Living in TikTok's Shadow, Kuaishou Bleeds Red Ink and Cash

Key Takeaways:

• Kuaishou’s adjusted net loss narrowed in the first quarter, but its ad revenue came under pressure during China’s latest Covid containment measures
• The company’s user base is almost half as large as that for TikTok parent ByteDance, even though its operating revenue and gross profit are just one-third as big

By Ken Lo 

Shares of Kuaishou Technology (1024.HK) have come a long way since their trading debut in Hong Kong last year. Unfortunately, that’s not a good thing for China’s No. 2 short video platform operator. The stock has lost more than 80% of its value from its post-IPO high, leaving early investors with huge losses as they await the day when Kuaishou will be profitable. But that day doesn’t appear to be coming anytime too soon, at least based on its latest quarterly financials announced on Tuesday.

The company certainly isn’t hurting for revenue. It registered 21.07 billion yuan ($315 million) for the quarter, up 23.8% year-on-year but down by 13.8% quarter-on-quarter, according to its first quarter report. Its non-GAAP net loss was 3.72 billion yuan, narrowing by 34.1% year-on-year and similar to the level from last year’s fourth quarter. Like many other companies in China, Kuaishou’s greatest challenges are coming in the current quarter as China’s economy takes a major hit from strict pandemic control measures, including a citywide lockdown stretching back to April 1 in Shanghai, China’s largest city and financial hub.

Kuaishou Chairman Su Hua confirmed that many of the company’s clients have slashed their advertising budgets as containment measures hurt their business. As a result, Kuaishou’s own ad revenue growth started to slow in mid-March with no sign of recovery. But Su is convinced that ad revenue will rebound strongly once the situation stabilizes and starts to improve, allowing Kuaishou to secure a bigger share of the ad market pie.

The stock got a temporary boost after months of decline, rising 5.4% on Wednesday to close at HK$66.75 after the latest results. But that’s hardly consolation for anyone who purchased the stock at its high of HK$415 in headier times.

Revenue setback 

The company’s revenue has been tracking downward lately, at least on a sequential basis. Revenue from its core online marketing services fell 14.2% in the first quarter compared with last year’s fourth quarter, and revenue from its livestreaming and other services also fell by 11.2% and 21%, respectively. Livestreaming-related e-commerce revenue dropped by an even sharper 27.1%. And all those figures didn’t even reflect the worst impact from the latest wave of pandemic controls. Much worse almost certainly lies ahead in the second quarter.

On the other hand, the company’s major operating indicators have continued to improve, perhaps at least partly fueled by demand from people confined to their homes during prolonged lockdowns. Its daily active users (DAU) and monthly active users (MAU) reached record highs of 346 million and 598 million, respectively, for the quarter.

The company has attributed the progress to three drivers, led by better user engagement and loyalty using differentiated content. Secondly, it said users are more receptive to short videos as a form of content dissemination. And finally, it also credited its enhanced operational efficiency.

The creation of short videos is less susceptible to high royalties, and such videos are easier to produce than longer ones. They are also more popular with young people who like to get their entertainment in more bite-sized portions. All that translates to higher returns for producers, making it a lucrative business. The short-video market is growing exponentially worldwide, with China alone home to 934 million consumers of such content by the end of last year.

Global sensation TikTok and its domestic Chinese edition Douyin, both owned by ByteDance, have emerged as world leaders and are a thorn in the side for bigshots like Facebook owner Meta FB and Google owner Alphabet GOOG. In addition to its early entry to the market, TikTok’s global success also owes considerably to its recommendation algorithms that have helped it attract huge user traffic very quickly. For investors, such intellectual property is far more valuable than the company’s hundreds of millions of users.

ByteDance revealed last year that Douyin and TikTok had more than 1 billion monthly active users, and that the company made $34.3 billion in revenue in 2020, nearly three times Kuaishou’s 81.1 billion yuan for last year. ByteDance also made $19 billion in gross profit for 2020, nearly four times Kuaishou’s figure for 2021. While Kuaishou’s user base is almost half the size of ByteDance’s, its revenue and gross profit were just one third as big, showing it still has room to better monetize its user base.

Despite its clear second-fiddle status to ByteDance, Kuaishou’s efforts to enhance user participation and loyalty are already paying off. The time spent on the platform by an average daily active user reached 128.1 minutes in the first quarter, up from 118.9 minutes in the fourth quarter of last year and 99.3 minutes for all last year. Online marketing service revenue per average daily active user stood at 32.9 yuan in the first quarter, up from 29 yuan a year earlier. That seems to show its strategy of better differentiating its content is bearing fruit.

Dwindling cash 

Beijing’s tighter regulation of China’s internet combined with fallout from recent Covid control measures have weighed on Kuaishou’s ad and user-generated revenue, dragging down its share price as well, said Francis Lun, CEO of GEO Securities. Against that backdrop, its continued losses mean it might only have enough cash to operate for another year or so, he added.

Lun’s concern is valid. The company registered negative cash flow for its operational, investment and financing activities in the first quarter. It is rapidly burning through cash, with its cash level falling by half to 15.3 billion yuan at the end of March from 32.6 billion yuan at the end of last year.

Companies with comparable business portfolios include Bilibili BILI, Hello Group MOMO and YY Inc. YY. Measured by price-to-sales (P/S) ratios, these three companies’ ratios are 2.76 times, 0.48 times and 1.22 times, respectively, compared with 2.9 times for Kuaishou based on a forecast for 84.2 billion yuan this year. That shows Kuaishou is valued higher than its peers, most likely due to its large market share and higher revenue.

“2022 was a year of trials and tribulations for internet companies like Kuaishou and Bilibili, said GEO Securities’ Lun. “More investors may be losing patience and cashing out, meaning its stock might sink deeper still if its losing streak continues.