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My Hold Investment Rating for Kuaishou Technology (OTCPK:KUASF) [1024:HK] Shares remain unchanged. My previous update for Kuaishou was written on September 14, 2021, where I addressed the company’s new foreign market penetration and the significant volatility in its share price between June and September 2021.
This latest article provides an overview of Kuaishou’s recent quarterly financial results. I conclude that the Company’s performance in the first quarter of 2022 is mixed and have elected to maintain my hold rating on Kuaishou. On the plus side, Kuaishou’s profitability is improving and the company’s e-commerce business has room for growth. On the negative side, the live streaming business is still being pressured by regulatory factors, and the weak advertising market in China will weigh on the performance of the online marketing service business.
Key financials exceeded market expectations
Kuaishou announced the company’s financial results for the first quarter of the current fiscal year last week, on May 24, 2022.
The company’s total revenue declined -14% QoQ to RMB21.1 billion in the first quarter of 2022. But Kuaishou’s Q1 revenue represented +24% year-over-year growth, and that was +2% higher than the market consensus revenue estimate it came from S&P Capital IQ.
Separately, Kuaishou’s adjusted non-GAAP net loss narrowed to -3.7 billion RMB in the most recent quarter from -5.7 billion RMB in the first quarter of 2021. Additionally, Kuaishou’s adjusted net loss for the first quarter of 2022 was about 17% better than sell-side analysts had forecast S&P Capital IQ Data.
In the following sections of the article, I analyze Kuaishou’s first quarter financial results in more detail to assess whether the company’s actual historical performance and future prospects are as good as those implied by the better-than-expected financial metrics.
A challenging outlook for the Online Marketing Services segment
The online marketing services business is the largest revenue driver for Kuaishou, accounting for 54% of total revenue in Q1 2022. Revenue for Kuaishou’s online marketing services business grew a robust +33% year-on-year from RMB8.6 billion in Q1 2021 to RMB11.4 billion in Q1 2022, according to the company’s recent quarterly earnings release .
But its online marketing services business saw segment revenue decline by -14% sequentially in the first quarter of this year. Kuaishou attributed the QoQ revenue decline for this segment to “advertising industry seasonality” in its Q1 2022 earnings release. The bigger concern is how the performance of Kuaishou’s online marketing services business for the full year 2022 will be impacted by weak advertising demand.
In its most recent Q1 2022 results release on May 24, 2022, Kuaishou acknowledged that “advertisers across sectors have adjusted their budgets to be more conservative” and announced that “the compound annual growth rate of our advertising revenue has been increasing since Mid-March with no significant recovery yet.” On the bright side, the difficult operating environment will also present Kuaishou with opportunities to gain market share from weaker rivals, and this serves as a partial offset for the decline in advertising budgets in general.
All eyes on regulatory headwinds for the live streaming business
Kuaishou’s second-biggest business is its live streaming segment, which contributed 37% of its first-quarter revenue.
The performance of the Company’s live streaming business in the first quarter of 2022 was lackluster, with quarterly segment revenue of RMB7.8 billion representing a -11% qoq revenue decline and +8% yoy revenue growth. It is noteworthy that Kuaishou’s live streaming business posted the lowest year-over-year revenue growth among the company’s top three business segments (the other two being online marketing services and e-commerce) in the first quarter of this year.
It’s likely that regulatory headwinds for China’s live-streaming industry have had some negative impact on Kuaishou’s live-streaming revenue. Kuaishou revealed at the company’s first-quarter earnings briefing that there have been “recent regulatory requirements (relating to the Chinese live streaming industry) to standardize features such as peak-time gift ranking,” with the goal of “reducing promotions.” , leading to large premiums.” The company clarified that “the impact on ‘Kuaishou’ from such new regulations “should be relatively less” as it claimed it had always “adhered to the principle” of “giving large gifts refrain”.
Still, it is a reality that increased government scrutiny of the live streaming business in China will limit Kuaishou’s future growth in this particular segment. March 30, 2022 I’m looking for alpha news The article had previously highlighted that “Chinese regulators are working on new regulations that are expected to limit internet users’ daily spending on digital tips.” As indicated by Kuaishou’s comments on the aforementioned recent quarterly earnings conference call, similar rules controlling tip amounts have actually been put in place.
Fast growing ecommerce business with limited contribution for now
Kuaishou’s e-commerce business, which it describes as “other services” in its earnings announcement, was the bright spot for the company last quarter.
Revenue of Kuaishou’s e-commerce segment grew +55% year-on-year from RMB1,211 million in Q1 2021 to RMB1,873 million in Q1 2022. This compares favorably with the respective revenue growth rates of the online marketing services segments and live streaming +33%. and +8% in the last quarter. As the live streaming business is hit by regulatory issues and the online marketing services segment is hit by weak demand, there is a need for the company’s e-commerce business to step up and fill the gap.
The e-commerce segment is still a relatively small part of Kuaishou’s overall business, accounting for just 9% of the company’s total revenue in the first quarter of 2022. However, it also means that Kuaishou’s small business has a long growth path ahead of it but growing e-commerce business.
To illustrate the long-term growth potential of Kuaishou’s e-commerce business segment, it’s worth assessing the company’s current conversion rate. According to a JPMorgan (JPM) sell-side research report dated May 25, 2022 (not publicly available) titled “A Clearer Path To Profitability,” it was estimated that “converting digital entertainment traffic into active shoppers” as “monthly active shoppers shared by Platform MAU (Monthly Active User)” for its e-commerce business was only 14% in the first quarter of 2022.
Expected turnaround in profitability in the coming period
As I mentioned in an earlier section of this article, Kuaishou’s adjusted non-GAAP net loss for the most recent quarter was much smaller than investors were expecting.
Forward, consensus fundingal projections obtained from S&P Capital IQ indicate that the sell side Analysts forecast that Kuaishou will achieve positive EBITDA by fiscal 2023 and positive normalized net income in fiscal 2024. Kuaishou’s lower-than-expected losses in the first quarter of 2022 clearly support positive expectations that the company will become profitable in a shorter period of time.
In addition to positive operational leverage that comes with a growing revenue base, Kuaishou may also become better at managing its expenses to optimize profitability. In his Q1 2022 earnings review, Kuaishou emphasized that “the decisions our management team made over the prior quarters to focus on cost control and operational efficiencies have brought a significant level of resilience to our business.”
bottom line
Kuaishou remains a hold-rated stock in my opinion. Although Kuaishou’s key financials for the first quarter of 2022 were better than expected, my analysis shows that the company’s recent quarterly financial performance has been mixed and supports my current “hold” rating.
