Kuaishou IPO – Good pivot

For once not too much is being demanded.

• Kuaishou is no ByteDance but this has forced it to pivot into other areas where there is little competition and where the long-term rewards could be significantly greater.
• The valuation being asked at IPO of $60bn which is not too demanding meaning that as long as the market holds its current valuation, there could be some significant upside in the shares.
• Kuaishou started life as a GIF-making tool that morphed into an app for sharing short-form videos (like TikTok) that struggled to gain traction for some time as its service was very haphazard.
• Following the recruitment of an engineer from Google (Su Hua who is now CEO), an algorithm was created that matched users to content and content to users meaning that the quality of the service improved by leaps and bounds and user growth took off.
• As of June 30 2020, user numbers stood at 302m DaU and 776m MaU meaning that in terms of its user base it is not that far behind ByteDance.
• However, while Kuaishou is very similar to TikTok when it comes to advertising revenues, it earns only a small fraction of the revenues that TikTk does.
• I suspect that the main reason for this comes down to its recommendation engine which is clearly not a patch on TikTok’s.
• ByteDance started with AI and created a service while Kuaishou did the opposite which is why I think ByteDance’s matching is much better.
• This will directly reflect on engagement and relevance meaning that advertising on TikTok is much more valuable to marketers than it is on Kuaishou.
• It is as a result of this realisation as well as the difficulty of competing head to head with ByteDance that I think Kuaishou decided to pivot.
• The main way it has done this is with a focus on live streaming and enabling both interactions with viewers as well as the ability to sell them products.
• YouTube does something similar to this, but it is very clumsy by comparison.
• Content creators on Kuaishou can receive small cash gifts from their viewers (of which Kuaishou takes 50%) as well as sell products directly through the app.
• Not surprisingly, this has become the vast majority of Kaishou’s revenues meaning that this app is rapidly becoming a cross between Instagram and Etsy.
• This also creates the possibility for the relationship between content creators and viewers to be much more valuable as opposed to TikTok where the user experience is very passive from the user’s perspective.
• To date, this pivot generated RMB25.3bn in H1 2020 revenues which I estimated expanded to around RMB60bn for the whole of 2020.
• Assuming that the growth rate in 2021 is around 50%, this would give revenues for 2021 of around RMB90bn or USD$13.9bn.
• This combined with $7bn on the balance sheet after the IPO gives an EV of $53bn and an EV/Revenue multiple of 3.8x for 2021.
• Alibaba is on around 6.5x and Tencent around 10x 2021 EV/Revenues for 2021 making this an interesting proposition.
• I will take a close look at it once the share is listed, trading has normalised and the information is more current and reliable.
• One to watch.