Incident Overview

On March 20, the company announced its 2023 annual results announcement. In 2023, the company achieved revenue of 113.47 billion yuan (yoy +20.5%), operating profit of 6.399 billion yuan, and adjusted profit of 10.271 billion yuan; of these, Q4 achieved revenue of 32,561 billion yuan (yoy +15.1%), operating profit of 3.622 billion yuan, net profit of 3.612 billion yuan, and adjusted profit of 4.362 billion yuan in a single quarter.

Analysis and judgment

The company's revenue growth is steady, and the company's development has entered an era of profit.

1. Traffic side: In terms of user growth, by optimizing user growth strategies and user algorithms, the company surpassed 700 million active users in 23Q4. The average number of monthly sales merchants in Kuaishou e-commerce increased by more than 50% year on year, and the number of marketing customers doubled throughout the year. The company's average daily activity and monthly activity reached 382.5 million (yoy +4.5%) and 7004 million (yoy +9.4%) in 23Q4, respectively, and the average daily usage time of Nikkatsu was 124.5 minutes. In terms of content consumption, the company created the ultimate native user experience through self-built links, and efficient traffic distribution drove rapid growth on both sides of supply and demand. By the end of 2023, Kuaishou Starlight Theater had launched a total of nearly 1,000 skits, including over 300 hundred million hit skits. The number of users who watched more than 10 episodes of heavy skits every day reached 94 million (yoy +50%) in 23Q4. At the same time, high-quality skits stimulated users' willingness to pay. The number of daily paying users for 23Q4 Kuaishou skits increased more than 3 times over the same period last year. In terms of search business, the company improved user search penetration rate and search experience by improving the construction of the “read and search” scenario and increasing the weight of social relationships and useful content in the ranking of search results. In 23Q4, the average number of users using Kuaishou search increased by more than 16% year over year, and search marketing service revenue increased nearly 100% year over year.

2. Performance side: The company's revenue has grown steadily, and the company's development has entered an era of profit. The company's operating profit in 2023 was 6.431 billion yuan and an operating interest rate of 5.7%. Compared with operating loss of 12.6 billion yuan and operating profit margin of -13.3% in 2022, it turned a loss into a profit. Looking at domestic and overseas business, domestic and overseas operating profits in 2023 were 11.402 billion yuan (yoy +5838.5%) and -2,789 billion yuan (-6.6 billion yuan in 2022), respectively. We believe that the increase in operating profit was mainly due to the high growth rate of domestic business. The increase in revenue from overseas business and effective control of marketing expenses also led to an increase in operating profit.

(1) Gross profit margin: The company's gross profit in 2023 was 57.391 billion yuan, up 36.2% year over year; the company's gross profit margin in 2023 was 50.6%, up 5.9pct from 44.7% in 2022. We believe that the increase in gross margin is mainly due to a decrease in the company's sales costs as a percentage of total revenue, that is, the revenue growth rate is greater than the sales cost growth rate, and the year-on-year increase in sales costs is mainly due to the increase in revenue sharing costs and related tax items.

(2) Expense rate: The company's 2023 sales expense rate, management fee rate, and R&D expense ratio were 32.16% (yoy-7.25pct), 3.10% (yoy-1.07pct), and 10.87% (yoy-3.76pct), respectively. Among them, the significant year-on-year decline in the sales expense ratio was mainly due to the company's moderation and more effective control of user acquisition and retention expenses. The year-on-year decline in management expenses and R&D expenses was mainly due to a decline in employee welfare expenses, including a decline in share-based remuneration expenses.

3. By revenue: In '23, the company's online marketing services, live streaming and other services (mainly e-commerce) achieved revenue of 60.304 billion yuan (yoy +22.97%), 39.054 billion yuan (yoy +10.36%), and 14.112 billion yuan (yoy +44.69%), respectively.

(1) Online marketing services: The company's online marketing business increased 22.97% year-on-year from 49.042 billion yuan in 2022 to 60.304 billion yuan, mainly due to the company's refined industry operation strategy and continuous improvement of product capabilities, driving an increase in the number of marketing customers and marketing customer investment consumption, and an increase in e-commerce merchant investment consumption. The company's online marketing services grew steadily in 23Q4, with revenue reaching 18.2 billion yuan (yoy +20.6%), and the number of active marketing customers increased by more than 160% year-on-year. In terms of internal circulation advertising: The “full site promotion” product has launched new functions such as in-investment diagnosis, post-investment review, and real-time analysis of materials to help merchants fully explore high-quality traffic in Kuaishou and maximize the total product transaction amount throughout the site. In 23Q4, the consumption of marketing products through “sitewide promotion” increased by more than 200% month-on-month. In terms of external circulation advertising: Continuously optimize the paid skit self-built link, create a high-quality skit ecosystem and user experience, and rely on algorithms to improve the real-time estimation model to increase users' willingness to pay and stimulate marketing customers' willingness to sell. In 23Q4, the marketing consumption of the paid skit industry increased by more than 300% year-on-year, and the distribution consumption of external circulation native marketing materials increased by more than 50% month-on-month.

(2) Live streaming: Thanks to the continuous enrichment of content supply and the continuous iteration of the live streaming ecosystem and algorithms, the company's e-commerce revenue in 2023 was 39.054 billion yuan, up 10.4% year-on-year from 35.388 billion yuan in 2022. Supply-side companies are deeply involved in expanding operations locally, driving an increase in the number of regional associations, number of anchors, and guild turnover. As of 23Q4, the number of regional associations the company cooperated with exceeded 1,300, the number of guild contracted anchors increased by nearly 40% year on year, and the average daily live broadcast time of anchors increased by more than 30% year on year, steadily increasing the scale of revenue. The “Live Streaming +” service continues to empower traditional industries. The average number of daily resume submissions in the 23Q4 Express Hire business increased by more than 200% year on year, and the average number of daily delivery users doubled year on year. The cumulative transaction volume of the Ideal Home business in 23Q4 exceeded RMB 16 billion.

(3) E-commerce: With the continuous improvement of e-commerce operation strategies, the number of active e-commerce paying users and retail merchants has increased, driving an increase in total e-commerce product transactions. Total product transactions in the company's 23Q4 e-commerce business increased 29.3% year-on-year, and GMV reached 403.9 billion yuan. On the user side, the average number of monthly paid e-commerce users exceeded 130 million yuan in 23Q4, a record high. Thanks to the continuous abundance of shopping scenarios such as pan-shelves, and continuous product and gameplay upgrades, the monthly active user penetration rate increased to 18.6%. On the supply side, more than 1 million operators of the company participated in the Double Eleven promotion in 23Q4, helping to accelerate the growth of the average number of monthly sales merchants, with a year-on-year growth rate of more than 50%. On the brand side, the total number of brand product transactions increased by 155% year-on-year during the promotion period, and the growth rate of nearly 2,500 brands doubled.

(4) Overseas business: The company focuses on the strategy of focusing on core market regions, continuously promotes the production of localized original content, and constructs multiple business layouts such as skits, mini-games, sports, etc., and the daily active users and user usage time in core overseas markets have steadily increased year-on-year. Total revenue from overseas business reached 847 million yuan in 23Q4, an increase of nearly 200% over the previous year, and operating losses narrowed from 6.6 billion yuan in 2022 to 2.8 billion yuan in 2023. In terms of overseas online marketing services, we continue to promote the construction and improvement of the product ecosystem around the three aspects of bid products, live streaming traffic, and native content, driving customers in e-commerce, gaming and other industries to achieve rapid revenue and consumption growth. Online marketing revenue for overseas businesses increased by more than 300% year-on-year in 23Q4.

Investment advice

The company's annual business operating profit performance was impressive. Operating profit turned loss into profit, and profit is expected to continue to improve. Therefore, we adjusted revenue for 2024-2026 to 128.361 billion yuan (yoy +13.12%), 141.481 billion yuan (yoy +10.22%), and 157.915 billion yuan (yoy +11.62%), and net profit to mother was 119.98 billion yuan (yoy +87.58%), and 220.32 billion yuan (yoy +42.58%), respectively ( YOY +28.80%), corresponding EPS is 2.76 yuan, 3.93 yuan, and 5.06 yuan respectively. The current stock price corresponds to 16 times, 11 times, and 9 times the valuation, respectively, maintaining the “buy” rating.

Risk warning

The risk of increased competition exceeding expectations, the risk of stricter policy regulation, the risk that advertising revenue growth will fall short of expectations, the risk that e-commerce GMV growth will fall short of expectations, the risk of live streaming falling beyond expectations, the risk that overseas expansion will not go smoothly, and marketing expenses will exceed expectations.