Kuaishou: The "Iron Brothers" selling goods is becoming "more familiar," how will the future path be?

$KUAISHOU-W(01024.HK) The third quarter financial report was released after the Hong Kong stock market closed on November 20 Beijing time. Since the company had communicated sufficiently with the market beforehand, the actual performance was basically in line with expectations, resulting in a smooth landing without surprises.

Specifically:

1. Growth pressure in live e-commerce has emerged: The GMV in the third quarter grew by 15% year-on-year, remaining flat compared to the previous quarter, but the overall slowdown trend is irreversible. It is expected that the growth rate will continue to decline in the fourth quarter under a high base.

The logic and reasons behind this, in addition to macroeconomic factors and the off-peak season for e-commerce that all peers face, Kuaishou also needs to bear the competitive pressure from KOL live e-commerce being undercut by traditional shelf merchants and subsidized users. The commission rate in the third quarter was 1.24%, a decline compared to the previous quarter, which reflects the platform's increased concessions to merchants.

It is recommended to pay attention to the management's comments on the performance during Double 11 and the performance so far in the fourth quarter, especially regarding the effects of the current round of national subsidies on Kuaishou's e-commerce.

2. User metrics slightly exceeded expectations: The MAU in the third quarter increased to 714 million, up by 22 million quarter-on-quarter, with daily active users surpassing 400 million, achieving this year's customer acquisition target. Although sales expenses continued to grow significantly (promotion expenses +18%, used for user retention and expanding local life services), it reflects the platform's proactive customer acquisition efforts. Other user engagement metrics also performed well in the third quarter, such as user stickiness remaining high after the influx of new traffic, with average daily usage time per user reaching 132 minutes, an increase of 10 minutes.

The actual user performance in the third quarter shows some differences from the trends tracked by external third parties, so if the market mainly references external data, Kuaishou's actual performance can be considered a small surprise.

3. Live streaming impact is rapidly converging: Although live streaming reward income continued to decline in the third quarter, the trend of slowing decline has not changed. Starting from the next quarter, the base effect will pass, and live streaming income is expected to recover growth.

Compared to platforms like Tencent Music and Cloud Music, the reason for Kuaishou's rapid adjustment in live streaming is that during this year of adjustment, Kuaishou has been organizing non-compliant live streaming rooms while actively introducing quality live streaming and fair onboarding to Kuaishou, thus offsetting the impact. For example, by the end of the third quarter, the number of institutions signing contracts with Kuaishou increased by 40% year-on-year, and the number of signed anchors increased by over 60% year-on-year.

4. External circulation continues to warm up: Advertising in the third quarter grew by 20% year-on-year, mainly driven by external circulation advertising. The incremental areas brought by external circulation advertising include short dramas with high industry prosperity, competitive e-commerce, and local life services. Changes in internal circulation advertising mainly follow GMV, while depending on the depth of monetization that the platform can "actively adjust" at that time.

Although Kuaishou launched several traffic tools aimed at e-commerce merchants in the third quarter, we believe that under the relatively difficult macroeconomic and competitive environment in the third quarter, the short-term improvement in Kuaishou's monetization rate is limited Therefore, it is expected that the growth rate of internal circulation advertising will be the same as the change in GMV, with a growth of 15%. This also means that the growth rate of external circulation advertising is over 25%, which is a strong recovery in the current environment.

5. Profit Margin Improvement Temporarily Paused: The quarter-on-quarter decline in gross margin in the third quarter is related to the content costs of the Olympics, the increased revenue share from the recovery of live streaming, and the increased server costs due to the demand for AI business development.

The exact additional investment is also reflected in sales expenses. While the salaries of sales personnel have decreased, promotional expenses (for customer acquisition and retention, local life business development, user shopping subsidies, etc.) continued to grow by 18% in the third quarter, which means an additional expenditure of 1.5 billion compared to last year. This ultimately resulted in a core business operating profit margin of 8.5%, a quarter-on-quarter decline of 2.7 percentage points.

6. Shareholder Buybacks Not Yet Increased: In August and September of the third quarter, under pressure on market value, Kuaishou increased its buyback efforts, spending HKD 1.9 billion to repurchase 47 million shares of the company. The buyback plan proposed at the beginning of the year is for 36 months with a total of HKD 16 billion, and as of September, HKD 4 billion has been used, which is 25% of the plan, essentially on track to complete the buyback by the end of the three years. Therefore, based on an annual buyback effort of HKD 5.3 billion, the current shareholder return is 2.3%, which is not high compared to other Chinese concept assets with returns.

Due to the company's limited foreign currency reserves and the need for expansion in overseas markets such as Brazil, there are currently no dividends. Perhaps when the Brazilian business turns profitable next year and continues to contribute foreign currency cash flow, dividends will be considered to increase shareholder returns.

As of the end of the third quarter, Kuaishou had cash and deposits totaling HKD 23.4 billion. If short-term investment financial assets are included, the total is HKD 50.8 billion, and after deducting long-term loans, the net cash is HKD 41.8 billion. Currently, the main business has already turned profitable and cash flow is positive, which does not consume too much cash, and there is no pressure on cash flow. Therefore, if they want to increase the buyback efforts, there are no absolute obstacles.

7. Detailed Financial Report Data Overview

Dolphin's Viewpoint

The performance in the third quarter is consistent with the company's guidance from the previous quarter, and the trends observed are within expectations. What surprised us is the user data, but conversely, old issues still need to be resolved—compared to peers, the transformation towards a general merchandise shelf is still slow.

Although the company is actively exploring multiple growth curves, such as local life, short dramas, games, online recruitment, etc., in the short term, Kuaishou's e-commerce attributes remain strong, and its performance is more susceptible to trends in the e-commerce sector, especially KOL live streaming e-commerce. With Q3 performance already fully anticipated, the outlook for Q4 becomes very critical. Since the third quarter, competition in the e-commerce industry has not eased, and KOL (Key Opinion Leader) live streaming has started to frequently encounter failures. Will this make merchants more "cautious" about KOL live streaming? Fortunately, with the issuance of a series of government policies such as national subsidies, the effects of these subsidies have been good. Although Kuaishou is not a mainstream platform for 3C digital products, it is expected to benefit to some extent.

Therefore, with one good and one bad piece of news offsetting each other, the guidance for Double 11 and the current fourth quarter e-commerce transactions will require attention to the management's responses during the conference call.

Beyond the revenue side, short-term profit margins seem to have stagnated at around 13% due to the end of the cost reduction and efficiency improvement cycle, as well as the expansion of new businesses like local life services, e-commerce competition, and the confirmation of costs related to AI. If new businesses cannot provide effective growth in the short term and total revenue maintains a growth rate of 10%, then the current HKD 226.7 billion corresponding to 2025's performance has an adjusted P/E of only 10x.

If this valuation is deemed reasonable, it indicates that the market either views Kuaishou entirely as an e-commerce stock or lacks sufficient confidence in its medium to long-term growth. Therefore, as KOL live streaming becomes "more mature," it is urgent to transform into a broader platform and seek the next growth curve. From the current progress, Kuaishou's focus is on local life services (in collaboration with Meituan) and short dramas. It remains to be seen whether management will reveal more progress, especially in local life services; otherwise, the company will need to ramp up efforts to increase shareholder returns to enhance long-term confidence.

The following is a detailed analysis

I. Peak season + Olympics, the market is warming up again

In the third quarter, Kuaishou had 714 million monthly active users, an increase of 22 million from the previous quarter, exceeding market expectations. Market expectations are generally based on the company's guidance and trends tracked by third-party data platforms. However, Kuaishou's performance is much better than the trends shown by third-party platforms.

In the third quarter, not only did traffic expand, but the activity level of existing users on the platform was also impressive. This is mainly reflected in:

1) Average daily usage time of 132 minutes/day, an increase of 2.3 minutes year-on-year;

2) User stickiness measured by DAU/MAU remained stable quarter-on-quarter. Generally, when there is a sudden influx of new users, the stickiness of new users tends to be lower, which would lower the overall value. However, in reality, it not only did not decrease but also maintained a historically high level.

3) Based on average daily usage time and DAU, the total user time per day grew by 7.3% year-on-year. The overall traffic growth will provide a significant boost to external advertising during this period.

However, as we mentioned earlier, the user change trend of Kuaishou shown by third-party data platforms is not so optimistic. Therefore, if the market mainly references data from third-party platforms, there will be a slight expectation gap.

II. E-commerce: Dual Pressure of Off-Season + Competition

In the third quarter, e-commerce revenue grew by 17.5% year-on-year, which was expected to face some marginal pressure. Breaking it down, GMV was 334.2 billion, with a year-on-year growth rate of 15% and a commission rate of 1.24%, which decreased quarter-on-quarter.

The decline in the commission rate means that the platform is giving merchants more discounts than during the previous quarter's 618 period (rebate subsidies), highlighting the competitive pressure in the industry.

During this period of external pressure, consumer spending power is insufficient, requiring more subsidies to stimulate a return to previous shopping demand. Meanwhile, with insufficient consumer spending power and low-price competition, merchants' profit margins are also being squeezed, necessitating subsidies.

Therefore, this year's internal war initiated by traditional shelf e-commerce has made the disadvantages of KOL live-streaming e-commerce more apparent—commissions and placement fees ranging from 20% to 50%, resulting in losses on each sale. As previously mentioned, the high commissions of KOL live-streaming e-commerce can actually be viewed as marketing expenses for merchants, with commissions essentially serving as "endorsement fees" for KOLs. Thus, when the environment worsens, it is understandable that this portion of the budget for merchants is the first to be cut.

Traditional e-commerce is advancing aggressively, and Kuaishou is also transforming towards general shelving. In the third quarter, the GMV proportion of general shelving was 27%, estimated to have increased by 1-2 percentage points compared to the previous quarter.

The slow progress of the general shelving transformation has been discussed in detail by Dolphin Jun in the previous quarter, so I won't elaborate here. Interested readers can review it here: The tide of hosts recedes, has Kuaishou also "slowed" down?

III. Advertising: External Circulation Continues to Warm Up

In the third quarter, advertising revenue basically met expectations, growing by 20% year-on-year to reach 17.6 billion yuan. The growth in the third quarter mainly relied on the pull of external circulation advertising, especially from short dramas with high industry prosperity and advertisers in competitive fields such as e-commerce and local life.

If we exclude internal circulation advertising (expected to grow by 15% year-on-year), Dolphin Jun estimates that the growth rate of external circulation and alliance advertising revenue exceeded 25%. In the current macro environment, this growth rate is evidently impressive

The specific growth drivers, in addition to the smart marketing solution for external circulation advertising (UAX) launched last quarter, also include the successful implementation of the short drama IAA business model this quarter. Currently, the business model for most short dramas is primarily paid, with embedded advertising as a supplement. Kuaishou tested the model of unlocking short dramas by watching ads last quarter, and this model has now been successfully implemented, which is expected to contribute to advertising growth in the long term.

The total daily user duration traffic growth rate in Q3 continued to increase by 7%, driven by a year-on-year increase in DAU traffic and an increase in average daily duration, which is expected to provide some support for accelerated advertising growth.

IV. The impact of live streaming adjustments is nearing its end

As the year-on-year base period passes, the live streaming tipping business is about to return to positive growth. In the third quarter, live streaming tipping revenue was 9.3 billion, a year-on-year decline of only 3.9%, continuing to converge. This is mainly due to Kuaishou's active introduction of more live streaming guilds, with the number of signed guilds increasing by 40% year-on-year in the third quarter and the number of hosts increasing by 60%.

In addition to accelerating the introduction of guilds, Kuaishou is continuously expanding live streaming scenarios (job recruitment, real estate agency), with growth in the third quarter as follows:

The average daily resume submission frequency for Kuaipin increased by 100% year-on-year (with a year-on-year growth rate of 130% last quarter).

The Ideal Home business is inevitably affected by the environment. Since the third quarter, relevant policies have continued to be actively issued, and public attention is not low, with the average daily search scale in Q3 increasing fourfold year-on-year.

V. Profit margin declines quarter-on-quarter: short-term disturbances and mid-term trends

In the third quarter, Kuaishou achieved a net profit of 3.27 billion under GAAP, continuing to decline quarter-on-quarter. Even when adding back SBC-adjusted Non-GAAP net profit, it was 3.95 billion, less than the 4.68 billion in the previous quarter, with the profit margin also declining by more than 2 percentage points quarter-on-quarter.

This means that despite an increase in revenue, the absolute value of profit has declined quarter-on-quarter, indicating that the company is in a period of investment expansion.

Since Kuaishou's net profit includes some gain income (government subsidies, financial management income, etc.), if we only look at the performance of the main business, Dolphin generally focuses on core operating profit indicators (revenue - costs - operating expenses). In the third quarter, core operating profit was 2.65 billion, with a profit margin of 8.5%, which is also rapidly declining quarter-on-quarter

The decline in profit margins in the third quarter is due to multiple factors. On one hand, there are short-term disruptions, such as the recognition of content costs for the Olympics, which is mainly reflected in the gross margin. On the other hand, there is at least a medium-term trend, which involves expenses for new business initiatives, such as promotional costs for developing local lifestyle consumption, user subsidies, server costs required for developing AI business, and promotional expenses needed for expanding overseas platforms and e-commerce businesses.

Looking at different regions (domestic and overseas), the overseas platform based in Brazil made smooth progress in the third quarter. On one hand, traffic continues to grow, and on the other hand, e-commerce-driven advertising revenue also maintained a growth rate of 100%, reaching 1.3 billion.