2Q23 Preview: Strong Live Streaming E-Commerce And Ad Momentum Continue
We believe the rapid growth momentum in e-commerce GMV and online marketing is the core driving force for 2Q23 top-line growth. External ads underwent a positive turnaround, particularly in online game ads, in the light of the strong 2Q/3Q23 seasonality and encouraging trend of new game approval. We expect continuous improvement in margin performance driven by strong revenue growth and operating leverage. We maintain BUY with a higher target price of HK$93.00.
WHAT’S NEW
• 2Q23 forecasts outperforming market expectations. Management guided for 2Q23 revenue to be higher than its previous guidance of 25% yoy, mainly driven by the resilient performance in the e-commerce and advertising businesses. Kuaishou Technology’s (Kuaishou) e-commerce GMV growth in 2Q23 will be higher than the previous 30% forecast, outpacing the industry growth of 12% driven by strong live streaming content and supportive merchant policies. Online marketing services revenue is estimated at 25% yoy, primarilly propelled by e-commerce advertising and recovering external/brands ads revenue.
Management guided for a positive turnaround in external ad growth, particularly contributed by online gaming and internet services clients given the heightened demand during the summer holiday. Other verticals with offline exposure such as FMCG, transportation and finance also showed encouraging improvements. Other services’ revenue growth was estimated at 46% yoy, spurred by resilient e-commerce GMV growth of 30% yoy and solid take rate of 1.3%. Live-streaming revenue is projected to generate stable growth of 20% yoy, anchored by a strengthened supply chain and optimised traffic distribution, partially impacted by the enhanced governance of the live-streaming ecosystem since Jun 23.
• Riding on healthy user growth trajectory. Daily active users (DAU)/monthly active users (MAU)) in 2Q23 was on track with its guidance to achieve a 7%/7% yoy growth to 372m/629m respectively in 2Q23. DAU is steadily advancing towards the target of 400m in 2H24. For 2Q23, the average daily usage time per DAU is estimated to be 118 minutes.
• 2Q23 margin outlook. Gross profit margin is projected to better than the previous guidance of 46.5%. Management also guided for operating profit to break even in 2Q23 while non GAAP net profit will jump to Rmb1.2b, underpinned by continuous narrowed overseas loss (lower than the Rmb800m-900m loss in 2Q23) and improved monetisation efficiency. The sustained profitability is also supported by streamlined marketing expense (around 32% of revenue vs. 40% in 2Q22).
STOCK IMPACT
• 2023 outlook intact. 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/live-streaming/other services respectively. Gross profit is guided to improve slightly yoy while selling, general, and administrative expenses (SG&A) is forecasted to remain flattish yoy, translating to non-GAAP net profit of Rmb3.5b-4.0b in 2023.
• Overview of 618 festival performance. Kuaishou experienced robust growth during the 618 shopping festival, with 40% yoy growth in order volume and 30% yoy growth in the number of buyers on its e-commerce platform. The growth was in line with its guidance of 30% yoy GMV growth in 2Q23. The platform saw a surge in order volume through soft-form video (SFV) and substantial GMV increases in various industries, including brand products, electronics, home appliances, cosmetics, and fresh goods. Kuaishou’s recent initiatives, such as the “Stream Initiatives” and “Pan-shelf Based Transaction,” have contributed to forming connections between merchants and KOLs, improving monetisation efficiency, and validating the shopping mall business model. Additionally, the optimisation of the search function has doubled the GMV generated from searches yoy in 1Q23. In contrast to its major competitor, Douyin also reported that total paid GMV soared by 70% yoy, and Douyin Mall experienced the fastest growth among major peers with a 178% yoy surge.
EARNINGS REVISION/RISK
• We leave our revenue forecasts largely unchanged. We raised non-GAAP net profit by 4.6%/18.6% for 2Q23/2023, translating to non-GAAP net margin of 4.5%/3.7% given the accelerated improvement in margin performance and narrowed loss from overseas operations.
• 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 higher target price of HK$93.00. We adjusted our SOTP valuation to 12-month forward and derived a higher target price of HK$93.00. We remain optimistic on the company due to the resilient growth momentum in e-commerce GMV and online advertising. Our target price implies 3x 2023F PS. The company is currently trading at 2x 12-month forward EV/Sales (17x 2024F 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.
