Kuaishou Technology: Share Price Decline Justified By Concerns

Summary

  • Kuaishou Technology’s stock price fell by -11% post-results announcement, as there are certain concerns as indicated by its 1Q 2021 financial performance.
  • On the other hand, there has been positive news flow for Kuaishou Technology in the past one month.
  • The market values Kuaishou Technology at consensus forward FY 2022 Enterprise Value-to-Revenue and EV/EBITDA multiples of 5.0 times and 74.0 times, respectively.

Elevator Pitch

I maintain my Neutral rating for Kuaishou Technology (OTCPK:KUASF) [1024:HK].

In my initiation article for the company published on April 16, 2021, I highlighted that Kuaishou Technology’s stock price closed at HK$240.0 on April 15, 2021, which was the lowest for the company’s shares since its listing in early-February 2021. In the past one and a half months, Kuaishou Technology’s share price has declined by a further -19% to HK$194.8 as of June 30, 2021.

The market currently values Kuaishou Technology at consensus forward FY 2022 Enterprise Value-to-Revenue and EV/EBITDA multiples of 5.0 times and 74.0 times, respectively. The company’s forward Enterprise Value-to-Revenue valuations are largely aligned with its future revenue growth expectations.

Kuaishou Technology’s stock price fell by -11% post-results announcement, as there are certain concerns as indicated by its 1Q 2021 financial performance. Its key livestreaming business line saw a significant revenue decline, and its user growth for its Kuaishou App is slowing.

On the other hand, there has been positive news flow for Kuaishou Technology in the past one month. Winning the broadcast rights to the Olympics could help the company in its overseas expansion efforts, while the recent “616” mid-year shopping festival has delivered good e-commerce sales for Kuaishou Technology in May 2021.

I see a Neutral rating for Kuaishou Technology as fair, taking into account both the positives and negatives highlighted in this article.

Fidelity is one of the US brokerages that readers can consider if they are keen to trade in Kuaishou Technology’s shares listed on the Hong Kong Stock Exchange. Kuaishou Technology’s Hong Kong-listed shares have a three-month average daily trading value of over $150 million, while the average daily trading value for the company’s OTC shares in the last three months was significantly lower at under $0.1 million.

Recent Financial Results Reveal Certain Concerns

Kuaishou Technology’s stock price has corrected by close to 20% in the last one and half months, as mentioned at the beginning of this article. Notably, the share price dropped by -11% from HK$232.2 as of May 24, 2021 to HK$205.6 as of May 25, 2021, after the company reported its 1Q 2021 financial results. The shares subsequently declined by an additional -5% in the next one month or so to close at HK$194.8 on June 30, 2021.

On the surface, Kuaishou Technology’s financial performance in the first quarter of 2021 looked decent. The company’s top line expanded by +37% YoY from RMB12.5 billion in 1Q 2020 to RMB17.0 billion in 1Q 2021, while its gross profit increased by +64% from RMB4.3 billion to RMB7.0 billion over the same period. Furthermore, quarterly sales were in line with market expectations, while the company’s adjusted net loss of -RMB4.9 billion in 1Q 2021 turned out to be narrower than what sell-side analysts had forecasted.

But if one delves deeper into Kuaishou Technology’s 1Q 2021 financial performance, it is easy to understand why the market reacted negatively to the company’s quarterly earnings announcement.

Firstly, not all of the company’s business lines delivered revenue growth in the first quarter of this year. A +162% YoY increase in online marketing services revenue to RMB8.6 billion and a +589% growth in revenue from other services (largely e-commerce) to RMB1.2 billion in 1Q 2021 were partially offset by a -20% YoY decline in live streaming revenue to RMB7.3 billion over the same period.

In my April 2021 initiation article on the company, I had cautioned that it is “important for Kuaishou Technology to diversify its revenue streams beyond its core live streaming business line” given regulatory headwinds. The livestreaming business line still contributed a substantial 42.6% of the company’s total revenue for 1Q 2021, while the fastest growing other services business line only accounted for 7.1% of its 1Q 2021 sales. This implies that Kuaishou Technology still has a long way to go in terms of revenue mix optimization.

Secondly, user growth for the Kuaishou App in the most recent quarter was disappointing. The monthly average users for Kuaishou Technology’s mobile application increased by merely +5% YoY from 495.0 million as of end-1Q 2020 to 519.8 million as of end-1Q 2021. This raises fears that Kuaishou Technology is probably approaching a peak with respect to its user base.

Thirdly, Kuaishou Technology seems to still be at a very early stage of monetization for its e-commerce business. The company’s e-commerce Gross Merchandise Value or GMV of RMB118.6 billion in 1Q 2021 only translated into RMB1.2 billion of revenue (equivalent to 1% of GMV) for its other services business line. In other words, while Kuaishou Technology’s e-commerce or other services business is growing fast in terms of revenue, the business line is unlikely to be a significant contributor to the company’s profitability in the near-term.

Positive News Flow Draws Attention

It is not all gloom and doom for Kuaishou Technology, as there has been positive news flow for the company in recent months.

Kuaishou Technology’s recent month-long mid-year shopping festival held between May 18, 2021 and June 16, 2021, referred to as “616”, helped the company grow its e-commerce sales for the month of May 2021 by more than +100% YoY. As highlighted in the prior section, e-commerce growth is a key component of the company’s plans to optimize its revenue mix to compensate for the weakness in its core livestreaming business line.

Separately, Kuaishou Technology also disclosed late last month that it became “the first short video and live-streaming platform globally to become an official broadcaster of the Olympics Games” by winning the “broadcasting rights for Tokyo 2020 Olympics and Beijing 2022 Winter Olympics.” This could boost its overseas growth ambitions. Earlier, Kuaishou Technology also revealed plans to increase its budget for growing international markets to $1 billion this year.

Kuaishou Technology is also looking into partnerships and investments to strengthen its position as a leading short video platform in China. Chinese media Yicai Global reported on June 16, 2021 that Kuaishou acquired a 10.38% equity interest in a company which owns the Renren Video mobile app, which is referred to as the country’s “fifth-largest video platform” focusing on “Western movies and television shows.”

Valuation And Risk Factors

The market values Kuaishou Technology at 7.2 times consensus forward FY 2021 Enterprise Value-to-Revenue and 5.0 times consensus forward FY 2022 Enterprise Value-to-Revenue, according to the company’s stock price of HK$194.8 as of June 30, 2021.

Kuaishou Technology also trades at a consensus forward FY 2022 EV/EBITDA of 74.0 times; the company is expected to be still loss-making at the EBITDA level for FY 2021. Based on consensus financial forecasts sourced from S&P Capital IQ, the company’s revenue is estimated to grow by +48% and +43% for FY 2021 and FY 2022, respectively.

Kuaishou Technology trades at a higher Enterprise Value-to-Revenue multiple as compared to most of its peers. The only exception is Bilibili Inc. (BILI), which boasts relatively higher forecasted revenue growth rates than Kuaishou Technology. In other words, Kuaishou Technology’s valuations are largely in line with its future revenue growth expectations.

Kuaishou Technology’s Peer Valuation Comparison

Stock Consensus Current Year Enterprise Value-to-Revenue Consensus Forward One-Year Enterprise Value-to-Revenue Consensus Current Year EV/EBITDA Consensus Forward One-Year EV/EBITDA Consensus Current Year Revenue Growth Consensus Forward One-Year Revenue Growth
Momo Inc. 0.6 0.5 4.3 3.0 -1% +15%
DouYu International Holdings Limited 0.7 0.5 Loss-making at EBITDA level 9.3 +3% +17%
HUYA Inc. 1.5 1.2 11.4 11.2 +12% +16%
Tencent Music Entertainment 4.4 3.5 33.0 21.3 +19% +20%
Bilibili Inc. 15.2 10.6 Loss-making at EBITDA level Loss-making at EBITDA level +62% +44%

Source: S&P Capital IQ

Kuaishou Technology’s key risks include a failure of the sales growth for the other business lines to make up for the livestreaming business line’s revenue decline in the future, slower-than-expected user growth, and a longer-than-expected time taken for the company to monetize its e-commerce business to a larger extent to generate higher revenue.

Author: The Value Pendulum, Seeking Alpha