occurrences

We attended the Kuaishou 2024 Investor Day event in Beijing on September 13, 2024. As in previous years, this Investor Day event updated investors with the latest business developments and prospects, including: company strategy and core business development, e-commerce and commercialization, international business, local lifestyle, and AI strategies. Here's our summary of the highlights of this Investor Day event.

reviews

1. Company strategy and core business development: Based on scientific and technological innovation, the explanation in this section revolves around an overview of community construction, AI strategy, user and content ecology, and live streaming, e-commerce, online marketing, and overseas businesses. Among them, in the user and content ecosystem, management has always believed that user-oriented content, products, and traffic systems are the pillars for Kuaishou to maintain growth. Therefore, the platform clearly prioritizes creators and user experience. For example, with more changes enabled by the platform's AI model this year, the traffic mechanism can better identify the homology between user value and commercial value, and the distribution system will place more emphasis on the combination of user value and commercial value. In terms of content recognition, in the past, low-cost content recognition was not very good. Users of this kind of low-cost content are not valuable, and their share in the ecosystem has dropped dramatically this year.

On the product side, strengthen social and private moats and explore innovative gameplay. In the past, 77% of users interacted with creators they followed. The private domain market increased 7% year over year, and user consumption stickiness was growing well; Shuangguan private messages also increased 40% year over year. More users shared links to achieve a closed loop within the site, such as recent popular gameplay and raising fire cubs after chatting with friends.

In terms of the content system, we continue to build communities branded as Kuaishou and shape unique content that is different from the industry. The differentiation of the content system is an important part of Kuaishou's competitiveness. For example, the number of users who search and share knowledge is very active, the two-dimensional field also has good user penetration and community content coordination, and the agricultural technology sector is very competitive in the entire industry. In the future, the company will continue to focus on the growth of the entire main site in terms of user size, user quality, and revenue, and continue to improve platform monetization.

2. E-commerce: The core strategy revolves around good products+good content

The management admits that the current development of e-commerce business is facing three major challenges: 1) with consumer spending prudence and conservative spending, users' demand to buy at low prices is stronger; 2) merchant operating profits are constantly being impacted, so all platforms are oriented to help reduce the burden on merchants, so that merchants can improve their operating efficiency and be willing to operate within the platform; 3) the platform and merchants have sustainable development. However, Kuaishou believes that there are still users on the platform whose e-commerce needs have not been fully met. As reflected, the e-commerce user penetration rate (MAC/MAU) of the platform is only 19%, and there is room for further improvement.

In this context, Kuaishou e-commerce believes that its core interest point is “how to let consumers see the video presentation and live broadcast presentation of a product.” The platform will continuously build, supplement and optimize consumers' transaction service capabilities and consumer security services around “good content” and “good products”, so that consumers can continue to buy and spend more within the platform.

The construction of good content revolves around live e-commerce, short videos, and graphics. Among them, live e-commerce continues to improve its operating efficiency: 1) Kuaishou provides independent creative slicing services for live streaming rooms. For example, when many anchors broadcast live, fans are not necessarily watching the live broadcast, so Kuaishou provides the live broadcast room with creative editing of the best moments. 2) This year, we have continued to deepen the marketing gameplay of live broadcast rooms to stimulate consumers to buy, place orders, and even obtain more cost-effective products during live broadcasts.

For example, the Shopping Group feature launched in mid-August can increase the number of orders per fan of the core anchor's shopping group by 25%. In the field of short videos and graphics, Kuaishou has continued to strengthen e-commerce capacity building in the short video space since last year. Q2 short video exposure increased by 17%, GMV for short videos increased by more than 50%, and more leading anchors and MCN organizations have begun to join Kuaishou to explore and experiment with short video delivery.

The construction of good products revolves around 4 aspects: abundance, affordability, attractiveness, and fulfillment services. Among them, management shared the progress of pan-shelf e-commerce: in February, the GMV of over 10,000 products on the shelf increased by 50%, and the GMV of the entire shelf increased by 55%. Separate marketing games and marketing activities have been carried out for pan-shelf market companies, such as big name supplements, low price sales, fast hand selection, and special supply. We hope that consumers can continue to establish a stable purchasing intention and stable purchasing mentality in this market, and we are committed to being able to continuously establish a more stable purchasing path for certain products with a high repurchase rate in the shelf market.

In terms of price power, management said that Kuaishou's product subsidies are relatively conservative compared to their peers, but they invest traffic and money to subsidize new merchants and newcomers because the company believes that allowing more merchants to sell products on the platform and make more money in this business model is Kuaishou e-commerce's continued core competitiveness, rather than short-term subsidies for a certain product.

Looking at the end of the day, Kuaishou e-commerce hopes to restructure the consumption decisions of 1 billion users, including 4 goals: 1) continue to strengthen the trust economy of leading anchors; 2) continuously strengthen the content driving force of content e-commerce through short videos, public live broadcasts, and graphics; 3) strengthen the guarantee of the shopping experience, so that consumers can feel at ease and dare to continue to buy after buying; 4) The construction of shelves helps consumers to slowly settle down the purchasing behavior of Kuaishou e-commerce through repeated purchases and deterministic demand, so that the platform GMV can move to a higher level.

Additionally, management described developments at the commercialization level. For example, the construction of internal circulation revolves around iterative product capabilities. For example, 1) Last year's full-site promotion hoped to be able to push Kuaishou's complex public and private domain traffic to customers in one stop through advertising products. 2) Kuaishou provides intelligent hosting. Traffic merchants can still have their own choices, but they can do better optimization in terms of bidding and other capabilities. 3) Short video streaming live streaming. This genre's advertising consumption has increased very fast in the past year. In the first half of the year, the advertising consumption of the entire genre increased by more than 50%, and we will continue to explore and explore more in the future.

In building external circulation capabilities, the core focuses on “seizing the circuit suitable for Kuaishou users' endowments”, including content consumption, content payment, and local tracks, such as skits, mini-games, etc. Currently, Kuaishou has 0.14 billion heavy consumer users of skits, 40 million paid skit users; more than 30 million monthly users of mini-games on the Kuaishou website; and the number of users of paid novels has increased by 50% over the previous year.

3. International business: Business in core countries has grown steadily, investing in the future to explore new opportunities. Over the past year, overseas revenue has grown rapidly, and losses have continued to narrow. The past two years have been a process of continuous contraction and focus on this business. Currently, the focus is on Brazil, with a team of about 800 people to serve the Brazilian market. They are optimistic about Brazil's e-commerce market space in the future. At the same time, they also believe that it will take some time for Brazil's logistics costs to improve. In terms of data, under the pressure of cost cuts and increased commercialization, Kwai maintained a steady increase in Brazilian DAU and usage time. The core strategy for future overseas business revolves around: relying on more advanced advertising efficiency to pursue recent break-even; relying on Brazilian e-commerce and financial services to seek mid-term development; relying on Chinese gameplay such as algorithms, AI, and games to enhance DAU and long-term user experience; more localized recruitment and deployment to discover possible new opportunities; and using the advantages of globally available servers to operate in other countries at low cost and wait for opportunities.

4. Local life: The local lifestyle business has always focused on user value, merchant value, and platform value. Since its establishment, the local lifestyle business has gone through 2 stages: 1) 22Q4-23H1: building a basic transaction link and verifying user needs; 2) From mid-23 to 2024, focus on industry+regional management to try to expand GMV and user scale; continue to expand GMV from the second half of 2024 to 2025 while starting to increase the monetization rate. In this process, the business always focuses on improving user value, merchant value, and platform value.

Value to users: Kuaishou has more declining users. User endowments are not exactly the same as friends and merchants; the core is to meet cost performance; for merchant value, Kuaishou believes that merchants need increased customer traffic, and when the market is bad, they need more customer flow. For example, when the customer flow is insufficient this year, merchants are willing to spend more budget; while in terms of platform value, the revenue of the local lifestyle business does not contribute much, but it is not a loss-making business; it also contributes a lot of life time value to users.

Based on these layers of value considerations, the business focuses on the demand side, supply side (goods/merchants), supply side (content), and matching. For example, on the supply side, the company is very careful in selecting cities and categories. The team consists of about 1,000 people, focusing on selecting places with good user endowments, Tier 3, 4, and 5, and suburban counties. In terms of performance results, third- and fourth-tier cities contributed more than 50%, and the suburbs of the new first-tier and second-tier cities were faster than urban areas; in terms of categories, they mainly did: 1) Food delivery, including urban areas, and the basic menu was good; 2) In the first half of the year, it was discovered that retail and lifestyle services were good, and many people in the county area would go shopping in large shopping malls, which could be transformed into GMV; 3) Wine tourism accelerated the core categories, especially scenic spots and travel agencies.

5. Financial highlights: Continuing to fight the three major battles, and the CFO outlined Kuaishou's financial progress over the past year around the two major indicators. Among them, the highlights include achieving 1 trillion GMV, 100 billion revenue, and 10 billionadj NP. In the first half of 2024, Kuaishou's profit far exceeded expectations, achieved user and revenue growth, and profit margins continued to rise. Furthermore, strong business performance provided a steady stream of cash inflows from operating activities, with 1H cash inflows totaling 13.4 billion yuan. While the business is strong, Kuaishou pays great attention to shareholder returns. Last year, it announced a 4 billion HKD repurchase plan, and this year it announced an additional 16 billion HKD, totaling 20 billion, and is firmly implementing the repurchase.

In the future outlook section, the CFO proposed three major campaigns and two indicators. The three major battles are: 1) Kaleidoscope: Continuously deepen and diversify the business ecosystem and revenue, expand the e-commerce commercial ecosystem, and at the same time develop more growth curves locally, overseas, and AI. 2) Upgrade: Continuously reduce costs and increase efficiency, driving ultimate ROI. 3) AI: generate revenue and reduce costs.

Evaluating whether these three major campaigns are being done well is mainly based on two indicators: 1) YoY growth rate of core business (advertising+commercialization in China) revenue reached 20% in 2Q. ; 2) Adj NPM 15%. These two numbers add up to 35%, which is pretty close to the 40 rule. I am confident that both numbers will be raised to 20% + in the future, and truly become an extremely excellent company.

risks

Macroeconomic growth continues to weaken