Can TikTok's story still end well despite struggling profits despite earning billions annually? input: ====== 2021 年春运火车票今日开售 ====== output: Tickets for Spring Festival 2021 are available today

Hello everyone, I am Dolphin Analyst!

Following the Hong Kong stock market's closing on November 22nd Beijing time, Kuaishou released their Q3 2022 earnings. The overall performance exceeded expectations, with the growth of live-streaming and e-commerce being fairly steady, despite advertising taking a hit due to macro-environment pressures.

The main highlight, which was similar to other Internet companies, was the unexpected decrease in loss. The optimization of server bandwidth and device depreciation costs, coupled with the continued compression in promotional expenses, respectively led to an improvement in gross profit margin and core loss. The fourth quarter adjustment, therefore, seems promising for positive net profit.

Specific operating conditions:

1. Traffic indicators: The user activity rate (DAU/MAU) dropped slightly, but the platform's overall traffic (total daily user time) increased by 23% year-on-year due to the main benefit of the hot summer period.

2. Revenue: The top three businesses all slightly exceeded market expectations.

(1) Advertising: Due to weaker macroeconomic repair, external circulation advertising continued to feel pressure and the Q3 growth rate was lower than the second quarter when e-commerce was boosted by the pandemic, but this was already within the market's expectations.

(2) E-commerce: The stable growth was also within expectations, increasing by 26% year-on-year with a GMV of 2225 billion. The number of active buyers and sellers has increased, and the user repurchase rate has also increased by one percentage point year-on-year. Although the third quarter commission discount slightly dropped, it finally resulted in an increase in the take rate.

Kuaishou's full-year GMV growth target is 9000 billion, and as of the end of Q3, it has already achieved 5888 billion. Combined with TikTok's Double Eleven research information, live-streaming e-commerce is still thriving despite the lacklustre situation in the e-commerce season this year. Dolphin Analyst expects that Kuaishou should be doing well, especially under low economic conditions, in which buyers have a low initiative to shop and pursue cost-effectiveness. The short video platform where traffic gathers, and e-commerce transactions achieve better resistance to the cycle, so there is no problem achieving the full-year target.

(3) Live-streaming business: Once again, it has achieved a significant increase, with continuous growth in paying users and penetration rates. Based on the 630 million traffic pool of the overall platform, the number of paying users is still less than 60 million, so the dynamic growth of live-streaming business mainly depends on the driving force of user scale. Furthermore, some small-scale sellers/anchors will also seek to promote/generate fans through donations in live rooms. These two growth drivers may offset the general trend of decline in the industry and the impact of live-streaming regulation.

1. Optimization of bandwidth costs, employee salaries, and promotional marketing expenses all decreased more than expected, leading to a significant improvement in the unexpected decrease in losses. The gross profit margin increased slightly month-on-month, mainly reflecting that core losses from the primary business are continuing to rise. However, compared to the second quarter, the rate of growth has slowed down.

Finally, non-IFRS net loss was 670 million, and the loss rate was 2.9%, a significant improvement from Q2's 6.5%. Among them, the value-added tax subsidy in Q3 also increased significantly, accelerating the pace of reduction in net loss. From a market-by-market perspective, domestic operating profits continued to expand positively in the third quarter after turning positive in the previous quarter. Overseas business is still in the stage of developing new markets, and necessary marketing investments are also essential. This is probably the main reason for the optimization of sales expenses.

Moreover, the net cash flows from operating activities in the third quarter increased significantly, reaching CNY 2.7 billion, benefiting from a partial reduction in losses and the increase in accounts payable (CNY 2.2 billion, as settlement rules with suppliers were adjusted).

Based on the disclosed financial statements of cash flow from operating activities, after deducting the capital expenditures on equipment and intangible assets of CNY 800 million in the third quarter, the net free cash flow was CNY 1.86 billion, marking the first theoretically positive cash flow.

As of the end of the third quarter, Kuaishou had CNY 30.9 billion in cash plus short- and long-term deposits, without any loans or short- and long-term debt. With a continuously improving trend of reducing losses, it can be said that there is basically no risk of cash flow.

Dolphin Analyst's Viewpoint

The operating trend reflected in the third quarter report and the potential for monetization represented by the revenue side are still reassuring. In the short term, the market may reward its performance with a certain amount of appreciation for its undervaluation. However, a closer look at the breakdown shows that the release of profits still depends on more aggressive expenditure tightening, especially on marketing and promotion expenses, which still account for the lion's share.

In the medium and long term, there are concerns about the market. For example, whether Kuaishou's traffic must rely on such high marketing and promotion and how it will develop is a subject of debate. Dolphin Analyst believes that it essentially depends on Kuaishou's product competitiveness and its ecosystem barriers. As a strong leader, Douyin's competitiveness is beyond doubt, and even when it has a significant lead in scale, its growth rate has not fallen behind, reflecting its excellent management execution. Meanwhile, Video Number, backed by WeChat, has extremely low traffic costs, and its current progress is going smoothly. Its daily active users have already reached 600 million.

These two strong leaders have almost limited the imagination of other platforms to catch up and surpass them. So what's left is to seek differentiation in competition and focus on segmented markets, which will undoubtedly bring lower scale ceilings.

Kuaishou, with over 600 million monthly active users, has already penetrated 60% of China's internet users and generated nearly CNY 100 billion in annual revenue, but it is still hovering around the break-even line. Facing the commercialization of Video Number next year, Kuaishou still needs to think about the next step in monetization, particularly the transition from small and medium-sized business customers to high-end branded business customers, which may be squeezed by the conjoined influence of Video Number and Douyin.

Dolphin Analyst's meeting summary will be released to user research group at the first time, please add WeChat ID "dolphinR123" to join the group. Detailed interpretation of this quarter's financial report

I. Ecological Traffic: Summer Peak Season Drives Expansion

Kuaishou's traffic continued to expand in the third quarter, with the MAU increasing to 626 million on a month-on-month basis under the influence of the peak season. According to Questmobile's third-party data, although the growth rate of the Kuaishou Lite app is faster, the main app has returned to positive growth since August.

The DAU reached 363 million, a year-on-year increase of 113.4%, and the user stickiness (DAU/MAU) fell to 58% on a month-on-month basis, but still approached Kuaishou's medium- to long-term goal of 60%.

In addition, the filling rate of short dramas and variety shows has been increased, ensuring that the user's length of time on the platform has further increased to 129 minutes/day. Calculated based on this, the overall traffic expansion rate (DAU growth rate * daily average user length growth rate) is 23%. Although this is slower than the previous quarter, last year's same period was a high base, and this trend of traffic expansion still seems stable.

From Questmobile's third-party data, the growth rate of the Kuaishou Lite app is still strong, but the main app has already resumed growth. The short drama "Renxin" and the variety show "Let's Go, Mom!" in the third quarter were very eye-catching and are expected to have a great impact on the growth of the main app's traffic and the overall length of stay.

Short-video property dividend for platform ecological traffic expansion is expected to continue in the short term. However, the rise of video numbers and the strong dominance of Douyin still compress the potential imagination of Kuaishou's traffic growth in the medium term.

II. Revenue: Advertising Headwinds, Live Streaming and E-commerce Exceeded Expectations

In the third quarter, Kuaishou's total revenue was RMB 23.1 billion, a year-on-year increase of 12.9%, exceeding the market's consensus expectation of RMB 22.3 billion. However, the company's guidance for revenue has always been relatively accurate. Besides the weakness of advertising under the macro environment, which is weaker than the outlook in the second quarter conference call, the growth of the other two businesses has remained stable. But compared to the forward-looking expectations that investment banks have lowered a month ago, the actual situation is better.

E-commerce, games, and other businesses that have been growing high have further increased their revenue share in the third quarter. However, the pillar of revenue contributions is still in advertising and live broadcasting.

Looking at the segmented business:

1. Advertising: Mainly reflects the effect of public domain traffic distribution. Generally, advertisers use Magnetic Golden Bull to advertise. The monetization ability of advertising is mainly related to Kuaishou's ecological traffic expansion, advertising inventory release, and platform pricing.

Revenue in the third quarter was 11.6 billion, up 6.2% year-on-year. Internal-loop advertising, mainly e-commerce advertising, is the main driving factor for the growth of advertising revenue in these quarters. On the contrary, external-loop advertising is still in an unfavorable situation. It mainly digested regulatory impacts before the second quarter, but since the second quarter, the pressure brought by macroeconomic weakness has become the main reason.

At present, the internal-loop advertising accounts for about 40% (Q2 conference call). Splitting it up, Dolphin Analyst expects that the external loop advertising will either remain flat year-on-year, or decline by a low-single-digit percentage. Although it has slowed down from the -10% in the second quarter, considering that the base number of external loop advertising last year should not be high, the actual repair progress is still average. However, this is mainly industry resistance, and it is not related to Kuaishou's competitiveness. On the other hand, in the short term, short-video platform advertising has cost-effective advantages during the economic downturn.

Internal-loop advertising maintains a growth of about 25%, which is in line with the trend of changes in e-commerce transaction volume.

Looking ahead to the fourth quarter, Dolphin Analyst expects that the advertising business will further repair. In addition to the low base brought about by the deepening of regulatory impacts, marginal changes in epidemic policies will also improve the expectations of advertisers for the fourth quarter e-commerce festival and next year, and then relax marketing budgets.

2. E-commerce: revenue of 2.59 billion, a year-on-year increase of 39.4%. Among them, except for the GMV of 222.5 billion, a year-on-year increase of 26.6%, the commission ratio in the third quarter was slightly lowered, that is, the monetization rate of e-commerce was increased, which in turn brought about a sharp rebound in overall revenue growth.

Dolphin Analyst believes that although there is no e-commerce festival in the third quarter, after the Shanghai epidemic is unblocked, merchants will quickly seek platforms to help clear their warehouse backlog. Kuaishou has a large-scale flow of cost-effective pursuit and an ecological environment of anchor items, so the conversion rate may be higher when processing discounted goods. Therefore, the performance of Kuaishou's e-commerce in the third quarter can be said to be not weak in the off-season. Looking forward to the fourth quarter, in the current economic environment, Kuaishou's e-commerce advantages may continue to exist, and Dolphin Analyst expects the target of 900 billion yuan for the whole year to be achieved without much problem.

In terms of e-commerce, Kuaishou has a strategy of "big promotion of Kuaishou brand" compared to last year, which supports self-owned brands of small and micro businesses and guides "white brands" to evolve into "Kuaishou brands".

Dolphin Analyst believes that "Kuaishou brand" is a differentiated competition that Kuaishou is striving for in the brand e-commerce market this year under the fierce attack of Douyin, by pushing cost-effective e-commerce. After all, Kuaishou's user base is more skewed towards cities below the second and third tiers, and the overall purchasing power is not as good as Douyin. Large and medium-sized brands or high-end products of the same brand, from the perspective of live streaming, are more willing to promote and transact live on platforms such as Taobao and Douyin, while on the Kuaishou platform, they may be more willing to cooperate with live streaming celebrities. As live streaming e-commerce and local life e-commerce continue to occupy a strategic position in Douyin, such differentiation may continue for a long time.

3. Live streaming: Stronger than expected, with revenue of 8.95 billion yuan, setting an absolute high and a year-on-year growth rate of 15%, while the market's general expectation is around 10%.

In the previous quarterly report, Dolphin Analyst mentioned that Kuaishou's live streaming has surpassed traditional live streaming itself, and lies in the pay-for-play marketing and drainage of small businesses and anchors on the surface, using the popularity of e-commerce to make up for the decline of show-like live streaming.

In addition, Dolphin Analyst believes that from the perspective of penetration rate and depth of single user payment, Kuaishou's live streaming business also has the power of counter-cyclical growth. The gradually expanding head traffic pool, but the live streaming payment rate is still very low, and the single user ARPPU (50 yuan/month) is obviously not comparable to other traditional live streaming platforms, such as Tencent Music's social entertainment whose ARPPU is 170 yuan/month.

From a fundamental point of view, the above influencing factors:

(1) The first type, merchant reward-based marketing or anchor reward-based drainage, may be a business in which Kuaishou has a relative advantage, but may also have eaten up some of the original magnetic advertising revenue. Keeps The output the same number of newlines as the input text.

(1) This is due to the stronger private domain attributes of KuaiShou. While Douyin weakens its top broadcasters and tilts traffic towards brand promotion, KuaiShou still maintains a balance between brands and broadcasters. However, the other side of the coin is that brand merchants' budgets will also be prioritized on Douyin.

(2) The second type is the inherent growth of live broadcasting business, which is essentially the result of competition in a stock market. It is achieved by snatching market share from traditional live broadcasting platforms to achieve counter-trend growth. Compared with the first type, the second type is a completely external increment and does not involve internal revenue erosion or migration.

In the short to medium term, KuaiShou's adjustments to the conversion of live streaming traffic and short video traffic are expected to drive the development of live streaming business better than the industry for some time. However, in terms of monetization, the pure advertising revenue of Magnetic Gold Cow is definitely more profitable than the live streaming tipping-style marketing revenue that requires a 60% split with the broadcasters.

(3) Profit: bandwidth depreciation optimization, marketing remains year-on-year contraction

KuaiShou's loss reduction rate in the third quarter also exceeded market expectations again, with a net loss of 670 million yuan after adjustment, a year-on-year decrease of 85%, and a loss rate of -3%. Dolphin Analyst's simple estimate is that there is a high probability of turning positive in the fourth quarter.

However, for Internet employees, equity incentives are the main component of compensation and benefits. Therefore, Dolphin Analyst tends to add back the impact of equity incentive expenditures and look at the core operating profit situation of the main business after removing items such as investment income and financial income and expenses.

Since in this quarter, these financial indicators unrelated to the main business include the value-added tax subsidies included in [other income], which increased significantly from 150 million yuan in the second quarter to 690 million yuan in the third quarter, there is a certain gap between the change in core operating profit and the change in adjusted net profit.

Looking at the core profit situation separately, the core business in the third quarter had a loss of 3 billion yuan, a year-on-year decrease of 50%, and a month-on-month decrease of nearly 200 million yuan. The loss rate was 13%, which was slightly better than the 15% in the second quarter, but the extent of improvement slowed.

The significant reduction in losses mainly comes from the year-on-year reduction in promotional expenses, as well as the optimization of bandwidth costs and equipment asset depreciation, which have successively optimized:

1. Optimization of bandwidth and equipment depreciation costs

In the previous quarter, the improvement in revenue sharing ratio drove the increase in gross profit margin. In the third quarter, the revenue sharing ratio was kept the same as in the second quarter, and more optimization was achieved by keeping stable or directly decreasing bandwidth costs and equipment asset depreciation and amortization costs while income is still growing year-on-year. The gross profit margin in the third quarter continued to rebound to 46.3%, with gross profit increasing by 26% year-on-year.

1. Promotional expenses continue to be higher than expected. In the third quarter, the main optimization of expenses was still in sales expenses. For sales, the original guidance from the company was close to market expectations of 10 billion yuan, but in the end, only 9.1 billion yuan was achieved. The cost savings here had an impact on the profit margin of more than 1 percentage point.

Meanwhile, from a year-on-year perspective, marketing expenses showed a significant contraction trend. Among them, the sales team was optimized by reducing employee benefits and promotional expenses mainly due to a halving of the customer acquisition incentives for the Extreme Edition and overseas ad budget.

Looking at the cost of acquiring and maintaining a single user (marketing expenses/total user base), the third quarter continued to optimize, although the optimization rate slowed down, possibly due to an increase in overseas marketing spending in newly developed markets. However, when calculated using the user cost index proposed by Dolphin Analyst in the article "The Giant Baby Disease That Is All 'Blood Loss', Who Can Cure It Between Kuaishou and Bilibili?,"(content cost associated with advertising and live-streaming businesses + marketing expenses), the user cost in the third quarter actually increased slightly on a month-on-month basis due to an increase in content costs.

As Dolphin Analyst also discussed in the article comparing Kuaishou and Bilibili, under the strategic direction of "Kuaishou Becoming Longer" (the layout of short dramas and long videos), investment in the content side will be higher than in previous years, so the cost of promoting and acquiring customers needs to accelerate its contraction in order to maintain the overall trend of optimizing user costs and achieve a truly profitable business model.

(end here)

Historical Research on Kuaishou by Dolphin Investment Research:

Earnings Call: -August 23, 2022: Minutes of the phone call on "The Pandemic Has Benefited Businesses, and the Post-Pandemic Period Provides Rational Benefits for Consumers" (https://longbridgeapp.com/topics/3360475?channel=nlwi) -August 23, 2022: Financial statement review "First Encounter with Profit, Kuaishou is Racing on the Road to Monetization Expectations" (https://longbridgeapp.com/topics/3360327?channel=nlwi) -May 24, 2022: Minutes of the phone call on the first-quarter performance "First-Quarter Performance Has Reflect Certain Pandemic Influences" (https://longbridgeapp.com/topics/2651855? invite-code=FRQWBJ)》

May 24, 2022 Financial Report Review: "Swimming against the current, Kuaishou submits a paper with 'no ambiguity'"

March 30, 2022 Phone Meeting Minutes: "In addition to cost reduction and efficiency enhancement, Kuaishou also has ambitions to support 'many industries' (phone meeting minutes)

March 29, 2022 Financial Report Review: "Kuaishou: The countdown begins for the 'Earn Money Phase' of the 'Brother Iron Economy'"

November 23, 2021 Phone Meeting: "What changes did management make behind the scenes with the improvement of financial margins? (Kuaishou phone meeting minutes)"

November 23, 2021 Financial Report Review: "Kuaishou's backbone stiffens with the change in personnel."

August 26, 2021 Phone Meeting Minutes: "Kuaishou: The focus in the future is to convert more public domain traffic into the private domain (phone meeting minutes)"

August 25, 2021 Financial Report Review: "Kuaishou: The long pursuit of the industry's second-best player"

May 25, 2021 Financial Report Review: "Kuaishou: How much longer can the 'money-burning' strategy of buying traffic last?"

May 24, 2021 Phone Meeting: "Kuaishou first-quarter performance phone meeting Q&A"

March 23, 2021 Financial Report Review: "Kuaishou's '116.6 billion' has actually become the question I get asked the most" On January 19, 2021, Financial Report Review of "Dolphin Research | How Much is the Value of the $50 Billion Kuaishou?"

Depth

On February 24, 2021, "Where Does the Value of Kuaishou Come From When It Has Many Shortcomings?"

On January 26, 2021, "Long-ignored Lao Tie Economy, Kuaishou Has a Market Capitalization of One Trillion Yuan."

On January 15, 2021, "Is Kuaishou Guilty?"

Risk Disclosure and Statement for this Article: Dolphin Research Disclosure and General Disclosure