Traffic side: DAU achieves 0.4 billion target. 3Q24 Kuaishou DAU yoy +5.4% to 0.408 billion; MauYoY +4.3% to 0.714 billion. Average daily time per capita yoy +1.8% to 132min. Total user usage time increased 7.3% year over year, and the average number of live broadcasts and short video broadcasts per day was nearly 110 billion. In terms of user growth, by optimizing product forms, improving the community interaction atmosphere, and refined operation of algorithm strategies, the frequency of product use is increased while expanding the scale of users, increasing user participation and user retention. In terms of content consumption, as an authorized broadcaster for the 2024 Paris Olympics, the amount of exposure of relevant content on the Kuaishou app reached 310.6 billion during the Olympics, and a total of 0.64 billion users watched the Olympics and interacted 15.9 billion. User search mentality continues to penetrate. 3Q's MAU using Kuaishou is over 0.5 billion, the number of daily searches increased 20% year over year to over 0.7 billion, and the peak number of searches per day exceeded 0.8 billion. We expect the 4Q24 platform DAU to maintain a slight increase of around 0.4 billion.

Advertisement: External circulation continues to grow rapidly, and the slow growth rate of internal circulation supports merchants in the short term. 3Q24 ad revenue yoy was +20.0% to 17.6 billion yuan (in line with Bloomberg's agreed expectations), and advertising accounted for 56.6% of total revenue. Among them, internal circulation has maintained steady growth. The number of monthly retail merchants has also increased by more than 50%, and intelligent marketing has further penetrated. Whole-site marketing solutions and smart hosting products account for 50% of Kuaishou's in-app circular marketing consumption. We judge that internal circulation growth has slowed month-on-month. Under macroeconomic challenges, the platform supports merchants with traffic subsidies and other measures to help merchants better achieve long-term operation. External circulation has increased significantly, especially in media information (marketing consumption of short dramas increased by more than 3 times), platform e-commerce, and local lifestyle. We expect 4Q24 external circulation advertising to grow faster than internal circulation, driving a 15.1% year-on-year increase in advertising revenue.

E-commerce: MPU reached 0.133 billion, and multi-site synergy was enhanced. 3Q24 Kuaishou GMV yoy +15.1% to 334.2 billion yuan, and other business revenue (mainly e-commerce commissions) yoy +17.5% to 4.16 billion yuan. The GMV growth rate has slowed down. We judge that macroeconomic factors affected weak consumer sentiment, the impact of competition in the e-commerce industry, and that the third quarter was the traditional e-commerce low season. On the demand side, 3Q e-commerce monthly paying users increased 10.8% year-on-year to 0.133 billion, and the e-commerce monthly active penetration rate reached 18.6%, yoy+1.1 pct. On the supply side, the number of monthly suppliers and sellers increased by more than 40% year on year, the number of new entrants increased by more than 30% year on year, and the number of product categories increased by more than 20% year on year. Talent operations are more refined. For leading experts to develop marketing games such as shopping groups and 10,000 groups, the Rising Star Program was launched in August to support small to medium experts, driving the average daily matching GMV of small to medium experts to increase by more than 40% month-on-month and the average number of matching products per day by more than 25% month-on-month. The e-commerce talent business GMV also increased by more than 24% during the 818 promotion period. GMV in the pan-shelf market continued to grow in large markets, accounting for 27% of GMV. The average daily sales market grew by nearly 70% year on year, and the average daily active buyers grew by more than 60% year on year. Short video GMV grew by more than 40% year on year, and GMV for short video streaming live streaming transactions increased nearly 40% month over month. We believe that Kuaishou e-commerce is expected to maintain steady growth under the promotion of a strategy of good content+good products, based on the advantages of content e-commerce, continuing to push the return to live broadcast rooms, combined with the rapid growth of shelves and short videos. We expect 4Q24GMV to increase 14% year over year, driving revenue from other businesses, mainly e-commerce commissions, to increase by about 18%.

Live streaming: Revenue fell 3.9% year over year, better than expected. 3Q24 Kuaishou live streaming revenue fell 3.9% year over year to 9.3 billion yuan (Bloomberg agreed to expect YOY -5.2%). By the end of the third quarter, the number of guild organizations contracted by the company had increased by more than 40% year-on-year, and the number of signed anchors had also increased by more than 60%. We expect 4Q24 live streaming to drop 4.0% year over year.

3Q24 adjusted net profit reached 3.95 billion yuan. The 3Q24 gross margin yoy+2.6pct, qoq-1.0pct to 54.3% (Bloomberg's agreed forecast was 53.9%). We determined that it was mainly due to the increase in the share of high-margin advertising and e-commerce business in the revenue structure, as well as the reduction in the share of cost sharing and depreciation of the live streaming business as a share of revenue. At the same time, copyright amortization of Paris Olympics content caused a month-on-month decline. 3Q24 sales expenses were 10.4 billion yuan, and the sales expense 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.

3Q24 achieved an adjusted net profit of 3.95 billion yuan (Bloomberg's agreed estimate of 3.91 billion yuan), and an adjusted net profit margin of 12.7%. Domestic adjusted operating profit was 3.5 billion, and overseas adjusted operating loss decreased by 75.9% year-on-year to 0.153 billion yuan. We expect the company's adjusted net profit for 4Q24 to be 4.54 billion yuan, and the adjusted net profit for the full year 24 will be 17.55 billion yuan.

The AI-enabled content and business ecosystem continues to deepen. The average daily consumption of 3Q AIGC marketing materials from marketing customers is over 20 million yuan. In terms of video generation models, the latest version 1.5 of Smart AI was released in September. It is leading the industry in terms of image quality, dynamic performance, and semantic response speed. Video clarity has been increased to 1080p, and upgraded features such as motion brushes have been launched.

We expect the adjusted net profit of the company to be 17.551/20.229/25.34 billion yuan for 24-26 (the original forecast was 17.005/23.602/30.127 billion yuan). Due to the year-on-year increase in gross margin and better-than-expected cost control due to revenue restructuring, we slightly raised our 24-year profit forecast; however, considering that consumer sentiment is still relatively weak and competition is uncertain under macroeconomic influence, the e-commerce business growth rate has slowed, so we lowered our 25-year revenue and profit forecast. Using PE valuation, maintaining the previous 24-year 14xPE valuation, the 24-year adjusted net profit of 17.551 billion yuan, the corresponding reasonable value was 245.7 billionCNY/ 265.8 billion HKD (exchange rate 0.924), and the target price was 61.62 HKD/share, maintaining the “buy” rating.

Risk warning: Macro consumption recovery falls short of expectations, domestic commercialization efficiency falls short of expectations, overseas business losses increase profit forecasts and investment suggestions