KUAISHOU-W: Continues High Growth This Year, Adjusted Net Profit Expected to Exceed Forecasts (4Q23 Earnings Call)

The minutes of the Q4 2023 earnings conference call for $KUAISHOU-W.HK can be referenced for financial report analysis in "KUAISHOU-W, blooming in all seasons, yet the market remains indifferent".

I. Key Financial Indicators vs. Expected Values

II. Management Report

1. Users: Q4 DAU 382.5 million, MAU 700 million, year-on-year growth of 4.5% and 9.4% respectively. Average daily user duration is 124.5 minutes. As of the end of 2023, the cumulative number of mutual users of KUAISHOU-W applications has reached 33 billion pairs.

Focusing on high retention and high-value users, acquiring high-quality user growth, Q4 unit customer acquisition cost continued to decrease year-on-year, and the daily active subsidy cost of KUAISHOU-W Speed Edition decreased year-on-year.

2. Entertainment Live Streaming: Supporting small and medium-sized anchors and those who promote traditional Chinese culture to create a healthy and sustainable entertainment live streaming ecosystem. By the end of Q4 2023, the company had cooperated with over 1300 regional guilds, while continuously promoting new content, interactions, and gameplay.

Advancing in multi-person scene live streaming, "big stage" and other emerging categories, the number of guild-contracted anchors increased by 40% year-on-year in the fourth quarter, and the average daily live broadcast duration of anchors increased by over 30% year-on-year.

In Q4 2023, the daily average resume submission for blue-collar recruitment business increased by over 200% year-on-year, and the daily average submission of users increased by over 100% year-on-year.

The cumulative transaction volume of the Ideal Home business in Q4 2023 exceeded RMB 16 billion.

3. E-commerce: The average monthly active selling merchants in Q4 grew by over 50% year-on-year, exceeding 100% for the whole year, with an increase in market share. Benefiting from the continuous enrichment of the general merchandise shopping scene, apart from the KUAISHOU-W small store monthly card, an e-commerce black card membership was launched for top users to increase user activity and purchase frequency.

On the supply side, over 1 million operators participated in the Double 11 promotion, and in December, the number of new merchants reached a record high of 660,000. Through services such as merchant training camps and the Fuyao Plan, the company supports new merchants in their cold start. For example, after the completion of the service center in the Suzhou industrial belt, the number of active selling merchants and GMV achieved over 40% growth compared to beforeIn Q4, the GMV of branded products increased by 155% year-on-year, with nearly 2,500 brands achieving a growth rate of 100%. In Q4 2023, the GMV of self-broadcasted products from well-known brands grew by over 100%, mainly driven by brand-intensive industries such as home appliances, home furnishings, menswear, and sports. Additionally, the Chuanliu Plan aims to strengthen the recall of brands with high-quality distribution goods and focus on self-broadcasting.

Regarding influencers, the Spark Plan has boosted new influencers to start broadcasting. In Q4, the proportion of mid-tier influencers in the overall influencer GMV increased by 7 percentage points.

The GMV share of pan-shelf e-commerce exceeded 20%, with daily average active sellers and buyers growing by over 60% year-on-year. During major promotions, the homepage mall tab was fully opened to expand traffic. The number of daily active sellers in the mall increased by over 130% year-on-year, and the number of daily buyers increased by over 130% year-on-year.

Short video e-commerce continued to grow rapidly in the fourth quarter, with a year-on-year growth rate exceeding 100%, mainly benefiting from the rich supply of short videos and the continuous improvement in content quality. During the Double 11 promotion presale period, merchants used short videos to increase visibility, setting a new record for presale GMV.

4. Advertising:The number of active marketing clients in Q4 2023 increased by over 160% year-on-year.

(1) Internal circulation advertising is the main driver:The "Full-Site Promotion" launched new features such as investment diagnosis, post-investment review, and real-time material analysis. In Q4 2023, merchants' consumption through the "Full-Site Promotion" product for marketing placement increased by over 200% month-on-month.

Company's intelligent hosting has been widely used in various scenarios such as live hosting, product hosting, and search hosting, reducing the threshold for small and medium-sized merchants to place ads and improving marketing consumption and effectiveness. In Q4, merchants' consumption through live hosting for marketing placement increased by over 150% month-on-month.

(2) External circulation advertising growth rate continued to increase compared to Q3:Mainly driven by industries such as media (over 300% year-on-year growth in paid short drama placements), education, and gaming.

Enhancing the integration of native marketing content and organic content in underlying data and traffic synergy to achieve true "marketing as content." Consumption in Q4 increased by over 50% month-on-month, and the penetration rate of total external circulation consumption continued to rise.

(3) Brand advertising increased by over 80% month-on-month:Mainly in the automotive sector, followed by fast-moving consumer goods, e-commerce, beauty, and skincare merchants placing brand ads through Starlight short dramas.

5. Short Dramas:By the end of 2023, KUAISHOU-W's Starlight short dramas had nearly a thousand episodes online, with over 300 episodes exceeding one billion views. Additionally, the company introduced tens of thousands of third-party paid short dramas.

In Q4 2023, the daily average number of heavy short drama viewers watching more than 10 episodes reached 94 million, a year-on-year increase of over 50%. The daily average number of paying users increased by over 3 times year-on-year.

6. Search:The construction of the "watch and search" scene was improved, adding weight to social relationships and useful content in search result rankings to enhance user search penetration and experience. In Q4 2023, the monthly average number of users using KUAISHOU-W search increased by 16% year-on-year, and the daily average search frequency continued to riseIn terms of commercialization, the search marketing service revenue in 4Q23 increased by nearly 100% year-on-year.

7. Overseas: The losses have significantly narrowed. Key regions such as Brazil and Indonesia have seen steady increases in daily active users and average daily usage time, promoting the localization of original content production, building a multi-business layout including short dramas, mini-games, paid courses, sports, etc. Sponsorship of popular programs in the Latin American region continues to enhance media brand influence. The total overseas business revenue in 4Q23 reached 847 million RMB, an increase of nearly 200% year-on-year, driven by e-commerce and gaming, with overseas advertising revenue growing by over 300% year-on-year.

Overseas marketing expenses have been significantly reduced by over 30%, and the operating losses of overseas business in Q4 have decreased by 63.2%, further narrowing on a quarter-on-quarter basis. The operating losses of overseas business in 2023 have decreased from 6.6 billion RMB in 2022 to 2.8 billion RMB.

5. Innovative Business: Focus on local life, fast recruitment, and ideal home, focusing on capacity building.

6. Cash: As of 4Q23, the company's total cash, cash equivalents, deposits, restricted cash, and wealth management products amounted to 61.6 billion RMB, with a net cash inflow from operating activities of 8.9 billion RMB in 4Q23.

II. Analyst Q&A

Q1: Regarding e-commerce, progress in the mall business, driving factors, and future growth prospects?

A: The progress of the mall in 4Q23 is good, with a GMV growth rate of over 50% year-on-year, and there is still room for continuous improvement in the future. The high-speed GMV growth of the mall is driven by both supply and demand, with the number of daily active merchants in the mall in the fourth quarter increasing by over 130% year-on-year. The company fully utilizes the high-quality supply of content scenes, links shelves such as content scenes through innovative gameplay, "Ten Thousand People Group" connects shelves with content scenes, and the platform hosts goods to achieve explosive sales in both domains; at the same time, it introduces phased commission-free policies for new mall merchants to incentivize merchant entry, and focuses on developing refined goods suitable for mall operations, introducing more mall-adapted SKUs.

In 4Q23, traffic entry points were gradually opened, with the full opening of the mall tab in December, and user-tiered operations. This includes refined subsidies, launching a new version for new users in the mall, making the interaction pages and product selection more user-friendly. The combination of big brands with discounts and good products has also converted many new e-commerce users, with the daily buyers in the mall in 4Q23 growing by over 70% year-on-year.

During the New Year shopping festival, a low-price special sale channel was launched, and recently during the Women's Day promotion, user purchase intentions were leveraged through traffic subsidies and exclusive discounts, gaining recognition from merchants for the high-speed growth of mall GMV and future sales potential. Additionally, more merchants are willing to leverage the mall's marketing scenarios to create explosive products.

Q2: Regarding advertising, specific strategies for optimizing ROI for merchants on the platform?

A: The platform has launched differentiated internal circulation product capabilities for merchants in different operating scenarios and volume stages, supplemented by high-quality traffic support, with the merchant scale in 4Q23 increasing by 50% compared to 1Q23.

(1) Site-wide Promotion: Including site-wide live broadcast promotion and site-wide product promotion. With the optimization goal of marketing investment and GMV scale for merchant site-wide traffic, it helps merchants explore high-quality site-wide traffic, drive GMV growth, and better meet merchant operational demandsLinkage marketing and organic traffic break the logic of division. Unleash the value of the entire site traffic.

During the Double 11 promotion, the peak consumption exceeded 15 million, and merchants also achieved a 20% overall GMV increase through site-wide live streaming placements.

(2) Intelligent Placement: Including live streaming hosting and product hosting. Intelligent placement capabilities are built for small and medium-sized merchants with insufficient placement capabilities. For merchants with low repurchase frequency and the need to expand their customer base, through product upgrades, improvement, new customer value analysis, and other measures, in conjunction with e-commerce subsidies, it increases merchant placement consumption, leading to user repurchases and expanding the customer base.

Merchants only need to express the marketing placement budget time period and conversion goals for live streaming rooms or products, and the system can automatically create marketing placement units, optimize marketing materials and template audiences based on algorithms, and continuously optimize in real-time.

In 4Q23, marketing placement consumption through live streaming hosting increased by over 150% compared to the previous quarter.

Q3: Regarding recent developments in the local life new business?

A: Local life not only contributes to GMV but also enhances user stickiness, making it one of the key new businesses that KUAISHOU-W values greatly. 2023 is the first year of local life for KUAISHOU-W, achieving many milestones from 0 to 1, with rapid GMV growth and continuously enriched supply.

In 4Q23, the daily average paying users for local life business increased by over 40% compared to the previous quarter, and the daily average active merchants increased by over 40%.

For a successful case study, the Harbin brand "Moon Eight Treasures" had a successful group purchase on Double 11, with online revenue tripling the usual store revenue, selected by CCTV as a breakthrough case in short video marketing.

In terms of content, there is increased support for influencers, recruiting and training new influencers through the "Fei Niao Plan" to incentivize the production of high-quality local life content.

The introduction of a group buying live streaming special plan helps group buying influencers connect with popular products and provide traffic support. The number of high-quality influencers increased tenfold from December to March, driving a more than 100% increase in the daily average number of active broadcasters in 4Q23.

The platform continues to advance its intelligent subsidy strategy, focusing on cost-effectiveness as a core competitive advantage. In January 2024, it reached a cooperation with OTA partners to introduce more high-quality classic tickets and travel routes to the platform, enriching the travel category supply. Through vivid video displays and explanations, KUAISHOU-W aims to create a new marketing field for travel on the platform.

Regarding innovative businesses, I would also like to mention the incubating game business, which has been developing and operating self-developed games for the past few years, accumulating talent and experience. The company is confident in the Chinese gaming market and the progress of KUAISHOU-W game development and will invest in the gaming business with a long-term view and controllable impact on the group's profit and loss. Hopefully, there will be substantial progress to share by the end of this year.

Q5: How do you foresee the performance in 2024?

A: Looking ahead to 2024, e-commerce and advertising businesses will continue to grow rapidly, operational efficiency will steadily improve, and it is expected that the gross profit margin will further increase year-on-year.

Factors driving gross profit margin: optimization of revenue structure, control and optimization of revenue sharing costs, and technological innovation to enhance bandwidth server efficiency for mobile games.S&M: The DAU is expected to continue growing in 2024 and achieve the target of 4 billion in the second half of 2024. The goal is to achieve user growth and maintenance costs without a significant increase, while further optimizing the cost of acquiring a single user and the cost of maintaining a single DAU, enhancing user growth ROI.

With the growth of e-commerce (including live streaming e-commerce, short video e-commerce, online malls, local lifestyle), S&M expenses will increase year-on-year, but the proportion of revenue will continue to decrease.

The overall group profit is gradually increasing, and it is expected that the adjusted net profit for the full year will exceed the consensus expectations (BBG expects 15 billion).

Q6: Regarding AIGC, what progress has been made in video generation?

A: The AI strategy was launched at the beginning of 2023, and over the past year, the company has solidly promoted the research and development, training, and implementation of self-developed large models.

In terms of self-developed large models, following the 13 billion and 66 billion parameter models, in 4Q23, a 175 billion parameter language large model was trained, achieving satisfactory results. Currently, its performance significantly exceeds GPT 3.5, approaching GPT 4.0 in dimensions such as understanding, detail, and readability. The company is confident that it will reach the level of GPT 4.0 within the next six months.

In multimodal models, the "KeTu" model of the WenShengTu large model exceeds the level of MidJourney V5. In the field of video generation, active progress was made in the patent research and development of related technologies at the end of last year.

Sor's successful exit was faster than expected, proving the feasibility of technological breakthroughs. The short video ecosystem presents a huge opportunity, and in the future, the combination of generative models and producer tools will help creators reduce barriers, improve short video production governance and efficiency.

In 4Q23, the focus was on advancing the application of digital human live broadcast scenarios, such as using large models to automatically generate live scripts, assisting digital humans in intelligent playback, enabling user comments, customer service assistants to expand IM interaction scenarios, and applying them to KuaiPin, LiXiangJia, and other businesses. Rapid iteration of application details such as AI XiaoKuai, AI WanPing, AI Search, etc., will continue to adhere to investment and exploration in large models and applications.

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