Traffic side: DAU grew steadily, MAU reached a record high, and the average time per capita remained above 120 minutes: 4Q23 Kuaishou DAU yoy +4.5% to 383 million; MAU yoy +9.4% to 700 million, a record high. Average daily time per capita yoy -7% to 124.5min. By the end of 2023, the total number of connected user pairs reached 33 billion. In terms of user growth, the company optimized the growth efficiency of various channels. The customer acquisition cost per unit of new users continued to decline year on year, and the subsidy cost for the 4Q Express Edition DAU decreased year on year. In terms of content consumption, as of the end of 2023, Kuaishou Starlight Skits had launched a total of nearly 1,000 skits, of which more than 300 hit skits were broadcast over 100 million, and the number of daily paying users for 4Q skits was more than 3 times that of the same period compared to the same period last year. User search mentality continues to penetrate. The average number of users using Kuaishou search increased by more than 16% year over year in 4Q, and search marketing service revenue increased nearly 100% year over year. We expect DAU to continue to grow throughout the year 24, reaching an average DAU target of 400 million in a single quarter in the second half of the year.

Advertising: Revenue grew by double digits year over year, and internal circulation advertising was strong. 4Q23 ad revenue yoy increased by 20.6% to 18.2 billion yuan (20.5%, which is basically in line with Bloomberg's agreed expectations), and advertising accounts for a new high of 55.9% of total revenue. Among them, internal circulation is the main driving force for advertising revenue growth. Whole-site promotion and intelligent hosting products lowered the marketing threshold for small and medium-sized merchants, and 4Q23, the consumption of marketing marketing through full-site promotion and live streaming hosting increased by more than 200% and more than 150%, respectively. It is expected that based on the booming development of live e-commerce, the internal circulation advertising revenue growth rate will continue to maintain a high growth rate. The year-on-year growth rate of external circulation continued to increase compared to 3Q23. In particular, there was continuous growth in the media information (marketing consumption of paid skit shows increased by more than 300% year over year), education and training, and gaming. We expect 1Q24 ad revenue to grow 26% year over year.

E-commerce: GMV exceeded trillion dollars throughout the year, and users' mentality continued to penetrate. 4Q23 Kuaishou GMV YOY +29.3% to 403.9 billion yuan. On the demand side, the average number of 4Q e-commerce monthly paying users reached a new high of 130 million, and the penetration rate among monthly active users increased to 18.6% (yoy+2pct). On the supply side, more than 1 million operators participated in the Double Eleven promotion, helping to accelerate the growth of the average number of monthly sales merchants, with a year-on-year growth rate of more than 50%. Pan-shelf oversized markets grew in 4Q, accounting for more than 20% of total commodity transactions. The total number of short video e-commerce product transactions increased by more than 100% year over year. We believe that GMV is expected to maintain a year-on-year growth rate of more than 25% throughout 2024 as shopping scenarios such as pan-shelves continue to enrich and better meet the needs of e-commerce users in live streaming venues.

Live streaming: Revenue remained flat year over year, and the livestream+ model empowers traditional industries. 4Q23 Kuaishou's live streaming revenue remained flat year over year, up 3.4% month-on-month to 10 billion yuan. The average number of daily resume submissions for the 4Q Express Hire business increased by more than 200% year over year, and the average number of daily delivery users increased by more than 100% year over year. The cumulative transaction volume of the 4Q Ideal Home business exceeded RMB 16 billion.

Adjusted net profit for the full year of 2023 reached 10.3 billion yuan, turning a loss into a profit, and further reducing overseas losses. 4Q23 gross margin yoy+7.6pct and qoq+1.4pct to 53.1%. We believe that as the share of high-margin advertising and e-commerce businesses in the revenue structure increases, gross margin is expected to continue to increase. 4Q23 sales expenses of 10.2 billion yuan, sales expense ratio yoy-3.1 pct. The absolute amount of R&D expenses and administrative expenses all declined year over year. 4Q23 achieved adjusted net profit of 4.362 billion yuan (Bloomberg's agreed estimate was 3.255 billion yuan), with 4Q23 operating profit in China reaching 4.25 billion yuan and overseas 4Q23 operating loss of 551 million yuan. We believe that in the future, under the core regional focus strategy, overseas countries are expected to accelerate the achievement of break-even.

We expect the adjusted net profit of the company to be 102.71/161.23/22.535 billion yuan in 23-25 (the original forecast was 78.36/183.6/30.423 billion yuan). The 24-25 adjustment was mainly due to strategic adjustments in the live streaming business, so the revenue forecast was lowered, and the gross margin forecast was lowered and sales expenses forecast increased. Using PE valuation, referring to the 24-year 15xPE valuation given to the company by a comparable company, the 24-year adjusted net profit of 16.123 billion yuan, the corresponding reasonable value was 241.8 billion CNY/ 266.6 billion HKD (exchange rate 0.907), and the target price was 61.28 HKD/share, maintaining the “buy” rating.

Risk warning: Macro consumption recovery falls short of expectations, domestic commercialization efficiency falls short of expectations, and overseas business losses have increased