Kuaishou investors cheer profit news and buyback plan

The short-video platform posted a modest adjusted profit in the first quarter, stemming the flow of red ink for the first time since its IPO

Key Takeaways:

• Kuaishou’s quarterly revenue rose nearly 20% year on year, helping to propel the company to an adjusted profit of 42 million yuan
• The company predicted rising revenue growth in the second half, lifted by a stronger advertising recovery, and announced a share buyback program

By Ken Lo

More than two years after a blockbuster IPO, the Chinese short-video platform Kuaishou Technology (1024.HK) is finally enjoying its first taste of profitability.

The company announced last Monday that its first-quarter revenue jumped 19.7% to 25.2 billion yuan ($3.55 billion) from the year-earlier period, while gross margin rose 4.7 percentage points to 46.4%. As a result, Kuaishou’s net loss narrowed 86% to 876 million yuan.

The results looked even better on a non-GAAP basis, which excludes non-operating factors such as changes in fair value, equity incentive expenses and asset impairments. By this measure the company landed in the black to the tune of 42 million yuan, its first profit since going public on the Hong Kong Stock Exchange in early 2021.

Most of Kuaishou’s business indicators improved in the quarter, with robust year-over-year growth in subscriber numbers, core business and overseas revenue. That, coupled with more effective cost controls, pushed the business into profit territory. On the same day as the earnings release, the short-video platform served up more welcome news for shareholders, with a plan to buy back up to HK$4 billion ($510 million) of its stock, from now until next year’s annual general meeting. Its share price rose around 3% the following day, as the market welcomed the double dose of positivity.

In the first quarter, revenue from Kuaishou’s core businesses of online marketing services, live streaming and e-commerce benefited from an economic rebound after the lifting of Covid controls. Revenue actually fell quarter on quarter due to a high base effect from an annual live streaming event towards the end of 2022, but the turnover rose compared with the same period a year earlier. A recovery in the advertising business, as well as growing merchandise e-commerce transactions, helped push revenue from the three core businesses up by between around 15% and 51% year on year, feeding into an overall 19.7% jump in company revenue to 25.2 billion yuan.

E-commerce booster

All along, Kuaishou and its arch-rival Douyin, owned by TikTok parent ByteDance, have made the bulk of their money by livestreaming and ad-based marketing. Of those two money spinners, livestreaming tends to have lower margins because income has to be split with the livestream hosts and the business incurs bigger tax expenses. But streaming remains an important way to consolidate online marketing services and to promote content.

To boost income, Kuaishou has ventured further into the more profitable arena of e-commerce in recent years, building revenues on the back of the accumulated user data that acts as a driving force for its business.

The company also put in a better performance in overseas markets, burnishing its quarterly results. Operating losses in overseas markets shrank 45% year on year to 823 million yuan, boosted by strong growth in livestreaming payments in Brazil and Indonesia. By contrast, operating profit in mainland China fell 24% to 963 million yuan, hit by seasonal factors.

CEO Cheng Yixiao was confident about a strengthening recovery in advertising and marketing in the second half of the year, saying finance, media, education and retail would benefit from international economic momentum.  Asked about future growth drivers, he said the e-commerce business would be helped by improved infrastructure for merchants, short-video content, branded e-commerce and different merchandise categories. Kuaishou will continue to invest in systems that allow merchants to accurately match users and improve conversion rates, he said.

The first-quarter results show the company has made strides in building its user base.  Average daily active users (DAU) rose by 8 million to 374 million, 8.3% more than the year-earlier quarter, while average monthly active users (MAU) grew by 14 million to 654 million, up 9.4% from the previous quarter.

Slashing sales costs

Kuaishou said management and technology tools, as well as the automated deployment of high-quality short dramas, video and live content, helped to drive up user numbers and enhance the stickiness of its apps. Average daily active users now spend 126.8 minutes per day on Kuaishou platforms, while total views of short videos and live content have risen more than 10% year over year. Total e-commerce gross merchandise volume (GMV) has grown faster than the user rate, climbing 28.4% year on year to 224.8 billion yuan, reflecting an increase in user spending.

Moreover, Kuaishou has upgraded its search function, thereby encouraging users to look actively for content. In the first quarter, monthly users of the search tool surpassed 420 million, with a peak of more than 650 million daily searches on the platform. The company also made progress in monetizing the search capabilities. The GMV of search-generated e-commerce doubled during the quarter, compared with the first three months of 2022, powering a 50% jump in search-related advertising revenue.

While seeking ways to boost income, Kuaishou has also been working on cutting costs, by controlling spending on user acquisition and retention. Its selling and marketing expenses, which account for the biggest chunk of expenditure, fell 8% to 8.72 billion yuan in the first quarter. In addition, its R&D expenses dropped 17% to 2.92 billion yuan as spending on R&D staff benefits fell, amid an efficiency drive and staff layoff plan underway since January this year.

With a robust earnings performance, Kuaishou’s forward price-to-earnings (P/E) ratio has scaled the lofty heights of 119 times, a much bigger multiple than its peers Hello Group (MOMO.US) at 6.3 times and JOYY Inc. (YY.US) at 30 times. However, some analysts see the gap narrowing. Investment bank Jefferies has raised its adjusted profit forecast for Kuaishou in the second quarter to 1.25 billion yuan and expects a full-year adjusted profit of 3.79 billion yuan. That would bring Kuaishou’s P/E ratio closer to the level of its peers. Jefferies maintains a Buy rating on Kuaishou and has lifted its price target from HK$105 to HK$108.

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