Kuaishou: Short-Term Uncertainty, Long-Term Potential (OTCMKTS:KSHTY)

Elevator Pitch

I assign a Hold rating to Kuaishou Technology (OTCPK:KUASF) (OTCPK:KSHTY) [1024:HK] stock. The focus of my previous January 12, 2024 write-up was Kuaishou’s shareholder return and financial outlook.

For this latest article, I look at the read-throughs from the recent 618 e-commerce festival and assess KUASF’s growth potential for the long run.

There is uncertainty relating to Kuaishou’s short-term revenue growth prospects, considering the key industry and company metrics relating to the latest 618 shopping event. On the flip side, Kuaishou should benefit from the growing online advertising share for short-form videos in the long term by virtue of being China’s second-biggest player. I have made the decision to stick with a Hold rating for Kuaishou in view of the factors mentioned above.

The company’s shares are traded on the OTC (Over-The-Counter) market and the Stock Exchange of Hong Kong. The average daily trading value for Kuaishou’s Hong Kong-listed shares was around $200 million (source: S&P Capital IQ) in the last three months. In contrast, Kuaishou’s OTC shares have low trading liquidity. US brokers such as Interactive Brokers and Hong Kong stockbrokers like Boom Securities will allow investors to trade in Kuaishou’s liquid Hong Kong-listed shares.

Read-Throughs From Recent e-Commerce Event Create Uncertainty Regarding KUASF’s Short-Term Prospects

A major e-commerce event in China is the “618 shopping event” which is “the country’s second-largest consumer shopping event next to its annual Singles Day event that is held in November” according to a prior Seeking Alpha News article. The latest 618 e-commerce festival that happened between May 20 and June 18 this year has relevant read-throughs for Kuaishou’s near-term outlook

Goldman Sachs (GS) recently issued a research report (not publicly available) on June 20, 2024 titled “Highlights From June 18 Shopping Festival.” In its late-June report, GS cited data from research firm Syntun which suggests that China’s overall “livestreaming GMV (Gross Merchandise Value) growth” moderated from +28% in the prior year’s 618 shopping event to +12% for this year’s 618 e-commerce festival.

Separately, a June 24, 2024 report published by Mainland Chinese stockbroker CMB International highlighted that KUASF’s +16% GMV expansion for the 2024 618 shopping festival was inferior to that of its peer. Specifically, Douyin had registered a relatively better +26% increase in GMV for this recent e-commerce event, according to data taken from Analysys. Also, Kuaishou had delivered a superior +28% YoY growth in e-commerce GMV for the first quarter of 2024.

The “normalization” of “discounts and subsidies” were seen as the main reason for the more modest growth in livestreaming GMV for the Chinese market, based on CMB International’s research. Notably, Kuaishou had also mentioned “enhancing subsidy efficiency” and achieving “higher subsidy efficiency” going forward at its most recent Q1 2024 analyst call in late May. In other words, lower subsidies might have affected KUASF’s e-commerce GMV expansion and top line growth for the near term.

The analysts’ consensus full-year FY 2024 revenue projection in local currency or RMB terms for Kuaishou was lowered by -2% (source: S&P Capital IQ) since mid-March, even though the company’s Q1 2024 top line was a +1.2% beat. The sell side also sees Kuaishou’s top line growth moderating from +16.6% for Q1 2024 to +9.8% and +11.2% in Q2 2024 and Q3 2024, respectively.

In summary, KUASF’s short-term revenue growth outlook has become more uncertain, and this is validated by the recent 618 shopping festival data.

Kuaishou’s Long-Term Internet Advertising Share Gain Potential

There is the potential for Kuaishou to gain substantial market share for the long run, if one looks beyond the uncertain short-term outlook for the company’s livestreaming e-commerce operations.

According to a December 4, 2023 report (not publicly available) published by Morgan Stanley titled “China Internet: 2024 Outlook”, online advertising has grown much faster than offline advertising, and short-form videos have been grabbing an increasing share of Mainland China’s internet advertising market.

As per Morgan Stanley’s December 2023 research, China’s offline ad market contracted by -21% and -2% for 2022 and 2023, respectively. During the same time period, the country’s offline ad market grew by +5% in 2022 and +15% in 2023.

Short-form videos’ share of the Chinese online ad market grew from 11% in 2019 to an estimated 25% in 2023. MS forecasts that short-form videos will account for an even higher 27% share of China’s internet ad market by 2025. Separately, KUASF highlighted in its Q1 2024 earnings briefing that “average daily spending in marketing for paid short videos, short plays (my emphasis) rose over fourfold year-over-year” for the “media information sector.”

Kuaishou is referred to as “China’s No 2 short video app” after Douyin by South China Morning Post in its recent June 7, 2024 article. As such, the company is likely to be a key beneficiary of a shift from offline advertising to online advertising, and short form videos’ growing share within the internet ad segment.

Concluding Thoughts

KUASF’s near-term outlook is uncertain, but the company has meaningful growth potential for the long run. This means that a Hold rating for Kuaishou is warranted.

The consensus full-year FY 2024 top line growth forecast for Kuaishou is +12.6%, which is much slower than the company’s historical FY 2019-2023 revenue CAGR of +30.5% as per S&P Capital IQ data. This provides justification for Kuaishou’s reasonably modest consensus next twelve months’ normalized P/E of 10 times, so I think that the stock is fairly valued.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.