Incidents:

On August 20, the company announced its 2024Q2 quarterly report, achieving revenue of 30.975 billion yuan (YoY +11.6%, QoQ +5.3%), gross margin of 55.3%, operating profit of 3.906 billion yuan, net profit of 3.98 billion yuan, net profit of 12.8%, and adjusted net profit of 4.679 billion yuan.

Our point of view:

1. Operating conditions: Continuously optimizing user growth strategies and algorithms. User data on the 2024Q2 platform maintained steady growth, MAU reached 0.692 billion, DAU reached 0.395 billion, daily active users spent an average of 122 minutes, maintaining high user stickiness. User traffic grew steadily, and total user usage time increased 9.5% year-on-year in the second quarter of 2024.

2. Analysis of the main financial indicators: 2024Q2 achieved revenue of 30.975 billion yuan (YoY +11.6%, QoQ +5.3%), gross margin of 55.3% (YoY+5.1pct, QoQ+0.5pct); sales expenses ratio was 32.4% (YoY+1.3pct, QoQ+0.5pct), R&D expense ratio was 9.1% (YOY-2.3pct, QoQ-0.6pct), management expense ratio 2.6% (YoY-0.8pct, QoQ+ 1.0pct). Adjusted net profit of 4.679 billion yuan was achieved, better than market expectations. The adjusted net interest rate improved to 15.1% year-on-year (YoY+5.4pct, QoQ+0.2pct), and profitability increased significantly.

3. Online marketing services: 2024Q2 online marketing service revenue increased 22.1% year-on-year to 17.5 billion yuan, and both internal and external circular advertising showed strong growth resilience. Internal circulation has maintained steady growth. Products such as “full-site promotion” and intelligent hosting have increased the willingness and effectiveness of merchants. Marketing consumption using full-site promotion or intelligent hosting products reached 40% of the total internal circulation marketing consumption, and marketing nodes and combined products have boosted the marketing consumption of small and medium-sized businesses to surge 60% year-on-year in 2024Q2; external circulation advertising has grown significantly, and investment in media information, e-commerce platforms, local lifestyle and other industries is strong. The industry penetration rate of UAX, an external circulation intelligent marketing product, continues to increase, and overall marketing consumption accounts for more than 30% of external circulation consumption. The skit business grew rapidly. The average daily marketing consumption of paid skits increased more than 2 times over the same period last year, and Kuaishou Starlight's investment revenue increased more than 20 times over the same period last year.

4. Live streaming business: 2024Q2 Kuaishou achieved live streaming revenue of 9.3 billion yuan, a year-on-year decrease of 6.7% and an increase of 8.5% month-on-month. This is due to Kuaishou's continuous iteration of refined operating models to establish a healthy and positive live streaming ecosystem. Kuaishou continues to be deeply involved in the live streaming business, promoting new products, new interactions, and new gameplay. Through the “short video+livestream+community” ecosystem, Kuaishou helps Cross Fire and Wang Zhe Rongyao Professional League gain more audience attention, empowers traditional industries with the “live streaming +” model, and the Fast Hiring and Ideal Home business is developing steadily. By the end of 2024Q2, the number of signed guild organizations increased by 50% year on year, and the number of signed guild anchors increased by 60% year on year.

5. Other businesses: 2024Q2's revenue from other businesses increased 21.3% year on year to 4.2 billion yuan, e-commerce GMV increased 15% year over year to 305.3 billion yuan, and the average number of monthly buyers of 2024Q2 increased 14.1% year on year to 0.131 billion yuan. The pan-shelf market continued to grow significantly. During the 2024 618 promotion period, the number of pan-shelf e-commerce orders increased 65% year on year, and the average number of monthly sales merchants increased by more than 50% year on year. In terms of brand merchants, during the 2024 618 promotion period, the GMV of consumer home furnishing brands increased by more than 83% compared to the previous year's 628 promotion. In terms of e-commerce, pan-shelf GMV continued to grow in large volumes in the second quarter of 2024, accounting for more than 25% of the total GMV. Improved overseas monetization efficiency helped continue to release the operating leverage effect, and the overall operating loss of overseas business decreased by 64.5% over the same period last year.

6. AI continues to empower core businesses, and fully open testing of Keling models: Kuaishou has developed industry-leading AI matrices, including Kuaishou Italian language models, visual generation models, and recommended large models. In 2024, Q2 Kuaishou opened comprehensive testing of the visual generation big model Keling, and launched a membership system for users around the world. At present, the AI matrix has been embedded in multiple business scenarios, supports content creation, content understanding, and user interaction, and provides merchants and marketing customers with more efficient tools, thus enhancing commercial competitiveness. 2024H1, nearly 0.02 million merchants used AI to optimize operations on the Kuaishou platform, and the daily peak consumption of AIGC materials from marketing customers reached RMB 20 million.

The profit forecast and investment rating take into account the steady growth of the company's advertising and e-commerce business, continuous improvement in single-user monetization efficiency, and steady implementation of cost reduction and efficiency. We adjusted the company's profit forecast. The company's FY2024-2026 revenue is expected to be 127.8/142.5/157.4 billion yuan, respectively, and the adjusted net profit to mother is 18.3/23.3/27.8 billion yuan, corresponding to PE 10/8/6X, respectively. We conduct SOTP valuations based on the profitability and competitive landscape of different business segments (with corresponding premiums/discounts), with a target market value of $217 billion for 2024E and target prices of $50 and HK$55, maintaining a “buy” rating.

Risks indicate the risk of slowing the growth rate of active users, the risk of stabilizing the production of high-quality content, the risk of changes in Internet information publishing policies, the risk of video content supervision, the risk of rapidly increasing content costs, the risk of rapid increase in channel costs, competition risk, antitrust risk, and valuation adjustment risk.