Everything you need to know about the Kuaishou IPO

What Does Kuaishou Do? 

Since launching as a GIF-making tool in 2011, Kuaishou has transformed itself into a short-form video and livestreaming juggernaut with 776 million monthly active users. The average daily active user on Kuaishou spends over 85 minutes on the platform per day.

Kuaishou's short-form video app isn't as popular as ByteDance's Douyin (China's version of TikTok), which reported 600 million daily active users in August 2020. Kuaishou is nevertheless growing at a rapid pace, with daily active users nearly doubling every year since 2017. For the six months ended June 30, 2020, Kuaishou reported 257.7 million daily active users, up from 155.4 million during the same period in 2019. Relative to those on Douyin, Kuaishou users tend to be younger, less educated and less cosmopolitan. This makes it more difficult for Kuaishou to monetize its short-form video users through targeted ads and ecommerce integrations.

Kuaishou's livestreaming platform is part Twitch, part QVC. Users can broadcast their gameplay to a live audience and receive virtual gifts from viewers in return. The app also has a separate games tab, allowing people to download mobile games from third parties, which in turn gives Kuaishou a share of in-app purchase revenue. On the ecommerce side, influencers take to Kuaishou to host live events where they promote products. Kuaishou receives commission on ecommerce items sold through its platform. Merchants can either sell directly through Kuaishou or through third-party integrations with partners such as JD.com. Kuaishou has also partnered with Alibaba in the past, as when the companies together generated 2.1 billion yuan ($324 million) in sales from Singles' Day 2019.

KUAISHOU’S FINANCIALS

Kuaishou issued preliminary financial filings ahead of its Hong Kong stock exchange listing. The filing showed that Kuaishou has prioritized user growth ahead of profitability: In the first six months of 2020, Kuaishou posted a net loss of 68 billion yuan ($10.5 billion) from its total revenue of 25 billion yuan ($3.9 billion). The financial disclosures show that Kuaishou hasn't posted an annual profit since 2017, though it has managed to come close to or exceed doubling more annual revenue between 2017 and 2019.

Kuaishou recognizes three revenue segments: livestreaming, online marketing services and other services. Livestreaming accounted for nearly 69% of total revenue in the first sixth months of 2020, while online marketing services accounted for 28% and other services just 3%. Investors may worry that Kuaishou is too dependent on livestreaming revenue, which is itself beholden to a handful of celebrity influencers; in 2019, for instance, the celebrity influencer Xinba accounted for more than 20% of the gross merchandise value sold on Kuaishou, according to the South China Morning Post.

Selling and marketing expenses are a key contributor to Kuaishou's net losses. In the first half of 2020, Kuaishou accrued 13.7 billion yuan ($2.1 billion) in selling and marketing expenses, which was more than half the company's total revenue. In previous years, Kuaishou mostly managed to keep these expenses below 20% of total revenue. The company resorted to more aggressive growth tactics in 2020, the most notable of which was a Lunar New Year promotion in which it gave away 1 billion yuan ($154 million) worth of virtual red envelopes to some 2.2 million viewers.

WHAT COULD GO WRONG?

Two themes stand out from Kuaishou's financial filing: government regulation and long-term profitability.

China's government is monitoring the livestreaming industry closely, and in late 2020 it imposed new rules that ban teenagers from gifting to streamers and require all users to register with their real names. Kuaishou discusses how future regulation could affect its business:

• "If we fail to comply with PRC laws and regulations, we may face fines or other penalties or may lose licenses we need to operate our business and suffer reputational harm, which may materially and adversely affect our business, financial condition, results of operations and prospects," Kuaishou writes.
• Kuaishou adds that this would not be without precedent, since it had to temporarily suspend platform functionality in 2018 due to compliance issues. It also discusses how these regulations could affect both media and ecommerce operations.

In terms of achieving long-term profitability, Kuaishou emphasizes the risk associated with its reliance on influencers and its general user monetization challenges:

• Douyin is the elephant in the room when it comes to Kuaishou's risk factors. Though the competitor is never named directly, Kuaishou writes: "Although we have adopted various measures to further strengthen the relationships between us and our content creators, such content creators may still choose to leave our platform, and their departure may cause a corresponding decline in our user base."
• And though this is somewhat of a catch-all risk disclosure, Kuaishou acknowledges its difficult path to profitability: "Our ability to continue to improve operational efficiency will depend on, among other things, our ability to attract and retain users, to enhance the interactions among our users, to optimize our operations, and to further achieve economies of scale."

WHO GETS RICH?

It's hard to precisely say how firms will benefit from the IPO, since Kuaishou's financial disclosure has been partially redacted and the investor roadshow is ongoing.

Here's where things stood when Kuaishou filed its preliminary financial filing in November 2020:

• Tencent owned just under 21.6% of Kuaishou. The tech giant is a key strategic investor since it owns WeChat and is one of the biggest players in the mobile gaming space. The relationship between Tencent and Kuaishou is a bit strange, however, since Tencent has launched numerous competing short-form video apps. In January 2020, Tencent launched a beta for Channels, a short-form video platform integrated with WeChat, which has already attracted over 200 million users.
• 5Y Capital owned 16.7% of outstanding shares.
• DCM owned 9.2% of outstanding shares.
• DST Global owned 6.4% of outstanding shares.

And based on an IPO roadshow terms sheet obtained by Nikkei Asia, Kuaishou has also attracted the following investors:

• Capital Group will invest $500 million.
• Invesco will invest $270 million.
• Fidelity will invest $270 million.
• Morgan Stanley Investment Management will invest $125 million.
• Nikkei Asia added that the Singapore sovereign wealth fund GIC, Abu Dhabi Investment Authority, Canada Pension Plan Investment Board, and Boyu Capital were among the other companies that agreed to purchase Kuaishou shares.

WHAT PEOPLE ARE SAYING

• "On the surface, both Kuaishou and TikTok are short video and live-streaming platforms that allow users to upload clips ranging from 15 seconds to 30 minutes. Kuaishou's product philosophy is around allocating attention to as many people as possible, so that 'everyone has a chance to stand in the sun'. TikTok's philosophy is about providing the end-user with the most engaging and stimulating content as effectively as possible." —Lillian Li wrote on the Chinese Characteristics substack.
• "Douyin (and all ByteDance algorithmic products) are based on the concept of distributing information as efficiently and effectively as possible. Therefore, community building is not a priority. Kuaishou, however, sees itself as a social product. It emphasizes interaction between the creator & viewers (actual comments versus just watching or even liking the video). Douyin, in a sense, focuses on building your loyalty to the platform, whereas Kuaishou is more interested in how connected you feel to others on the platform." —Rui Ma wrote on a Twitter thread exploring the differences between Douyin and ByteDance.