Kuaishou: To Say Goodbye to 'Rustic' Valuation, It Still Depends on Keling

$KUAISHOU-W(01024.HK) released its third-quarter report after the Hong Kong stock market closed on November 19, Beijing time. The Q3 performance was generally stable, with the highlight being the profit exceeding expectations due to internal efficiency improvements. The recent deep correction in stock price is likely mainly influenced by market sentiment towards Kling.

Specifically:

1. Significant operational efficiency improvement: In the third-quarter report, there was a significant discrepancy in profit expectations, with core operating profit increasing by 5 percentage points year-on-year, showing greater optimization compared to the first two quarters of this year. The key reasons are the control of sales and R&D expenses.

2. Kling slightly exceeded expectations: Kling's revenue in the third quarter exceeded 300 million, slightly better than the previously guided range of 280-300 million. The company also expects higher revenue in the fourth quarter due to the release of Kling 2.5 Turbo. The actual payment situation so far can be followed up in the conference call. However, in terms of technical scores, Kling 2.5 Turbo still ranks first globally in the text-to-video and image-to-video large models, and it also has a relative advantage in unit pricing.

3. E-commerce growth slowed: The GMV growth rate in the third quarter was 15%, which slowed compared to the previous quarter. Although changes in the base have an impact, the growth rate in the third quarter was slightly below previous periods when viewed seasonally. This may be related to some influencers stopping their broadcasts. However, if Kling (calculated at 320 million) is excluded and other income is considered, the year-on-year growth rate this quarter is as high as 34%, which is not only significantly accelerated but also much higher than the GMV growth rate.

Dolphin Research believes that although we generally calculate other income/GMV as the e-commerce commission rate level, the growth of other income is not entirely influenced by e-commerce due to the prosperity of short dramas. However, considering the GMV penetration rate of general shelf e-commerce remains unchanged at 32%, and the increased revenue-sharing costs, Dolphin Research speculates that the sudden high growth of other income is more likely due to the incremental brought by short drama payments, followed by an increase in commission rates.

4. Advertising steadily recovering: The marketing and advertising revenue growth rate in the third quarter was 14%, continuing to recover compared to the second quarter, mainly benefiting from AI model iterations, new features improving ROI, and the penetration of intelligent delivery solutions, with UAX's penetration rate in external circulation ads reaching 70%. In addition, the prosperity of the short drama industry itself will also bring more traffic revenue and IAA revenue sharing.

5. Live streaming pressure exceeded expectations: The growth of live streaming payments in the third quarter was 2.5%, relatively weak, mainly affected by the industry's shrinking trend and competition.

6. Ecosystem slowly expanding: The monthly active users in the third quarter were 730 million, with a net increase of 16 million quarter-on-quarter, showing a significant increase, so user stickiness slightly weakened quarter-on-quarter. However, the increase in marketing expenses in the third quarter was not significant, indicating that the traffic recovery was not purely due to buying traffic.

Kuaishou's user metrics have not performed well on third-party platforms in the past two years. Although the data is not comprehensive, at least in horizontal comparison, the pressure is greater than that of peers. The user metrics disclosed in the Q3 actual financial report also remained stable, but the average daily user duration reached a new high, possibly due to the growth brought by rich content such as short dramas and exclusive galas.

The growth bottleneck of the ecosystem is one of the core factors suppressing Kuaishou's valuation. Although there is still room for improvement in profitability (as shown in Q2 and Q3), the valuation is slightly inferior to the expected profit growth level.

7. Buyback significantly slowed: Possibly due to the rapid rise in stock price, the company reduced its buyback actions in the third quarter, repurchasing only 3.45 million shares in three months, costing HKD 260 million, with an average price of HKD 74 per share. So far this year, a total of HKD 2.2 billion in buybacks and HKD 2 billion in dividends have been made. According to the normal buyback pace of HKD 500 million in the fourth quarter, the total shareholder return yield is less than 2%, which is not high. Currently, Kuaishou has a net cash of HKD 17.4 billion (cash + short-term investments - short-term borrowings), theoretically still having room to improve shareholder returns.

8. Detailed financial report data overview

Dolphin Research's View

The third-quarter performance was not bad, except for live streaming payments being below expectations, other businesses were basically stable, with the positive point being the improvement in internal operational efficiency. Combining the current performance and expected levels, the current market value basically neutrally reflects the e-commerce value of traditional main businesses (corresponding to 14x and 11x for this year/next year, respectively), with Kling not being separately accounted for much.

Therefore, to some extent, if the guidance in the conference call does not reveal major issues (especially in terms of e-commerce growth rate, as there have been influencers gradually withdrawing from live streaming sales since this year, such as Simba's permanent suspension in August, and the ecological cycle effect caused by the recent food delivery war, which has enhanced the competitive advantage of peers), then how much room there is for future value enhancement still depends on Kling.

In September, Kuaishou released the new version of the Kling large model, Kling 2.5 Turbo. This model has significant improvements in product function experience such as prompt understanding, narrative coherence, high dynamic quality, and style consistency. According to ELO scoring results, Kling 2.5 Turbo still ranks first globally in the text-to-video and image-to-video subfields. At the same time, it is overall cheaper in unit price compared to the second-ranked Google Veo 3 series.

However, with the launch and continuous iteration of Sora 2, Seedance, and Veo 3, the competition in the video large model field is visibly intensifying. Therefore, the market is becoming uncertain about how long Kling's advantage can last. As a result, a week after the launch of Kling 2.5 Turbo, the overall market sentiment peaked, choosing to take profits and leave.

Simply put, if HKD 60 represents the reasonable value of Kuaishou's basic business (11x P/E corresponding to 2026 expectations, matching e-commerce platform valuation), as long as e-commerce remains stable, it can be seen as a valuation bottom for a stage, while the range from HKD 60 to 90 is mainly the value increment brought by Kling. Due to the rapid changes in competition, the long-term value of Kling is indeed difficult to calculate. But at least from the short-term landed performance, after removing the more obvious bubbles, a short-term neutral valuation for Kling can be calculated:

From expectations, Kling's revenue this year exceeding RMB 1 billion, or USD 150 million, is highly probable. Following this trend, with the assistance of Kling 2.5 Turbo, Q4 is expected to reach RMB 400 million in revenue, bringing the annualized scale to RMB 1.6 billion. In the early stage of video large model development, we believe there is no need to worry too much about the impact of competition eroding the stock market next year. Thus, next year's revenue is expected to grow by at least 60% compared to this year. Based on the valuation range of 10-20x PS for SaaS platforms in the growth stage, Kling's short-term value can also be worth RMB 15-30 billion, bringing a 6-12% incremental space compared to Kuaishou's current market value of RMB 250 billion.

Meanwhile, as mentioned above, there is still room for improvement in Kuaishou's profitability. If short-term systemic risks ease and market sentiment turns positive, traditional businesses are also expected to gain a valuation premium from e-commerce to social platforms.

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