KUASF - Kuaishou: Negatives Priced In

2023-10-26 11:02:26 ET

Summary

• The key negatives for Kuaishou are potential selling pressure for the company's shares assuming share sales by its corporate shareholder and ex-chairman, and unfavorable policy developments.
• Kuaishou's shares have lost more than a fifth of their value in the last two weeks, and its key valuation multiples have de-rated during this same time frame.
• I retain a Hold rating for Kuaishou on the basis that the stock's negatives are factored into its valuations.

Elevator Pitch

My investment rating for Kuaishou Technology ( OTCPK:KUASF ) [1024:HK] stock is a Hold. I previously reviewed Kuaishou's financial results for the second quarter of the current year with my earlier August 14, 2023 update .

With this latest write-up, my focus is on policy risks for China's live streaming industry, and the potential for Tencent Holdings Limited ( OTCPK:TCEHY ) ( OTCPK:TCTZF ) [700:HK] and Kuaishou's former chairman to reduce or divest their respective stakes in the listed company.

Taking into account the policy risks, the possibility of selling pressure from key shareholders' potential stake disposals or reduction, and the stock's current valuations, Kuaishou continues to be rated as a Hold.

Readers should be aware that they can deal in Kuaishou's shares traded on both the OTC market and in Hong Kong. The three-month mean daily trading values for Kuaishou's shares listed in Hong Kong and on the OTC market were $140 million and $0.8 million, respectively as per S&P Capital IQ data. Interactive Brokers is an example of US stockbrokers that can facilitate trading in Hong Kong-listed shares for their clients.

Concerns About Unfavorable Policy Developments

There are good reasons to be worried that Chinese internet and live streaming businesses such as Kuaishou might possibly be affected by adverse policy developments going forward.

In my prior mid-August article, I highlighted restrictions on minors' time spent online and a crackdown on live streaming events' lucky draws as example of new policies targeted at domestic internet and live streaming companies. A review of recent news flow seems to suggests that things aren't getting any better on the policy front.

Chinese state media Global Times published a news article on October 16, 2023 mentioning that Weibo ( WB ) "will start to publish the real names of online influencers on their front account page by the end of October."

It will be reasonable to assume that it will be easier for Chinese regulatory authorities to take action against errant internet or live streaming platform operators and their respective users, as online anonymity gradually becomes a thing of the past in China. In the past, Kuaishou did get hit by financial penalties from regulators relating to inappropriate content hosted on the company's platform.

Separately, Chinese state broadcaster CCTV (China Central Television) reported on October 25 this year that there were rumors relating to "a ban on live streaming of goods (or products)" in the Chinese city of Hangzhou. In this CCTV report (translated using Google Translate ), it is noted that the Hangzhou Municipal Commerce Bureau has claimed that these "rumors are untrue."

In Q2 2023, Kuaishou's Other Services segment was the fastest growing of its three business segments (the other two being online marketing services and live streaming) boasting a +61.4% YoY top line expansion which it attributed to "to the growth of our e-commerce business" in its results announcement . In the company's 1H 2023 interim report , Kuaishou stressed that it "made solid progress in our e-commerce business" in the second quarter, and highlighted its "nearly 39% year-over-year increase in GMV (Gross Merchandise Value)" for the recent quarter. As such, if there are any new policies putting restrictions in place for live streaming e-commerce activities in China, this will be a negative development for Kuaishou.

Potential Sale Of Shares By Ex-Chairman And Key Corporate Shareholder

In the short term, there are fears associated with potential selling pressure from share sales by certain insiders and corporate shareholders.

Last week, Kuaishou announced that "Mr. Su Hua will cease to be the chairman of the Board" starting on October 29 because of "his other business commitments", although he will remain as "an executive Director."

Given that Su Hua has already been progressively reducing his equity stake in Kuaishou from 55.77% in early June to 55.69% on October 20 this year, it wouldn't be a surprise if Su Hua decides to sell more of his shares in Kuaishou in the future after he steps down as the company's chairman.

Another source of potential selling pressure might come from Kuaishou's key corporate shareholder, Tencent. As per data taken from S&P Capital IQ , Chinese internet giant Tencent holds a 18.9% equity interest in Kuaishou.

Tencent had previously distributed its shares in JD.com, Inc. ( JD ) [9618:HK] and Meituan ( OTCPK:MPNGF ) ( OTCPK:MPNGY ) [3690:HK] to the company's shareholders in 2021 and 2022 , respectively as a means of exiting non-core investments.

While there isn't any indication of Tencent making plans to divest its shareholdings in Kuaishou any time soon, this remains an overhang for the company's shares.

Stock Price And Valuations

In the past two weeks, Kuaishou's Hong Kong listed shares with the ticker 1024:HK fell by -21% from HK$65.00 at the end of the October 12, 2023 trading day to HK$51.55 as of October 25 this year.

Kuaishou also suffered from severe valuation multiple compression in the last couple of weeks. As of October 12, the market valued Kuaishou at consensus forward next twelve months' EV/EBITDA and normalized P/E ratios of 12.3 times and 24.2 times, respectively as per S&P Capital IQ data. In comparison, Kuaishou is currently trading at relatively lower consensus forward EV/EBITDA and P/E multiples of 9.4 times and 18.0 times (source: S&P Capital IQ ), respectively.

Closing Thoughts

The negative factors pertaining to key shareholders' stake divestment and unfavorable policy developments are reflected in Kuaishou's recent share price performance and valuation multiple de-rating. Therefore, I am sticking with my Hold rating for Kuaishou.

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