Best Positioned For Advertising Comeback; To Break Even In 2Q23
Kuaishou delivered robust GMV growth during the 618 shopping festival, propelled by the introduction of various new initiatives. Kuaishou’s ad revenue will continue to accelerate driven by e-commerce ads and external brand ads, primarily supported by brand expansion and e-commerce share gain with higher take rate. We expect resilient live-streaming revenue growth to sustain in 2Q23 which bodes well for stronger seasonality. Maintain BUY. Target price: HK$90.00.
WHAT’S NEW
• 618 shopping festival’s data is robust… According to Kuaishou Technology’s (Kuaishou) 618 reports, from 1-18 Jun 23, the order volume on its e-commerce platform grew 40% yoy and the number of buyers increased 30% yoy, in line with its 2Q23 GMV guidance of 30% yoy growth. The order volume through Soft-Form Video (SFV) surged by 210% yoy and the gross merchandise value (GMV) of search and payment based soared by nearly 130% yoy. GMV of the brand products/electronics and home appliances/cosmetics/fresh goods industry surged by 200%/59%/100%/70% yoy. Self-broadcast GMV for brands was up by 64% yoy and the average order value increased by 33% yoy. Kuaishou reported that e-commerce orders/number of buyers hiked 40%/30% yoy and Douyin reported that total paid GMV grew by 70% yoy while GMV of Douyin Mall (its shelf-based scenario) rocketed by 178% yoy, the fastest growth among major peers.
• …bolstered by recent launch of new initiatives. “????” (stream initiatives) helps to form a connection between merchants and KOLs, where Kuaishou created a flywheel of merchandise and traffic increase on the platform, which will eventually improve monetisation efficiency. “????” (Pan-shelf based transaction) is another major realm in Kuaishou’s Omni Domain e-commerce business strategy, aiming to validate the shopping mall business model and customer user mindshare. Meanwhile, as Kuaishou optimises its search function to better identify user intention, the company improves the product relevance of search results, leading to a doubling of GMV generated from the searches yoy in 1Q23.
• External performance ads to resume positive growth navigating through 2H23, in light of the strong performance of 618 and refined channel policies. In addition, management saw a healthy and gradual recovery lately in verticals such as games, information services, medical care, finance, and education. Kuaishou has also expanded its advertising reach to a wider audience in the gaming, social networking, and offline advertisers such as financial and transportation.
STOCK IMPACT
• Resilient live-streaming performance mainly underpinned by: a) Consistent improvement of live streaming content quality and optimisation of user content matching efficiency to algorithm interactions, b) on the supply side, promoting the development of live streaming as a professional and continuous advanced or diverse cooperation with top talent agencies and streamers, c) introducing interesting gameplay to meet users’ social and entrepreneurial needs, d) and the algorithm constructing a management mechanism for users throughout their lifecycle which enhances live streaming conversion rates.
• Strong 2Q23 and 2023 guidance; above-industry growth continues. Looking into 2Q23, management guided for revenue to grow by mid-twenties to around 25% yoy, primarily bolstered by solid brand advertising revenue and over 30% yoy growth in e-commerce GMV. Gross profit margin is projected at 46.5%. Management guided for operating profit to break even in 2Q23 while non-GAAP net profit to reach Rmb1.2b-1.3b, thanks to a lower marketing expense (around 32% of revenue vs. 40% in 2Q22) and continuous narrowing of overseas loss. Management guided for total revenue to grow 20% yoy for full-year 2023, primarily supported by 20%/mid- to high-teens/40% yoy growth from online marketing/livestreaming/other services respectively. E-commerce GMV is expected to remain flattish yoy
while gross profit will improve slightly yoy. Selling, general, and administrative expenses (SG&A) is forecasted to remain flattish yoy, translating to non-GAAP net profit of Rmb3.5b4b in 2023.
EARNINGS REVISION/RISK
• Our forecasts for Kuaishou remain unchanged.
• Risks: a) Weaker advertisement demand due to the weak macro environment, b) increasing competition from Douyin, c) minor protection restrain on short form video time spent, and d) expanding loss from the overseas business and local life services initiatives.
VALUATION/RECOMMENDATION
• Maintain BUY with a target price of HK$90.00. We remain optimistic on the company due to resilient growth in live-streaming and ad recovery momentum. Our target price implies 1.8x 2023F PS. The company is currently trading at 2x 12-month forward EV/Sales (26x 2024 PE), below its historical mean of 4.2x.
SHARE PRICE CATALYST
• a) Higher monetisation rates across all categories, b) less competition from peers, c) positive government policies to simulate consumption, and d) lifting of regulations on internet platforms.
