KSHTY - Kuaishou: Positive Q2 Earnings Overshadowed By Regulatory Headwinds

2023-08-14 11:38:10 ET

Summary

• Kuaishou Technology recently revealed that the company expects to deliver positive headline earnings for the second quarter of 2023.
• But Kuaishou's 2H 2023 outlook is less favorable, taking into account regulatory headwinds for China's live streaming sector.
• Considering both the company's positive earnings alert and the live streaming industry's regulatory developments, I continue to assign a Hold rating to Kuaishou.

Elevator Pitch

My Hold rating for Kuaishou Technology ( KUASF ) [1024:HK] shares remains unchanged. I previously touched on Kuaishou's financial performance for the fourth quarter of 2022 and the stock's valuations with my prior write-up published on April 4, 2023.

In the current article, I turn my attention to Kuaishou's positive earnings alert for Q2 2023 and the recent regulatory developments for the Chinese live streaming industry. I have a favorable opinion of Kuaishou's second quarter positive profit alert, as this indicates that the company's efforts to focus on profitability are starting to pay off. On the other hand, I am cautious about Kuaishou's financial prospects for 2H 2023, as the company's live streaming business might be negatively impacted by regulatory headwinds. Considering these various factors, I have decided to retain my Hold rating for Kuaishou.

Kuaishou's shares are listed on both the Hong Kong Stock Exchange and the OTC market. The company's OTC shares have decent trading liquidity with a three-month average daily trading value of around $800,000 (source: S&P Capital IQ ). Readers also have the choice of dealing in Kuaishou's Hong Kong-listed shares which boast a relatively higher three-month average daily trading value of roughly $190 million. Kuaishou's shares listed on the Hong Kong Stock Exchange can be traded with US brokerages providing access to international markets like Interactive Brokers.

Positive Earnings Alert

At the end of last month, Kuaishou issued an announcement disclosing that the company expects to register a minimum headline net income of RMB560 million in 1H 2023.

Considering that Kuaishou's reported net loss attributable to shareholders for Q1 2023 was -RMB873 million, its 1H 2023 positive alert implies that the company's Q2 2023 headline net profit will be at least RMB1.4 billion. As such, the second quarter of this year could potentially be the first time that Kuaishou has managed to deliver positive quarterly headline earnings since its February 2021 IPO .

Kuaishou's Q1 2023 adjusted core net profit was RMB42 million, which was adjusted for share-based compensation costs amounting to approximately RMB1 billion. Assuming a similar level of share-based compensation expenses going forward, the company's Q2 2023 adjusted core net income might be more than RMB2.4 billion. As per S&P Capital IQ data, the sell-side analysts' consensus second quarter adjusted core earnings estimate for Kuaishou prior to its positive profit alert announcement was a much lower RMB1.3 billion.

In the company's positive earnings alert announcement dated July 31, 2023, Kuaishou attributed its good bottom line performance to key factors like "increasing scale of user community", an "enhanced monetization strategy" and better "operating efficiency." The company's renewed focus on profitability is likely to have been the key driver of its above-expectations Q2 2023 adjusted earnings. Kuaishou had earlier noted at its Q1 2023 results call in late-May that it "launched several major campaigns last year to reduce our costs and enhance efficiencies" and prioritized "investments in higher ROI (Return On Investment) segments."

The market had responded well to Kuaishou's better than expected Q2 2023 financial performance. KUASF's stock price rose by +5.3% on July 31, 2023, the day the positive earnings alert was issued, and KUASF's shares went up by an additional +1% in the subsequent two weeks.

In the subsequent section, I explain why I think that Kuaishou's positive share price momentum isn't likely to be sustained.

Regulatory Headwinds

China's live streaming sector is facing regulatory headwinds, and this is a key negative for Kuaishou which could limit its stock appreciation potential in the near term.

On August 2, 2023, Seeking Alpha News reported that "the Cyberspace Administration of China has drafted guidelines for preventing minors from spending too much time on their smartphones." For example, Chinese youths aged between 16 and 18 years old won't be allowed to spend more than two hours every day surfing the internet under these new guidelines.

Previously, JPMorgan Chase ( JPM ) published a report (not publicly available) on the Chinese live streaming market titled "Fundamental Impact And Trading Strategy In Reaction To The Recent Industry-Wide De-Monetization" on July 26, 2023. In this late-July JPM report, it is mentioned that "22 video- and audio-based live streaming platforms have suspended either their entire operations or some of their service offerings with exposure to lucky draws" in recent months which points to "a new round of regulatory scrutiny." Based on JPMorgan's projections, Chinese live streaming companies could potentially see their respective revenues decline by between -5% and -10% in 2H 2023 as a result of such regulatory headwinds.

Kuaishou has been trying to diversify its revenue by business and expand outside of China in recent times, but the company is still heavily dependent on its live streaming business and its Mainland Chinese operations. Last year, live streaming contributed 38% of Kuaishou's top line, with online marketing services and other services accounting for the remaining 62% of the company's FY 2022 revenue. Also, Kuaishou's overseas business segment was still loss-making in 2022 and represented less than 1% of the company's sales in the previous year. Therefore, Kuaishou's short-term financial outlook has become less favorable, taking into account recent regulatory developments for the Chinese live streaming industry.

Concluding Thoughts

Kuaishou Technology shares did pretty well after the company published its positive earnings alert for Q2 2023. However, I don't see Kuaishou's stock price rising significantly in the very near term, as regulatory headwinds for the Chinese live streaming industry are most probably going to affect the company's financial results for the second half of the year. In that respect, I have chosen to maintain a Hold rating for Kuaishou.

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