Kuaishou Earnings: Profitability Significantly Improves, but Revenue Slowdown Is Ahead

We maintain our fair value estimate of HKD 70 for Kuaishou 01024 after the company reported second-quarter revenue of CNY 27.7 billion, reflecting a 28% increase year on year that was 2% better than consensus. Kuaishou saw mixed results as it achieved profitability for the first time, but we expect revenue to decelerate as user growth appears to be slowing—the platform added only 2 million daily average users, or DAU, this quarter to 376 million. Despite the slowdown in users, advertising revenue increased 30% year on year, driven by overall strength in e-commerce and native ads. Kuaishou indicated that it saw greater demand from advertisers, which led to a 20% increase year on year for average marketing revenue per user. In addition, e-commerce gross merchandise volume, or GMV, grew 39% year on year. The revenue growth, combined with reductions in bandwidth and sales and marketing costs, led to a 500-basis-point gross margin increase and positive operating margins for the first time.

While Kuaishou showed profitability improvement, this was offset by an expected potential decline in livestream revenue beyond 2023. The company guided toward an implied low-single-digit growth for livestreaming revenue, and we estimate that livestream users declined sequentially this quarter. In addition, the daily time spent per DAU declined year on year by 6% to 117 minutes, and we also expect less time spent on the platform per DAU next quarter as well. This should lead to a decelerated revenue growth of 21% year on year for third-quarter 2023, but Kuaishou should continue to gradually improve its operating margins. Despite mixed results, we believe that Kuaishou has attractive levers it can pull to easily increase monetization, mainly in its e-commerce business. Given the current market volatility and this quarter’s mixed results, we believe that investors could wait for a pullback, which could present a more attractive upside to our fair value estimate.