KSHTY - Kuaishou Isn't Undervalued Notwithstanding Above-Expectations Results

2023-04-04 13:14:00 ET

Summary

• Kuaishou Technology's Q4 2022 sales beat the sell-side's consensus estimate by +3.7%, while its quarterly net loss of -RMB45 million was way better than the market's consensus forecast of -RMB303 million.
• Kuaishou's shares have pulled back significantly since the publication of my previous article, but the stock's current valuations aren't still sufficiently attractive.
• My Neutral view of Kuaishou remains unchanged, considering both the company's recent financial performance and the stock's valuations.

Elevator Pitch

I have a Hold or Neutral investment rating assigned to Kuaishou Technology ([[KUASF]], [[KSHTY]]) [1024:HK] stock.

In my earlier January 20, 2023, article , I wrote about a controlling shareholder's reducing its stake in Kuaishou and also discussed about the company's recovery prospects.

My focus is on the assessment of Kuaishou's recent quarterly financial performance with this latest update. Kuaishou's top line and bottom line for Q4 2022 surpassed the market's expectations, and this suggests that the company should able to sustain mid-teens percentage revenue expansion and move closer towards profitability going forward. However, I think that Kuaishou is fairly valued at best, taking into account its forward FY 2024 P/E ratio of above 20 times. Therefore, I make the decision to stick with a Hold rating for Kuaishou, until its valuations become more compelling (i.e., mid-teens forward P/E multiple or lower).

Investors can choose to trade in either Kuaishou's OTC shares or its Hong Kong-listed shares. Kuaishou's OTC shares with the KUASF ticker boast a mean daily trading value of almost one million dollars for the last three months. In comparison, the three-month average daily trading value for the company's Hong Kong-listed shares with the 1024:HK ticker was relatively higher at around $200 million. For investors who demand a higher level of trading liquidity, they can consider buying or selling Kuaishou's shares traded in Hong Kong using U.S. brokers with foreign market access such as Interactive Brokers.

Fourth Quarter Revenue Was Better Than What Analysts Anticipated

Kuaishou revealed its financial performance for the fourth quarter of 2022 last Wednesday on March 29, 2023.

The company's top line increased by +15.8% YoY from RMB24,430 million for Q4 2021 to RMB28,292 million in Q4 2022. Kuaishou has delivered a faster pace of top line expansion in the most recent quarter; the company's YoY sales growth for Q2 2022 and Q3 2022 were relatively slower at +13.4% and +12.9%, respectively. Kuaishou's actual fourth quarter top line turned out to be +3.7% higher than the sell-side's consensus revenue projection of RMB27,281 million as per S&P Capital IQ data.

All of Kuaishou's key businesses performed well in the recent quarter. Revenue generated from Kuaishou's online marketing services, live streaming, and other services grew by +14.0%, +13.7%, and +33.7% to RMB13.2 billion, RMB8.8 billion, and RMB2.4 billion, respectively.

Kuaishou highlighted at its Q4 2022 results briefing that that its online marketing services business benefited from an increase in "revenue from our e-commerce merchants" as the Chinese economy got better. For its live streaming business, Kuaishou's success in attracting more paying users paid off, as its number of monthly paying users expanded by +20.4% to 58.4 million in the recent quarter in YoY terms. The strong growth in revenue contribution from other services in the recent quarter was attributable to a +30% YoY increase in e-commerce Gross Merchandise Value to RMB312 billion and a +50% YoY jump in monthly active merchants.

Q4 2022 Net Loss Was Much Narrower Than Expected

Both Kuaishou's operating profit and bottom line beat the market's expectations.

Kuaishou reversed from an EBITDA loss of -RMB1,290 million in the last quarter of 2022 to generate a positive EBITDA of RMB1,936 million for the most recent quarter. The Q4 2022 EBITDA for the company came in +49% above the analysts' consensus estimate of RMB1,299 million (source: S&P Capital IQ ).

Separately, Kuaishou's normalized net loss narrowed from -RMB1,312 million for Q2 2022 and -RMB673 million for Q3 2022 to -RMB45 million in Q4 2022. According to data taken from S&P Capital IQ , the sell-side analysts were predicting a much wider net loss of -RMB303 million for Kuaishou in the final quarter of the prior year.

The company had done a brilliant job in managing costs, which helped to drive positive EBITDA and a narrower net loss for the recent quarter. The selling, general & administrative (SG&A) costs-to-revenue ratio for Kuaishou declined from 45.6% in Q4 2021 and 44.1% in Q3 2022 to 38.1% for Q4 2022.

Also, Kuaishou had been able to achieve user base expansion without overspending on subsidies. At its Q4 2022 earnings call , Kuaishou stressed that it "continued to improve user conversion efficiency" in the recent quarter by working on its "user operation strategies" and "smart subsidy promotions."

But Kuaishou's Valuations Aren't Sufficiently Appealing

I warned in my prior late-January 2023 write-up for Kuaishou that the sale of shares by the company's controlling shareholder indicated that the stock's valuations weren't attractive. Kuaishou's share price performance in the last two months appeared to provide support for my views. The company's OTC shares and Hong Kong-listed shares have witnessed declines of -16% and -14%, respectively, since my earlier article was published.

As per S&P Capital IQ's valuation data, Kuaishou is now valued by the market at a consensus forward fiscal 2024 normalized P/E multiple of 21.3 times. Based on my estimates, Kuaishou is expected to register reasonably modest revenue growth and net profit margin at the mid-teens percentage and high single-digit percentage levels, respectively in FY 2024. These top line expansion and profitability metrics for Kuaishou don't justify a forward P/E valuation multiple in excess of 20 times.

Closing Thoughts

Kuaishou Technology's Q4 2022 financial performance was ahead of what the sell-side analysts had forecasted. But the stock's current valuations should have already factored in Kuaishou's strong top line growth and narrowing losses in the recent quarter. My view is that a Hold rating for Kuaishou Technology is justified.

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