instead increased by 15% year-on-year, with 95% of it being customer acquisition expenses. Looking solely at customer acquisition expenditure, it has grown by 18% year-on-year. However, with the current MAU not increasing but decreasing, it is puzzling whether existing users also need to maintain current marketing expenses to sustain activity.

If we include content costs, based on Dolphin Jun's previous proposal of "user maintenance costs," it seems that the user costs in this area have been difficult to further optimize in the past year. This implies that the improvement in profit margin may only rely on revenue growth in the later period, as well as the long-term optimization of bandwidth costs inherent in the internet.

Looking at different regions (domestic and overseas), the domestic market is the main profit driver, but the pace of reducing losses in the overseas market is temporarily on hold.

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

Earnings Calls

May 27, 2024 Earnings Call "New Shelf Gameplay Launch - Kuaishou Preferred (Kuaishou 1Q24 Earnings Call Summary)"

May 22, 2024 Earnings Review "Kuaishou: Double Flywheels Driving, Profits Cannot Be Hidden"

March 22, 2024 Earnings Call "Kuaishou: Continued High Growth This Year, Adjusted Net Profit Expected to Exceed Expectations (4Q23 Earnings Call)"

March 21, 2024 Earnings Review "Kuaishou Blooming in All Seasons, Market Still Turns a Blind Eye"

November 22, 2023 Earnings Call "External Circulation Advertising Growth Benefits from Refined Operations (Kuaishou 3Q23 Performance Earnings Call)"

November 21, 2023 Earnings Review "Stop Nitpicking! Kuaishou is Crazy "Turning the Tables""

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

August 22, 2023 Earnings Review "Kuaishou's "Mutation": From Blood Loss to Instant Huge Profits, Can It Dispel Capital Prejudice?"

May 22, 2023 Earnings Call "Advertising Recovery, Striving for Further Increase in E-commerce Market Share (Kuaishou 1Q23 Earnings Call Summary)" Financial report review on May 22, 2023 "Is Kuaishou still lackluster?"

March 29, 2023 conference call "Kuaishou: Good growth expectations, more focused on internal strength than subsidies (4Q22 conference call summary)"

March 29, 2023 financial report review "Kuaishou: Running-style loss reduction, can it break biases?"

November 23, 2022 conference call "Kuaishou: Short-term ad weakness repaired, cost reduction and efficiency improvement continue (3Q22 conference call)"

November 22, 2022 financial report review "With annual revenue of hundreds of billions and struggling profits, can Kuaishou's story come full circle?"

August 23, 2022 conference call "Businesses benefited from the epidemic, post-epidemic rational consumer dividends (Kuaishou conference call summary)"

August 23, 2022 financial report review "First glimpse of profitability, Kuaishou sprinting on the road to monetization"

May 24, 2022 conference call "First-quarter performance already reflects some epidemic impact (Kuaishou conference call summary)"

May 24, 2022 financial report review "Against the tide, Kuaishou's submission is a bit 'unambiguous'"

March 30, 2022 conference call "In addition to cost reduction and efficiency improvement, Kuaishou also has the ambition to 'carry many industries' (conference call summary)" 2022 March 29 Financial Report Review "Kuaishou: The Countdown to Making Money Begins"

In-depth

2022 June 15 "Both Suffering from 'Blood Loss' Giant Baby Syndrome, Can Kuaishou and Bilibili Recover?"

2021 February 24 "Kuaishou Criticized Heavily, Where Does the Value Come From?"