On September 13, we were invited to participate in Kuaishou's 2024 Investor Conference. The management shared the latest business strategies and AI enabling directions:

Community ecology and user aspects: 1) Maintain the supply of differentiated content, such as the knowledge-based encyclopedia, Kuaishou's characteristic two-dimensional, three rural areas, intangible heritage, etc., to create characteristic benchmark creators. 2) Innovative gameplay was introduced to enhance user interactivity/engagement. The length of review time in the second quarter was +28.8%, and the number of private messages between two levels increased 40% year over year. 3) In content distribution, AI empowers the ability to recognize/understand content, increases the proportion of high-quality content, promotes the integration of user value and commercial value, and enhances monetization space.

E-commerce: The average price per unit in the industry is on a downward trend. Kuaishou continues to strengthen content and shelf space, increase supply, and increase purchase conversion: 1) In terms of content, based on various live streaming+short videos+graphics business sites to enhance purchasing intentions, the live streaming public domain GPM (thousand views turnover) increased 18% year-on-year in the 2nd quarter, and GMV for short videos +50% year-on-year. 2) Launch marketing games such as “Ten Thousand People Group” to improve order conversion. 3) Further enrich the supply side, enhance price power and service capacity, and shorten the decision-making link. In the first half of the year, the number of sales sellers/customers was +60%/55%, respectively. In the second quarter, the share of retail products increased by 7% compared to the same period last year. 4) Talent distribution matching efficiency improved, and the average daily matching GMV in the 2nd quarter was +90% compared to the same period last year. 5) The shelf market strengthened marketing gameplay. In the second quarter, Pan-Shelf MAC (number of monthly purchasers) increased by more than 40% year-on-year.

Advertisement: 1) Internal circulation: AI enables product capability iteration and increases monetization rate. In the first half of the year, the overall promotion customer penetration rate was +25 percentage points year over year, the average daily consumption penetration rate was +20 percentage points year over year, and the smart hosting customer penetration rate increased +32 percentage points year over year. The customer structure is becoming more balanced, and more small and medium-sized businesses are beginning to learn about commercial investment. 2) External circulation: Focus on tracks suitable for Kuaishou users' endowments, such as skits/novels/mini-games. In terms of skits, based on 0.3 billion daily activity/40 million paying subscribers, paid skit consumption increased 300% + year over year in the first half of the year. Minigames and novels gradually replicated the closed-loop native link of skits to drive consumption growth. On the product side, large models enabled improved launch capabilities, and the customer penetration rate of fully automated UAX delivery reached 40%.

The live streaming sector continues to optimize the ecosystem, and innovative content such as the big stage drives the penetration and length of live streaming. In the first half of the year, the guild structure became healthier, and the number and revenue share of mid-waist associations increased.

Local life: The market is sinking, and both supply and demand sides maintain rapid growth. On the user side, strengthen the low price mentality through price comparison+marketing activities, and monthly trading users in the 2nd quarter were +278% compared to the same period last year. The supply side continued to expand categories and introduce wine tourism, etc., and the average number of daily sales merchants increased about 5 times over the same period in the second quarter. From dining+ to refined operations across regions, each city gradually achieved profit.

Going overseas: Continue to promote commercialization in core countries, and achieve profit by 2025. Business in Brazil, the core country, is growing steadily. Relying on the advertising business in the short term, a break-even balance may be achieved by the end of the year. In the medium to long term, we rely on the gradual improvement of local logistics facilities to develop e-commerce and financial services.

Investment Implications: Investors focus on e-commerce commercialization and AI development. We believe that in terms of advertising, the loading rate is 8-9%, there is still room for improvement, there are still opportunities to explore the industry segment, and it should maintain steady growth faster than the general market. GMV growth has slowed in the short term due to competition in the e-commerce industry, but there is still potential to increase the penetration of purchasers. Al development focuses on content understanding+recommendation+video generation, empowering and upgrading existing businesses in the short term, optimizing user experience, assisting content production/distribution, improving matching and monetization efficiency, and seeking breakthroughs in algorithm innovation over the long term. The video generation model can easily start commercial monetization. 2C/2B all have development opportunities. We maintain our forecast of 17%/21% growth in e-commerce GMV/advertising revenue in 2024. We expect the increase in high-margin business revenue share and bandwidth cost optimization to keep the company's profit expansion trend unchanged, and maintain the adjusted net profit forecast of RMB 18 billion for 2024. The current price corresponds to the 2024 price-earnings ratio of only 8.5 times, maintaining the purchase rating and the target price of HK$54.