After Douyin& Wechat Channel's Batter, where is Kuaishou's future?

$KUAISHOU-W(01024.HK) The fourth quarter financial report will be released after the Hong Kong stock market closes on March 25, Beijing time. In the past month, due to the AI hype, Kuaishou has led the rise, with its low point increasing by nearly 50% to date, and in the days before the recent adjustment, the increase even exceeded 80% compared to the previous peak.

Although Dolphin Research believes that from a valuation perspective, Kuaishou still has some room relative to its peers (which also indicates that the bias of funds has not been eliminated). However, after a wave of speculation, it is necessary to calmly assess the current fundamentals before Kuaishou can truly shine.

Specifically:

1. Live e-commerce slows down, and the transition to a general merchandise model still needs to accelerate: In the fourth quarter, GMV reached 462.1 billion, with a year-on-year growth rate of 14%, slightly slowing down compared to the previous quarter, with certain market expectations under a high base.

The industry performance in the fourth quarter was also poor, but live e-commerce was marginally worse. Although Kuaishou began its transition to a general merchandise model two years ago, its GMV proportion has just reached 30%, and the pace is not fast.

Peers like Douyin have already seen their general merchandise GMV proportion approach 40%, and it is expected to significantly increase to over 50% this year, showing a strong willingness to transition. Of course, Kuaishou's slow transition may also be related to its strong private domain attributes and a more robust live broadcast ecosystem.

However, on a quarter-on-quarter basis, the net increase in GMV for this year's fourth quarter needs to increase by 10 billion compared to last year, mainly driven by the addition of shopping users, such as 7 million new users added during Double Eleven.

Dolphin Research believes that the subsequent growth will mostly follow the "volume" logic, that is, converting more e-commerce users. Currently, the average monthly shopping buyers are 143 million, with a penetration rate increasing to 19.5%. Last quarter, the company did a lot of work in introducing new merchants, especially small and medium-sized merchants, which may be aimed at attracting more user conversions by expanding more SKUs.

2. The logic for future commission rate increases weakens: In the first half of the year, Kuaishou's e-commerce commission rate increased year-on-year. However, starting from the third quarter, it became noticeably difficult, with the fourth quarter commission rate at 1.06%, slightly down year-on-year.

In addition to the necessary rebates for actively introducing new merchants, it is also related to the intense industry competition. Last year, e-commerce platforms engaged in fierce price wars and merchant support battles, so it is not ruled out that platforms have made more concessions.

3. Macroeconomic + competition, external advertising pressure becomes prominent: In the fourth quarter, advertising growth was 13%, with a rapid slowdown compared to the previous quarter, which is due to the larger environment, but competition had a significant impact.

Dolphin Research roughly breaks it down, with e-commerce advertising following GMV changes, and the growth rate slightly slowing down to 14% compared to Q3. External advertising also dropped from nearly 25% to around 15%, mainly driven by new short dramas, games, etc. From the company's operational details, fully automated placement + UAX advertising system has improved the traffic service for merchants, thereby bringing more marketing budgets from merchants.

4. Live Streaming Exceeds Expectations for Recovery: Throughout last year, live streaming was actively adjusting, and in the fourth quarter, with the continued increase in game live streaming buffering effects, the actual revenue from tips showed a slightly better-than-expected recovery pace. It is anticipated that this year can return to low-speed positive growth.

From the cost breakdown provided by Dolphin Research, the proportion of revenue-sharing costs in live streaming increased somewhat in the fourth quarter. This may reflect the introduction of more high-quality guilds (especially game streamers) with higher revenue-sharing rates, which raised the overall revenue-sharing ratio in live streaming. In the fourth quarter, the number of signed guilds on Kuaishou increased by 30% year-on-year, and the number of signed streamers grew by over 60% year-on-year.

5. Users Continue to Grow Slowly: In the fourth quarter, MAU increased to 736 million, a quarter-on-quarter increase of 22 million, with daily active users stabilizing at 400 million. Sales expenses continued to grow (promotion expenses +12%, used for user retention and expanding local life services), reflecting the platform's ongoing willingness to acquire customers. However, the stickiness of new users still needs to be cultivated, which lowered the DAU/MAU and average daily duration.

According to QM data, Kuaishou's user metrics are significantly weaker than Douyin, WeChat Video Accounts, and Xiaohongshu, indicating that the impact of competitive diversion is still considerable. However, if the market mainly uses external data as a reference, Kuaishou's actual performance can be considered a small surprise.

6. Actual Profitability Below Expectations: The gross profit margin remained flat in the fourth quarter, and expenses were slightly controlled compared to market expectations (reducing staff to increase efficiency). The overall profit margin, Non-IFRS net profit margin, was 13.3%, still showing a slow upward trend.

Although the adjusted net profit was in line with expectations, it was affected by fluctuations in foreign exchange gains and losses and wealth management. Looking at the actual core business profit performance, the profit margin in the fourth quarter was 9.86%, which only improved by 0.5 percentage points year-on-year, actually falling short of expectations.

6. Shareholder Buybacks Have Not Increased: The overall market value in the fourth quarter increased compared to the third quarter, but Kuaishou slowed down its buyback efforts, spending nearly HKD 1.5 billion to repurchase 32 million shares of the company.

The buyback plan proposed at the beginning of last year is for HKD 16 billion over 36 months, and as of now, 5.9 billion has been used by February, accounting for 37%, essentially following a pace that will just use it up by the three-year expiration. Therefore, estimating this year's buyback at an average of HKD 5.5 billion per year, the current shareholder return is 2.3%, which is not high.

Due to the company's limited foreign currency and the need for expansion in overseas businesses such as Brazil, there are currently no dividends. Perhaps once the Brazilian business turns profitable this year and can continuously contribute a certain scale of foreign currency cash flow, dividends will be considered to increase shareholder returns.

As of the end of the fourth quarter, Kuaishou had cash + deposits = HKD 24.3 billion. If short-term investment financial assets are included, the total is HKD 51.5 billion, and after deducting long-term loans, the net cash is HKD 40.4 billion. Currently, the main business has long been profitable and cash flow is positive, which does not consume too much cash, and cash flow is no longer under pressure. Therefore, if there is a desire to increase buyback efforts, aside from the issue of exchanging USD cash, there should be no subjective obstacles 7. Detailed Financial Report Data Overview

Dolphin Research Perspective

Q4 performance still reflects a platform status of the "second half of the dividend period": The growth of the traffic ecosystem is becoming increasingly difficult, and the competition in live e-commerce is evolving faster than the internal transformation of the general shelf. Ultimately, this is the competitive aspect that has always been criticized by the market, which can never truly catch a breath.

The new giant, Video Account, has the advantage of strong backing, with last year's 500 million DAU marking the completion of the first step in user accumulation. As it continues to optimize user stickiness, the next step will be to increase inventory and improve ad loading rates. During this process, merchants' favorability will correspondingly increase, and with a fixed total budget, the marketing budget for "non-essential" platforms will naturally be reduced.

Therefore, the awkward expectations of traditional business are the key obstacles preventing Kuaishou from truly returning to a social platform valuation rather than an e-commerce platform valuation. This will also cause the market's focus during Kuaishou's valuation repair process to be more concentrated on a key question: Can Keling or AI bring a new "magic bullet"?

Dolphin Research believes that AI can potentially play a role in two main aspects:

First is "opening up" to generate incremental revenue, the most direct being Keling's charging.

Currently, Keling serves over 6 million users and has produced 65 million videos and 175 million images since the beginning of the year. Keling's pricing is relatively lower than similar AI video generation platforms like Pika and Midjourney. With a monthly revenue of 10 million and a certain growth rate, it is expected to reach a scale of at least 500-1 billion this year (currently online for nearly 9 months, with accumulated revenue of 100 million RMB).

But the key is that the sustainability of this medium to long-term growth is not well guaranteed. After two years of large model baptism, Dolphin Research increasingly feels that the short-term advantages of the model itself cannot determine the outcome; what is more important is the control over the entry point.

In addition to direct monetization, potential increments may come from AI's improvement in content recommendation accuracy, thereby increasing user stickiness (duration) and the ROI of ad distribution, thus securing incremental budgets from advertisers.

However, Dolphin Research may take a cautious view here. On one hand, after DS brings AI capabilities to the same starting line, the improvements brought by technology may not provide the company with a relative advantage. On the other hand, the content recommendation and ad distribution of short videos are already sufficiently high, so the marginal effect of AI's enhancement may not be as high as imagined.

The second is "throttling" to save costs, which refers to AI's role in reducing costs and increasing efficiency for the company. This mainly manifests in employee replacement, resource reuse, and reduced operational friction costs, thereby enhancing the company's profitability.

Combining the above two aspects, from the current valuation expectations, it is clear that "opening up" will have a more significant impact on Kuaishou's valuation increase, as it can bring about expected differences in future growth trends. However, based on the simple analysis above, it seems overly optimistic to expect AI to bring a new growth flywheel for Kuaishou. **

However, the biggest benefit of AI for Kuaishou at present is— to eliminate some funding biases and achieve a certain degree of valuation correction. Before the "revaluation of Chinese concept stocks" trend, Kuaishou's valuation was visibly low, and it was common for funds to overlook it. Even after some recovery, the current valuation of USD 31.4 billion, relative to this year's adjusted net profit, has a Non-IFRS P/E valuation of only about 11x.**

But after the AI trend emerged, Kuaishou, which has flexible capabilities, has gradually entered the sight of more investors. Coupled with its relatively low valuation, it is believed that in the short to medium term, the increase in funding attention will relatively raise Kuaishou's overall valuation range.

In short, the space for valuation depends entirely on AI sentiment. The upcoming conference call can focus on how management views this year's business outlook, including some business changes brought by AI (cost reduction and efficiency improvement). If the outlook is positive and the tone is optimistic, it may alleviate some concerns from funds (mainly southbound funds and hedge funds). When the technology sentiment improves later, there may continue to be interest in Kuaishou's "low valuation" and "AI attributes" in the short term.

The following is a detailed analysis

1. Aggressive customer acquisition, but the peak trend may still be hard to change

In the fourth quarter, Kuaishou had 736 million monthly active users, an increase of 22 million from the previous quarter, exceeding market expectations. Market expectations are generally assessed by combining 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 (flat and slowly declining).

The difference here, Dolphin Research speculates, may lie in non-mobile platform users and the impact of Kuaishou and Kuaishou Lite not being strictly deduplicated. Although the fourth quarter is a low season for entertainment platforms, Kuaishou's e-commerce attributes have strengthened, thus increasingly fluctuating with the changes in e-commerce peak and off-peak seasons.

Specifically, while expanding users in the fourth quarter, user stickiness has somewhat declined. In addition to seasonal factors (higher entertainment demand stickiness during holidays), it should also be due to new users not fully developing their usage habits. This is mainly reflected in:

Average daily usage time of 126 minutes/day, only increasing by 1 minute year-on-year;

User stickiness as reflected in DAU/MAU has significantly declined quarter-on-quarter, influenced by both seasonality and the rapid acquisition of new customers.

Based on average daily usage time and DAU, the total user time per day has increased by 5.8% year-on-year. Total traffic growth is generally one of the driving forces behind the growth of external circulation advertising in the current period.

However, as we mentioned earlier, the user change trend shown by third-party data platforms for Kuaishou is not so optimistic—total user duration has a year-on-year negative growth. Therefore, if the market mainly references data from third-party platforms, there will be a slight expectation gap.

However, Dolphin Research will remain cautiously optimistic about this expectation gap. From the operational indicators we calculated—user acquisition + retention costs—the fourth quarter saw another year-on-year increase. This indicates that even if traffic is steadily expanding, the increase in monthly active users during the period is backed by more promotional expenses and content investment from the company. Therefore, from an operational efficiency perspective, there is a marginal decline.

2. E-commerce: The transformation to a general merchandise shelf needs to accelerate

In the fourth quarter, e-commerce revenue grew by 14% year-on-year, continuing the expected slowdown. Breaking it down, GMV was 462.1 billion, with a year-on-year growth of 14%, and the commission rate was 1.06%, a year-on-year decline.

The industry performance in the fourth quarter was also poor, but the marginal performance of live-streaming e-commerce was even worse. Although Kuaishou began its transformation to a general merchandise shelf two years ago, the current GMV proportion has just reached 30%, which is not fast.

Competitors like Douyin have already seen their general merchandise GMV proportion approach 40%, and it is expected to significantly increase to over 50% this year, showing a strong willingness to transform. Of course, Kuaishou's slow transformation pace may also be related to its strong private domain attributes and a more robust live-streaming ecosystem.

Therefore, e-commerce growth currently still relies mainly on new user conversion. In the fourth quarter, the average monthly shopping buyers reached 143 million, with a penetration rate increasing to 19.5%. In the previous quarter, the company did a lot of work in introducing new merchants, especially small and medium-sized businesses, which may be aimed at attracting more user conversions by expanding more SKUs.

The decline in commission rates indicates that competition on the platform is fierce, further increasing the discounts offered to merchants.

3. Advertising: The impact of competition is hard to ignore

In the fourth quarter, advertising revenue fell short of expectations, with a year-on-year growth of only 13%, reaching 20.6 billion. The quarter-on-quarter slowdown in the fourth quarter was too rapid, for macroeconomic reasons, but competition had a significant impact.

Dolphin Research roughly breaks it down, e-commerce advertising follows the changes in GMV, with growth slightly slowing to 14% compared to Q3, while external circulation advertising dropped from nearly 25% to around 15%, mainly driven by short dramas and games But short dramas represent a completely incremental demand, as well as an incremental inventory and advertising model (IAA business model). Imagine, without short dramas, how much growth could be generated from external circulation advertising other than short dramas?

In Tencent's financial report last week, the advertising growth rate for the fourth quarter was 17%, and Dolphin Research estimates that the growth rate for video account advertising is expected to exceed 35%, with a scale of 5.9 billion. However, the loading rate for video accounts is only 3.5%, so this year's growth driver will come from the release of the loading rate, and during this process, merchants' attitudes towards it will also improve accordingly.

On the other hand, Douyin, a fierce competitor, has maintained a terrifyingly stable 20% growth in traffic. Under the pressure from both sides, apart from hoping for macroeconomic support, what can Kuaishou rely on to fill the gap in external circulation advertising?

In the fourth quarter, Kuaishou's total user daily duration traffic growth continued to increase by 5.6%, supported by year-on-year growth in DAU traffic and an increase in average daily duration. However, the high single-digit increase in eCPM in the fourth quarter is the main driver of growth in external circulation advertising, possibly aided by site-wide traffic tools and UAX improving advertising ROI.

4. Live Streaming Recovery Progress Exceeds Expectations

In the fourth quarter, live streaming rewards revenue reached 9.8 billion, with a year-on-year decline of only 2%, slightly exceeding market expectations for recovery. Dolphin Research believes this is mainly due to Kuaishou's continuous and proactive introduction of more quality guilds, with the number of signed guilds increasing by 30% year-on-year in the fourth quarter and the number of streamers increasing by 60%.

On the other hand, the proportion of revenue-sharing costs calculated by Dolphin Research for live streaming can also be seen. The proportion paid to streamers in the fourth quarter is expected to have increased, possibly due to quality guilds demanding higher sharing ratios or fixed commissions, especially the latter, which may make the gross profit margin of live streaming appear relatively low before the current reward flow reaches a stable scale.

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

The average daily resume submission for Kuaipin increased by 100% year-on-year (with a year-on-year growth rate of 100% in the previous quarter), and the scale of two-way matching increased by over 270% year-on-year;

The Ideal Home business inevitably saw a year-on-year increase of over 260% in the average daily search scale.

5. Slow Improvement in Profit Margin

In the fourth quarter, Kuaishou achieved a GAAP net profit of 3.97 billion, increasing sequentially following the e-commerce peak season. The Non-GAAP net profit, adjusted for SBC and investment gains and losses, was 4.7 billion, in line with market expectations.

However, there are government subsidies, wealth management income, and other revenues unrelated to the main business. If we only look at the fundamentals of the main business, Dolphin Research generally looks directly at the "core operating profit of the main business" without making any adjustments.

In the fourth quarter, the core operating profit of the main business was nearly 3.5 billion, with a profit margin of 9.86%, which only increased by 0.5 percentage points year-on-year. Although expenses are still being controlled, the pace of profit margin improvement has become more difficult under rapidly slowing revenue.

Therefore, for Kuaishou, in a competitive environment where a real slowdown is hard to see, necessary investments (user acquisition & retention, etc.) cannot be lacking. In this case, to achieve sustained performance growth, it can only rely on Topline expansion, in simple terms, it means "increasing revenue."

Looking at different regions (domestic and overseas), in the fourth quarter, the overseas platform's advancement is still in the Brazilian market. On one hand, traffic is still growing (Brazil DAU increased by 9.3% year-on-year, with daily average duration increasing to 75 minutes both year-on-year and month-on-month), and on the other hand, e-commerce-driven advertising revenue also maintained a growth rate of 83.5%. Overall, the business model of Brazilian e-commerce shows a trend of gradually becoming viable.

Dolphin Research "Kuaishou" historical report (last year):

Earnings report season

November 20, 2024 conference call “Kuaishou: Pay attention to the marketing methods of content e-commerce” November 20, 2024, Financial Report Review: Kuaishou: The "Old Iron" E-commerce is Becoming More Mature, How Should the Future Path Be?

August 20, 2024 Conference Call: Kuaishou: Environmental Pressure Continues in the Second Half of the Year, Focusing on Content E-commerce (2Q24 Conference Call Minutes)

August 20, 2024 Financial Report Review: The Decline of Hosts, Has Kuaishou Also "Slowed Down"?

May 27, 2024 Conference Call: Introducing a New Shelf Play - Kuaishou Preferred (Kuaishou 1Q24 Conference Call Minutes)

May 22, 2024 Financial Report Review: Kuaishou: Driven by Dual Flywheels, Profits Can't Be Hidden

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

March 21, 2024 Financial Report Review: Kuaishou, "Four Seasons in Bloom," Still Ignored by the Market

November 22, 2023 Conference Call: Growth in External Advertising Benefiting from Refined Operations (Kuaishou 3Q23 Performance Conference Call)

November 21, 2023 Financial Report Review: Stop Nitpicking! Kuaishou is Crazy "Defying the Odds" amid Change

August 23, 2023 Conference Call: [Advancing Shelf E-commerce as a New Growth Point for E-commerce Business (Kuaishou 2Q23 Conference Call Minutes)](https://longportapp.cn/zh-CN/topics/9257130? invite-code=)》

August 22, 2023 Financial Report Review: “Mutation” Kuaishou: From Huge Loss to Instant Profit, Can It Eliminate Capital Bias?》

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

May 22, 2023 Financial Report Review: Is Kuaishou Still Worthless?》

March 29, 2023 Conference Call: Kuaishou: Good Growth Expectations, No Intention to Subsidize Internal Consumption, More Focus on Internal Improvement (4Q22 Conference Call Minutes)》

March 29, 2023 Financial Report Review: Kuaishou: Running to Reduce Losses, Can It Break the Bias?》

November 23, 2022 Conference Call: Kuaishou: Short-term Advertising Weak Recovery, Cost Reduction, and Efficiency Improvement Continue to Advance (3Q22 Conference Call)》

November 22, 2022 Financial Report Review: Annual Revenue of Hundreds of Billions, Struggling for Profit, Can Kuaishou's Story Still End Well?》

August 23, 2022 Conference Call: Pandemic Brings Merchant Benefits, Post-Pandemic Brings Rational Consumer Benefits (Kuaishou Conference Call Minutes)》

August 23, 2022 Financial Report Review: Initial Profitability, Kuaishou is Racing on the Road to Monetization Expectations》

May 24, 2022 Conference Call: First Quarter Performance Already Reflects Some Pandemic Impact (Kuaishou Conference Call Minutes)》 May 24, 2022 Financial Report Review: "Going Against the Tide, Kuaishou Submits a 'Clear' Answer"

March 30, 2022 Conference Call: "In addition to cost reduction and efficiency improvement, Kuaishou has the ambition to 'carry many industries' (Conference Call Minutes)"

March 29, 2022 Financial Report Review: "Kuaishou: The Iron Economy Starts the 'Countdown to Profit'"