Kuaishou: Double flywheels driving, profits cannot be hidden

After the Hong Kong stock market closed on May 22nd Beijing time, Kuaishou-W.HK released its financial report for the first quarter of 2024. The highlight of the performance lies in profitability, driven by high gross profit from advertising and e-commerce, coupled with group-wide cost reduction and efficiency improvement, ultimately resulting in core operating profit related to the main business far exceeding expectations.

Specifically:

1. How did the profits exceed expectations: On one hand, the growth of high-margin e-commerce revenue exceeded expectations, while on the other hand, the optimization cycle of bandwidth servers + a year-on-year halving of management expenses led to a significant contraction in total operating expenses. Combined with a 70% year-on-year decrease in share incentive expenses, and a 17% year-on-year decrease in other expenses related to office facilities and travel, it indicates that the operational efficiency improvement brought about by organizational optimization in the past two years (shortening reporting chains, reusing human resources, and flattening the organization) has further manifested.

In the end, the first-quarter operating profit beat consensus expectations by 65%, achieving a Non-GAAP net profit of 4.4 billion. The company's previously set profit target for 2024 is 16 billion. If subsequent competition does not face significant marginal deterioration, then based on the current Q1 level relative to the off-season, the certainty of achieving the target is very high.

2. Sharp increase in e-commerce monetization rate: Other income from e-commerce in the first quarter was 4.2 billion, a 48% year-on-year increase, exceeding the market's expected 3.9 billion. The GMV remained basically the same, with the surprise coming from the monetization rate. Through calculations, the platform commission rate reached 1.45%, an increase of 0.2 percentage points year-on-year.

If estimated based on e-commerce advertising accounting for around 50%, the comprehensive monetization rate of commission + advertising is expected to reach 4.3%, an increase of 0.7 percentage points year-on-year, approaching Kuaishou's steady-state target of 4.5% set earlier. The main reasons for Kuaishou's gradual increase in the comprehensive e-commerce monetization rate are believed to be full-site promotion + support for small and medium-sized anchors + assisting brands in self-broadcasting, which essentially shorten the profit chain between themselves and merchants, thereby sharing more profits from the industry chain.

Recently, the market may be concerned that the rapid growth of GMV on Kuaishou has slowed down since the second quarter, mainly due to the impact of top anchors like Simba stopping broadcasts. It is believed that the contradiction between traffic distribution and profit distribution will inevitably occur as the platform grows. Although short-term negative impacts are unavoidable (Kuaishou's emphasis on private domain), it is not to the extent of serious harm (as a social platform with a scale of 700 million, most of the traffic bargaining power still lies in the hands of the platform). Currently, Kuaishou is focusing on more value exploration around the "people looking for goods" scenario, with Q1's general shelf e-commerce GMV accounting for 25%, a 5 percentage point increase from the previous quarterTherefore, while GMV growth slows down, if monetization can be deepened, it is expected to alleviate the growth pressure on overall e-commerce revenue. At the April Kuaishou E-commerce Conference, a new sales hosting model was proposed (especially targeting manufacturing merchants with weak sales links), which involves participating in more industrial chain links to further unlock the potential for breakthrough in take rate.

3. External circulation advertising continues to rebound: Advertising revenue in the first quarter increased by 27%, basically meeting expectations. Excluding e-commerce advertising (expected to grow by over 35% year-on-year), Dolphin Jun estimates that the growth rate of external circulation and alliance advertising revenue is also approaching 15%-20%, close to the high single-digit level in the second quarter, with a noticeable acceleration in growth. The company explained that the launch of intelligent marketing solutions provides advertisers with a more comprehensive marketing service, and the effective application of AIGC has also increased advertisers' willingness to increase budgets.

Dolphin Jun believes that the recovery/ignition of industries more suitable for marketing on the Kuaishou platform is also a major reason driving accelerated revenue growth, such as short dramas (paid traffic), games (e.g. Yuanmeng vs. Danzai user acquisition), education (strong demand for quality education), and other industries.

4. Live streaming decline within expectations: Due to the sustained impact of live content governance implemented since the middle of last year, live streaming revenue in the first quarter decreased by 8% year-on-year, with the company having provided sufficient guidance in the previous quarter. However, compared to Tencent Music and Cloud Music, which are also undergoing governance of their ecosystems, Kuaishou's live streaming revenue did not experience a panic-like decline. Combining the company's actions in the live streaming business, we believe that while governance is ongoing, the accelerated introduction of high-quality guilds (50% year-on-year growth in Q1) has offset the short-term performance drag. Continuing this operational trend, we expect a decline of around 10% in live streaming revenue for the full year.

5. Has traffic peaked? Emphasis on e-commerce imprint during the off-season transition: In the first quarter, Kuaishou historically leveraged the Chinese New Year holiday period for customer acquisition, but the actual monthly active users in Q1 were 697 million, a decrease of 3 million compared to the previous period. This counter-trend change also occurred in the previous quarter. Dolphin Jun believes that as Kuaishou's e-commerce attributes take the lead, changes in user activity may shift to be more consistent with the seasonal changes in e-commerce. Of course, attention also needs to be paid to the potential competitive impact of video accounts.

Although traffic growth has stagnated, the activity of retained users on the platform has increased, with the average daily usage time reaching a new high of 129.5 minutes/day compared to the same period last year, reflecting an increase in DAU/MAU ratio. Dolphin Jun calculated a 7.5% year-on-year increase in total user time spent per day, reversing the trend of year-on-year decline in the fourth quarter of last year due to a high base (caused by the World Cup).

6. Repurchase shows a slight gesture of goodwill: Kuaishou has repurchased 35 million shares since the beginning of this year, spending HKD 1.6 billion. Compared to the current market value, the support for the stock price is limited, indicating a gesture of goodwill towards shareholders. The company has announced another repurchase plan starting from June 13, totaling HKD 16 billion over 36 months, with an average annual dividend yield of 2%, which is not particularly high7. Detailed Financial Data Overview

Dolphin's Viewpoint

Kuaishou has once again delivered results that exceed expectations. Based on the refreshed operational efficiency and profit levels, the implied forward P/Non-IFRS NP valuation may be less than 10x for a 25-year performance, indicating a visibly undervalued position.

Recently, there has been a rapid influx of capital into Chinese concept stocks, leading to a quick surge in stock prices. However, from a valuation perspective, Kuaishou's stock price rebound has been relatively lagging, and there was even a correction after May. The reason behind this change lies in third-party data showing a significant slowdown in Kuaishou's e-commerce GMV growth in April due to the impact of top anchors like Xinba stopping broadcasts.

Additionally, this year, Video Number has been focusing on live e-commerce, which is estimated to have increased market concerns. However, this earnings report also presents two unexpected factors: 1) There is further room for breakthrough in the monetization rate of Kuaishou's e-commerce, or rather, live e-commerce, which cannot be simply aligned with the monetization rate of traditional e-commerce platforms. 2) The internal organizational optimization at Kuaishou has been more effective than the market anticipated. These two unexpected factors are expected to guide the market to raise expectations for Kuaishou's medium to long-term profit levels, increasing the cost-effectiveness of Kuaishou's current valuation. Although there may still be disputes regarding the sustainability of future high growth due to competition, Kuaishou still has the potential to address these challenges. Even if the assumptions are realized, the impact of competition will not be immediately reflected, at least not for Kuaishou, which still has a place in the competition, rather than for players who have not even qualified to enter the arena. Considering the adjusted valuation and changes in business development, Dolphin still believes that even if the medium to long-term logic of Kuaishou is unclear, the short-term outlook should not be too pessimistic.

The following is a detailed analysis:

I. Has Traffic Peaked? E-commerce Imprint Becomes Heavier as Peak and Off-peak Seasons Alternate

In the first quarter, Kuaishou historically leveraged the Chinese New Year holiday period for customer acquisition, but in Q1, the actual monthly active users decreased by 3 million to 697 million. This counter-trend change also occurred in the previous quarter. Dolphin believes that as Kuaishou's e-commerce attributes take the lead, changes in user activity may shift to be more consistent with the peak and off-peak seasons of e-commerce. Of course, attention should also be paid to the potential competitive impact of Video Number.

Despite stagnant traffic growth, the remaining user base has shown an increase in platform activity. Not only has the average daily usage time reached a new high of 129.5 minutes/day compared to the same period last year, indicating an increase in user stickiness, but the DAU/MAU ratio has also improved. Dolphin's calculation shows a 7.5% year-on-year growth in total daily user time, reversing the trend of year-on-year decline in the fourth quarter of last year due to a high base (caused by the World Cup).

The e-commerce attribute of Kuaishou is becoming increasingly prominent, so the changes in user activity are more consistent with the fluctuations in e-commerce peak and off-peak seasons (higher user growth in the second and fourth quarters), rather than in previous years when the entertainment attribute was stronger and user activity varied with summer and winter vacations. However, at present, there is still pressure for further traffic growth. In addition to the existing large user base, there is also competition accelerating from platforms like Douyin and Xiaohongshu.

2. E-commerce Monetization Rate Surges

The growth of the three major businesses in the first quarter still relies on the penetration of e-commerce transactions—GMV reached 289 billion, a year-on-year increase of 28.6%, which basically meets market expectations.

In addition to Kuaishou's consistent brand support strategy, the expansion of shelf e-commerce continues to contribute to incremental growth. In the first quarter, the GMV share of shelf e-commerce was 25%, an increase of 5 percentage points from the previous quarter. The company's target for this year set in the previous quarter was to increase it to 25% to 30%. Despite not being a traditional peak season in the first quarter, with the boost from the Chinese New Year and International Women's Day, as well as the rich scenarios of shelf e-commerce, there were still 126 million monthly active buyers, a decrease of only 400,000 from the previous quarter.

Direct monetization through e-commerce transactions comes from commission income, which grew by 48% in the first quarter. In addition to the strong growth in GMV, the increase in the take rate commission rate exceeded expectations.

If we estimate based on e-commerce advertising accounting for around 50%, the comprehensive monetization rate of commission + advertising is expected to reach 4.3%, an increase of 0.7 percentage points year-on-year, approaching Kuaishou's stable target of 4.5% set earlier. The main reasons for Kuaishou's gradual increase in the comprehensive e-commerce monetization rate are believed to be platform-wide promotion + support for small and medium-sized anchors + assisting brands in self-broadcasting. These three actions essentially shorten the profit chain between Kuaishou and merchants, thereby sharing more profits from the industry chain.

Looking ahead to the second quarter, it is the peak season for e-commerce, but generally, transactions are mostly flat before the 618 shopping festival. Data for April shows a significant decline in Kuaishou's GMV growth rate, partly due to the high base from last year and the impact of top anchors like Xinba stopping broadcasts (according to 2023 data, Xinba's GMV accounted for 4% of Kuaishou's total GMV).

It is believed that as the platform grows, conflicts between traffic distribution and profit distribution will inevitably occur. Although short-term negative impacts are unavoidable (Kuaishou has a relatively heavy private domain attribute), it is not to the extent of causing serious harm (as a social platform with 700 million users, most of the traffic influence still remains in the hands of the platform) Currently, Kuaishou is focusing more on value exploration around the "people finding goods" scenario, with Q1 GMV share of pan-shelf e-commerce reaching 25%, a 5 percentage point increase from the previous quarter.

Therefore, while GMV growth is slowing down, if monetization can be deepened, it is expected to alleviate the overall growth pressure on e-commerce revenue. At the Kuaishou e-commerce conference in April, a new sales hosting model was proposed (especially targeting manufacturing merchants with weak sales links), which involves participating in more industrial chain links to further unlock the potential for a breakthrough in take rate.

III. External circulation advertising further warms up

In the first quarter, advertising revenue basically met expectations, with a year-on-year growth of 27%, reaching 16.7 billion RMB, accelerating on a quarter-on-quarter basis. Excluding e-commerce advertising (expected to grow by over 35%), Dolphin Jun estimates that the growth rate of external circulation and alliance advertising revenue is also approaching 15%-20%, compared to the high single-digit level in the second quarter, showing a significant acceleration in growth. The company explained that the launch of intelligent marketing solutions provides advertisers with a more comprehensive marketing service, and the effective application of AIGC has also increased advertisers' willingness to increase budgets.

Dolphin Jun believes that the recovery/ignition of industries that are more suitable for marketing on the Kuaishou platform is also a major reason driving the accelerated revenue growth, such as short dramas (paid promotion), games (such as Yuanmeng vs. Danzai for user acquisition), education (high demand for quality education), and other industries.

Q1 total user daily time spent growth rate rebounded to 7.5%, driven by year-on-year traffic growth and the increase in daily average time spent, which is expected to provide some support for the accelerated growth of advertising.

In addition, the popularity of short dramas and the competition between "Yuanmeng Star" and "Danzai Party" have also contributed to the revenue of Douyin and Kuaishou.

Looking at the first quarter alone, Kuaishou's performance exceeded the overall online advertising industry. According to QM data, the growth rate of online advertising weakened in the first quarter, but Kuaishou still significantly outperformed the industry. Similar to Tencent's logic, having a social platform with live e-commerce capabilities gives Kuaishou stronger countercyclical capabilities.

IV. Live streaming governance impact within expectations

In the first quarter, live streaming tipping revenue was 8.575 billion RMB, a year-on-year decrease of 8%, further demonstrating the impact of live streaming governance, which the company had already guided for in the previous quarter. However, compared to Tencent Music and Cloud Music, which are also governing their ecosystems, Kuaishou's live streaming revenue did not experience a panic slide. Combining the company's actions in the live streaming business, **we believe that it may be a combination of governance and accelerated introduction of high-quality guilds (50% year-on-year growth in Q1), offsetting the short-term performance dragContinuing this trend, we expect the full-year live streaming revenue to decline by no more than 10%.

In addition to accelerating the introduction of guilds, Kuaishou is also further expanding its live streaming scenes, mainly through Kuaipin (job intermediary) and Ideal Home (real estate intermediary). The growth in the first quarter is as follows:

Kuaipin's daily average resume submissions increased by 180% year-on-year (compared to 200% year-on-year growth in the previous quarter), showing strong growth momentum.

Ideal Home's business covers over 100 cities, with over 50,000 cooperating anchors and undisclosed real estate transaction volume for the current period. Considering the industry situation, real estate transactions were quite dismal in the first quarter, but there are signs of improvement in some first-tier cities in April, which should continue to be monitored.

V. Profits Exceed Expectations Again: "Broad In Plan" Advanced Edition

In the first quarter, Kuaishou achieved a GAAP net profit of 4.1 billion, continuing to increase on a quarter-on-quarter basis, still in a high-growth period of turning losses into profits, with a profit margin increase to 14%. Non-GAAP net profit was 4.39 billion (mainly adding back SBC equity compensation expenses of 290 million), with a profit margin of 15%.

The improvement in profit margin mainly comes from: on one hand, the e-commerce revenue growth with high gross profit margin exceeded expectations, and on the other hand, the optimization cycle of bandwidth servers + halving of operating expenses year-on-year led to a significant contraction in total operating expenses.

However, sales expenses did not continue to decline year-on-year. Considering that under competition, the overall growth of traffic has shown signs of fatigue (marketing expenses have not decreased, but the user base has shrunk compared to the previous period) and Kuaishou is currently focusing on monetization, it is expected that the possibility of further optimization or increase in the future is relatively limited, so the marketing expense ratio is mainly expected to be improved through further expansion of monetization.

With stock incentive expenses down 70% year-on-year, and other expenses related to office facilities and travel down 17% year-on-year, it indicates that the operational efficiency improvement brought about by organizational structure optimization in the past two years (shortening reporting chains, reusing human resources, and flattening the organization) is further manifesting.

Since Kuaishou's net profit includes some gains (government subsidies, financial income, etc.), if only looking at the performance of the core business, Dolphin Jun generally focuses on core operating profit indicators (revenue - costs - operating expenses).The core operating profit in the first quarter reached 3.4 billion, with a profit margin of 11.7%, still exceeding market expectations (~21 billion), with an expected difference of 1.3 billion. One-third of it comes from revenue exceeding expectations, one-third from cost optimization, and the remaining one-third from the overall contraction of operating expenses exceeding expectations.

When looking at different regions (domestic and overseas), the domestic market is the main profit driver, and the losses in overseas markets have also significantly decreased. Compared to the previous quarter, the first quarter's profit improvement mainly came from business departments rather than the headquarters' mid-office management departments (the combined operating profit of domestic and overseas business departments is 37 billion > group's core operating profit of 34 billion). In other words, there was a 12% year-on-year decrease in personnel compensation expenses, reduced in the business departments, which aligns with the trend we mentioned last quarter - the slowing effect of organizational optimization adjustments in the headquarters' mid-to-back office. The subsequent profit improvement is also more based on the increased realization efficiency at the business level.

Dolphin Research's historical report on "Kuaishou" (in the past year):

Financial Report Season

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

March 21, 2024 Financial Report Review "Kuaishou, Blooming in All Seasons, Still Overlooked by the Market?"

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

November 21, 2023 Financial Report Review "Stop Nitpicking! Kuaishou is Going Against the Odds"

August 23, 2023 Conference Call "Advancing Shelf E-commerce as a New Growth Point for E-commerce Business (Kuaishou 2Q23 Conference Call Summary)"Financial Report Review on August 22, 2023: "Kuaishou: From Blood Loss to Instant Profit, Can it Dispel Capital Bias?" Read more

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

Financial Report Review on May 22, 2023: "Is Kuaishou Still Mediocre?" Read more

March 29, 2023 Conference Call: "Kuaishou: Good Growth Expectations, Focusing on Improving Internal Strength Instead of Subsidies (4Q22 Conference Call Summary)" Read more

Financial Report Review on March 29, 2023: "Kuaishou: Running Towards Reduced Losses, Can it Break Prejudices?" Read more

November 23, 2022 Conference Call: "Kuaishou: Short-term Ad Weakness Recovery, Cost Reduction and Efficiency Improvement Continues (3Q22 Conference Call)" Read more

Financial Report Review on November 22, 2022: "Annual Revenue of Hundreds of Billions, Struggling Profits, Can Kuaishou's Story Come Full Circle?" Read more

August 23, 2022 Conference Call: "Business Bonuses During the Pandemic, Rational Consumer Bonuses Post-Pandemic (Kuaishou Conference Call Summary)" Read more

Financial Report Review on August 23, 2022: "First Glimpse of Profit, Kuaishou Galloping on the Road to Monetization" Read more

May 24, 2022 Conference Call: "First Quarter Performance Already Reflecting Some Pandemic Impact (Kuaishou Conference Call Summary)" Read moreMay 24, 2022 Financial Report Review "Going against the tide, Kuaishou hands in a 'no-nonsense' paper"

March 30, 2022 Conference Call "In addition to reducing costs and increasing efficiency, Kuaishou also has ambitions to 'carry many industries' (conference call summary)"

March 29, 2022 Financial Report Review "Kuaishou: Iron buddy economy starts the 'countdown to making money'"

In-depth

June 15, 2022 "Both suffering from 'blood loss' giant baby syndrome, can Kuaishou and Bilibili recover?"

February 24, 2021 "Kuaishou has many criticisms, where does its value come from?"

January 26, 2021 "Dolphin Research Institute | The underestimated iron buddy economy, Kuaishou's market value of hundreds of billions is foreseeable"

January 15, 2021 "Dolphin Research Institute | Does Kuaishou have original sin?"

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