Core views
Kuaishou announced its Q1 results. Overall revenue was in line with expectations, and profit side was released at an accelerated pace.
Q1 Kuaishou achieved revenue of 29.4 billion yuan (yoy +17%, +1.3% vs. consensus); Q1's IFRS net profit was 4.12 billion yuan (+84% vs consensus 2.24 billion yuan), which was significantly better than expected, NPM was 14.0%; non-IFRS net profit was 4.39 billion yuan (+39.6% vs consensus 3.143 billion yuan), NPM was 14.9%, and commercial off-season profit continued to grow month-on-month. The profit side beat is mainly due to 1) the increase in gross margin exceeding expectations by nearly 55%, achieving the mid-term target of 55%; 2) revenue from the accelerated increase in e-commerce monetization rate exceeds expectations; 3) other revenue brought an increase of 500 million dollars. The company announced an additional three-year repurchase plan of HK$16 billion to increase shareholder returns.
Brief review
By business, Kuaishou Q1 e-commerce GMV achieved 288.1 billion yuan (yoy +28%) in line with expectations; other businesses achieved revenue of 4.2 billion yuan, yoy +48% (+5.9% vs consensus); advertising revenue was 16.7 billion yuan, yoy +27% (+0.9% vs consensus); and live streaming revenue was 8.6 billion yuan, yoy -8% (-0.1% vs. consensus). User growth and algorithms continue to be optimized, and users and traffic remain stable. Q1 Kuaishou DAU was 394 million people, yoy +5.5%, MAU was 697 million people, yoy +6.6%. The average daily usage time of a single user once again increased to 129.5 minutes, and the platform user stickiness was stable.
Pan-shelves are progressing rapidly, and Q1 e-commerce revenue has exceeded expectations. Thanks to abundant supply and the construction of a pan-shelf scenario, Kuaishou e-commerce GMV achieved 28% growth. The number of active buyers in Q1 reached 126 million, the user penetration rate was 18%, the number of annual active users reached nearly 290 million, and the number of customer orders increased steadily. Pan-shelf GMV accounts for about 25%; the e-commerce monetization rate continues to rise, and e-commerce revenue growth is close to 50%, which is faster than GMV growth.
Ad revenue is in line with expectations. Internal circulation is still the main driving force, and external circulation continues to recover. Q1 advertising revenue was 16.7 billion yuan, yoy +27%. Media information, education, games and other industries in external circulation advertisements, including skits, are growing strongly. Internal circulation advertising is growing faster than overall e-commerce GMV. Products such as “full site promotion” and intelligent hosting greatly enhance the marketing effectiveness of merchants and actively promote the willingness of merchants to launch. Overall marketing consumption in 24Q1 accounts for 30% of internal circulation consumption. The average number of Kuaishou search users in 24Q1 increased by more than 15% year-on-year, and revenue from search marketing services increased by more than 50% year-on-year.
To increase shareholder returns, the company once again announced a three-year repurchase plan of HK$16 billion. Based on the three-year uniform repurchase calculation, the corresponding dividend rate is 2.2%. We expect the company's revenue for 2024-2025 to be $1291/146.7 billion, respectively, and non-IFRS net profit of $193/265 billion, providing 16 times P/E for 24, and a target price of HK$78 for 2024, maintaining a “buy” rating.
(1) Revenue & profit: Revenue is in line with expectations, e-commerce and advertising are growing at a high rate, and the profit side exceeds expectations
On the revenue side, 24Q1 Kuaishou achieved revenue of 29.4 billion yuan (yoy +17%, +1.3% vs. consensus), which is basically in line with Bloomberg's expectations. By business, Kuaishou Q1 e-commerce GMV achieved 288.1 billion yuan (yoy +28%) in line with expectations; other businesses achieved revenue of 4.2 billion yuan, yoy +48% (+5.9% vs consensus); advertising revenue was 16.7 billion yuan, yoy +27% (+0.9% vs consensus); live streaming revenue was 8.6 billion yuan, yoy -8% (-0.1% vs consensus). The e-commerce monetization rate increased more than expected, and the revenue growth rate was higher than GMV's growth rate.
On the profit side, Kuaishou Q1 achieved net profit of 4.12 billion yuan (+84% vs consensus 2.24 billion), net profit of 14.0%, non-IFRS net profit of 4.39 billion yuan (+39.6% vs. consensus 3.143 billion), and a net profit margin of 14.9%. The profit side exceeded expectations mainly due to 1) the increase in gross margin exceeding expectations by nearly 55%, achieving the 55% medium-term target; 2) the narrowing of management expenses exceeding expectations by 360 million. 3) Other revenue brought in an increase of 500 million.
By region, overseas losses continued to narrow. Overseas business operating losses this quarter were 270 million yuan. The loss reduction was mainly due to rapid growth in overseas revenue. In 24Q1, overseas business achieved revenue of 990 million yuan, yoy +3% /qoq +17%; domestic business operating profit was 4 billion yuan, and operating profit margin was 14%.
E-commerce performance is still strong, and its share of revenue is increasing. 24Q1 Kuaishou e-commerce achieved GMV of 288.1 billion, yoy +28%, which is basically in line with expectations. Other business revenue is 4.2 billion yuan, yoy +48% /qoq -3% (5.9% vs. consensus). On the demand side, the number of monthly active e-commerce buyers in 24Q1 was 126 million, yoy +22.4%, and the number of non-e-commerce users remained flat, with a monthly active user penetration rate of 18%; on the supply side, the average number of monthly active sellers of 2024Q1 grew by more than 70% year-on-year. During the 2024 New Year's Festival, the GMV of branded products increased by more than 70% compared to the previous year; on the e-commerce market, the Pan-Shelf growth rate was far too high to 50%, corresponding GMV's share increased to 25%.
The recovery of external circulation continues to accelerate, and internal circulation is still strong. 24Q1 Kuaishou's online marketing business revenue was 16.7 billion yuan, yoy +27% /qoq-9% (+0.92% vs. consensus). Among them, the growth rate of external circulation advertising is estimated to exceed 20%, and the growth rate of internal circulation advertising still exceeds the advertising market. The company continues to strengthen the refined operation of the industry, upgrade intelligent marketing products, and continuously optimize algorithms. The company launched a fully automated lead marketing product (UAL, Universal Auto Ads for Leads), which uses AIGC to improve the production efficiency and quality of marketing materials and provide customers with intelligent targeted marketing capabilities. The peak daily consumption of AIGC marketing materials exceeded 10 million yuan in the first quarter.
The live streaming business was affected by regulations and adjustments were made in the short term. 24Q1 Kuaishou's live streaming revenue was 8.6 billion yuan (-0.06% vs consensus), yoy -8% /qoq -15%, mainly due to the platform's continuous strengthening of the live streaming ecosystem governance. We believe that short-term ecological management will help Kuaishou establish a long-term sustainable ecosystem. The development of live streaming content is far more important than commercial revenue. Empowering traditional industries with “live streaming +” as the foundation will help the company explore new business possibilities.
(2) Costs & Expenses: Management costs were significantly better than expected, and gross margin continued to increase month-on-month
In 24Q1, the company's gross margin was 54.8%, yoy+18pct/qoq+3.2pct. On the one hand, the increase in gross margin was due to the improved revenue structure brought about by high-margin e-commerce and advertising businesses, and on the other hand, due to the unexpected decline in bandwidth and content costs.
24Q1 marketing expenses were 9.4 billion yuan, yoy +8% /qoq -15%, marketing expenses ratio was 31.9%, yoy-7.8pct/qoq1.9pct.
24Q1 R&D expenses were 2.8 billion yuan, yoy -3.4% /qoq +15%, R&D expenses were 9.7%, yoy-16pct/qoq-3.9pct.
24Q1 management expenses were 460 million yuan, yoy -49% /qoq -39%, management fee ratio was 1.6%, yoy-56pct/qoq-30pct.
(3) Traffic: The number of users reached a new high, and the length of time remained steady
24Q1 Kuaishou MAU was 697 million people, yoy +6.6%, exceeding Bloomberg's unanimous expectations; DAU was 394 million, yoy +5.5%; DAU was 129.5 minutes per day. In terms of user growth, Kuaishou promotes the acquisition of high-quality user growth guided by retaining high-value users. Through algorithm strategies and operational optimization, customer acquisition costs and maintenance costs for a single user were reduced year over year. Q2 expects DAU to grow by around 4% year over year, reaching the 400 million DAU milestone in the second half of the year. On the content side, the company continues to explore and expand its unique and advantageous content. As of the first quarter of 2024, Kuaishou's 20 short dramas had more than 100 million views, 7 surpassed 300 million times, and the average daily paid consumption of short dramas was +400%.
Profit forecasting and valuation
We expect the company's revenue for 2024-2025 to be $1291/146.7 billion, respectively, and non-IFRS net profit of $193/265 billion, providing 16 times P/E for 24, and a target price of HK$78 for 2024, maintaining a “buy” rating.
Risk analysis
Internet traffic dividends peaked, offline recovery after the pandemic, the short video traffic dividend period ended, and there was a risk that user size and length growth would peak or decline; content industry regulatory policies continued to be tightened, and content production and content output would be limited; live streaming supervision policies continued to be strengthened; advertising business growth fell short of expectations due to the macroeconomic downturn; short video creation involved content copyright risks; the Federal Reserve's interest rate hike process exceeded expectations and continued to suppress the overall performance of Chinese securities; uncertainty about the development of Sino-US relations; the risk of RMB exchange rate depreciation exceeding expectations; China Stock Exchange Rate Delisting Risks; Other Impacts Outbound risk factors for the overall performance of the Internet.