Traffic side: Users are growing steadily, user stickiness is maintained well, and the per capita time is more than 120 minutes. 2Q24 Kuaishou DAU yoy +5.1% to 0.395 billion; MAU yoy +2.7% to 0.692 billion. Average daily time per capita yoy +4.1% to 122 minutes. Total user usage time increased 9.5% year over year. In terms of user growth, by creating an active community atmosphere, DAU can achieve high-quality growth, and maintain user investment and increase ROI under refined operation. In terms of content consumption, the platform created a unique supply of high-quality content. The sports category “Kuaishou Village Olympics” attracted over 0.135 million viewers, the total number of online live viewers exceeded 0.52 billion, and the total exposure volume of the entire network exceeded 6.4 billion; Kuaishou Starlight launched the first domestic AIGC original fantasy short drama “Mountain and Sea Mirrors Break the Waves”. Q2 launched 12 of the nearly 50 short dramas with over 100 million broadcasts. User search mentality continues to penetrate. 2Q used Kuaishou's MAU of nearly 0.5 billion, and the number of searches in a single day increased by more than 20% over the same period last year. We expect the 3Q24 platform DAU to maintain healthy growth and achieve the 0.4 billion target.

Advertisement: External circulation is growing rapidly, and internal circulation is slowing down due to the influence of the GMV market. 2Q24 ad revenue yoy +22.1% to 17.5 billion yuan (slightly lower than Bloomberg's agreed YOY +22.6% forecast), and advertising accounted for 56.5% of total revenue. Among them, internal recycling revenue grew steadily, accounting for 40% of the total consumption of sitewide promotion or smart hosting products, and the investment consumption of small and medium-sized businesses also increased by 60%. External circulation has increased significantly, particularly in industries such as media information (average daily consumption of paid skits increased by more than 2 times), e-commerce platforms, and local lifestyle (total consumption of 1H local businesses increased 172% month-on-month). We expect 3Q24 to maintain high growth in external advertising, leading to a 20.2% year-on-year increase in overall advertising revenue.

E-commerce: MPU penetration has reached a record high, and supply-side abundance continues to increase. 2Q24 Kuaishou GMV yoy +15% to 305.3 billion yuan, and other business revenue (mainly e-commerce commissions) yoy +21.3% to 4.16 billion yuan. The growth rate of GMV has slowed down. We judge that macroeconomic factors affect weak consumer sentiment, and competition for investment subsidies on various e-commerce platforms is relatively intense due to the 618 big promotion. On the demand side, 2Q e-commerce monthly paying users increased 14.1% year-on-year to 0.13 billion, and the e-commerce monthly active penetration rate reached 18.9%, yoy+2.6pct. On the supply side, the number of monthly suppliers and sellers increased by more than 50% year on year. GMV in the pan-shelf market continues to grow rapidly, accounting for more than 25% of GMV, the average daily sales rate is over 50% year on year, and the average daily buyer's growth rate is over 70% year on year. Short video GMV grew nearly 70% year over year. Search GMV increased by more than 80% year over year, thanks to the introduction of large models to improve the ability to identify users' shopping intentions. We believe that Kuaishou e-commerce will continue to make deep efforts in live streaming, do a good job in product supply, merchant operation, talent support, and user experience, and fully explore users' e-commerce needs through the steady construction of a pan-shelf scenario. We expect 3Q24GMV to increase 15% year over year, driving revenue from other businesses, mainly e-commerce commissions, to increase by about 15.9%.

Live streaming: Revenue fell 6.7% year over year, better than expected. 2Q24 Kuaishou's live streaming revenue fell 6.7% year on year to 9.3 billion yuan, mainly due to the company's live streaming ecosystem governance. The launch of high-quality content and gameplay led to a better-than-expected decline in live streaming revenue (Bloomberg unanimously expected YOY -13.9%). By the end of the second quarter, the number of guild organizations signed by the company had increased by nearly 50% year-on-year, and new categories such as group broadcasts and big stages were launched. We expect the 3Q24 live stream to drop 4.7% year over year.

The adjusted net profit for 2Q24 reached 4.68 billion yuan, and the profit margin reached a record high. 2Q24 gross margin yoy+5.1pct, qoq+0.5pct to 55.3% (Bloomberg's agreed forecast was 54.5%), achieving 6 consecutive quarterly improvements. We determined that it was mainly due to the increase in the share of high-margin advertising and e-commerce businesses in the revenue structure, as well as optimization of revenue sharing costs, and improvements in bandwidth and server usage efficiency. 2Q24 sales expenses were 10 billion yuan, and the sales cost ratio yoy+1.3 pct was mainly due to an increase in promotion activity expenses. The absolute amount of R&D expenses, administrative expenses, and the share of revenue all declined year over year, and labor efficiency was further improved. 2Q24 achieved an adjusted net profit of 4.68 billion yuan (Bloomberg's agreed estimate of 4.34 billion yuan), and the adjusted net profit margin reached a record high of 15.1%. Domestic adjusted operating profit was 4.5 billion, and overseas adjusted operating loss decreased by 64.5% year-on-year to 0.277 billion yuan. We expect the company's adjusted net profit for 3Q24 to be 3.88 billion yuan, and the adjusted net profit for the full year 24 will be 17.01 billion yuan.

Follow the progress of commercialization of the company's AI big model. The large flexible video generation model that was tested in June has generated over 10 million videos, the large graphical image generation model is officially open source, and the Happy Language Big Model has achieved the goal of exceeding GPT 4.0 for comprehensive performance in Chinese scenes. The company's AI matrix has been integrated into multiple business scenarios to provide capabilities for content creation, content understanding and recommendation, e-commerce, and online marketing. In the first half of 2024, nearly 0.02 million merchants used large model capabilities on the Kuaishou platform to achieve intelligent management, and AIGC marketing materials consumed an average of 20 million per day in June. It is recommended to continue to pay attention to the application and payment progress of large model capabilities in the company's commercialization scenarios.

We expect the adjusted net profit of the company to be 170.05/236.02/301.92 for 24-26 (the original forecast was 17.015/24.816/31.627 billion yuan. Since the decline in live streaming revenue was better than previously anticipated, but at the same time, the slowdown in e-commerce GMV growth affected advertising and commission revenue, so we slightly adjusted our revenue for 24 years. Furthermore, in the second half of the year, the company is expected to increase investment in core business marketing expenses and AI research and development, so we have adjusted our cost and profit forecasts.

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 17.005 billion yuan, the corresponding reasonable value was 255.1 billionCNY/ 278.7 billion HKD (exchange rate 0.915), and the target price was HK$64.02 per 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