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Futu Research | In-depth Analysis of Kuaishou Technology: Five Reasons to be Bullish on the 'Lao Tie Economy'

On January 26, Kuaishou Technology (01040.HK) officially launched its IPO on the Hong Kong Stock Exchange, with a market value reaching up to HKD 472.4 billion.After nearly a decade of development, Kuaishou Technology has become the leader in China's short-video sector and was also the first player in the industry to go public. This research believes that Kuaishou, as a scarce market asset and occupying a first-mover advantage, has considerable long-term growth potential. This article will analyze five key reasons for being optimistic about Kuaishou from dimensions such as user scale, community stickiness, and commercialization progress.

I. Company Overview: Continuous iteration from 2G to 5G, Kuaishou sheds its passive approach to embrace a competitive corporate culture

1) Company Introduction

Kuaishou Technology (01040.HK) is an absolute top-tier short-video platform in China.As of Q3 2020, Kuaishou Technology had 769 million monthly active users (including mini-program users), with daily active users reaching 305 million. As of June 2020, Kuaishou was already the second-largest short-video platform globally by daily active users and also the largest live-streaming platform globally in terms of virtual gifting (live-stream tipping) revenue.

Based on its massive user base, Kuaishou currently monetizes through live streaming, advertising, and e-commerce businesses. Kuaishou Technology's revenue grew from RMB 8.3 billion in 2018 to RMB 39.1 billion in 2019, and in the first nine months of 2020, Kuaishou achieved revenue of RMB 40.7 billion.

2) Kuaishou’s Evolution - Continuous Iteration from the 2G to the 5G Era

Kuaishou Technology was founded in 2011 and has rapidly iterated and evolved as technology advanced from 2G to 5G. Initially, Kuaishou started as a GIF creation and sharing tool, becoming a prototype for short-video content. Through three major transformations, it gradually evolved from a GIF animation tool into one of the leading short-video platforms in China.

2G Era:Starting as a GIF animation tool platform, numerous animated images were disseminated via Weibo, after which a GIF-sharing community was established within the app.

The 3G era：In 2013, the company transitioned to short-video business. With the popularization of mobile internet and the reduction in data costs, it was the first to seize the opportunity presented by the rise of short videos.

The 4G/5G era:In 2016, Kuaishou expanded from short videos into live streaming, becoming the world's largest standalone live streaming platform by 2017, and gradually began developing e-commerce operations.

Through three major transformations from 2G to 5G, Kuaishou accurately seized the opportunities brought by each technological revolution.For internet companies, whether management can agilely adapt to rapid technological iterations is fundamental to long-term success. Through continuous evolution, Kuaishou fully capitalized on the massive traffic dividends brought by mobile internet, with user scale and valuation continuously rising. By December 2019, after its Series F funding round, Kuaishou’s valuation reached $28.6 billion, expanding more than 14 times compared to 2016.

3) Senior management and team

Kuaishou has often been labeled as 'rustic' or 'targeting lower-tier markets,' but its founders and management team have a strong background in technology and the internet. Based on the current resumes of the core management, Kuaishou’s leadership consists of young talents from prestigious universities with rich experience in the internet industry.

From the previous actions of Kuaishou’s management, we can see that Kuaishou's 'laid-back' culture evolved into a more 'aggressive' approach to adapt to intensified competition and commercialization demands in the short-video industry. In 2019, Cheng Yixiao and Su Hua issued an internal letter to transform the company’s previously relaxed organizational atmosphere, setting strategic goals such as reaching 300 million daily active users and improving team discipline.

In May 2020, Kuaishou made significant adjustments to its organizational structure, with changes in the commercialization direction being particularly noteworthy. Ma Hongbin, who led Kuaishou to surpass 300 million daily active users, was appointed as the head of Kuaishou’s commercialization efforts, signaling an accelerated push towards monetization. According to LatePost, Kuaishou’s three key strategic directions for 2021 are vertical expansion (up and down scrolling), targeting Southern markets, and industrialization, with industrialization closely related to commercialization.

Second, reason for optimism 1: The top traffic pool of the video era, with vast growth potential in users and engagement

1) The top traffic pool of short videos, known as the contemporary 'attention black hole'

In the internet era, the most important asset for B2C companies lies in their users.All internet business models, whether live streaming, advertising, or e-commerce, must be based on a large user base and high user engagement. Only when there are many users can there be financial prosperity, which is a unique model of internet commerce.

Short videos + live streaming are the absolute top traffic drivers of the 5G era.Compared to text, images, and audio content, short video content naturally has the advantage of being 'short, fast, and instantly gratifying,' which fully meets users' needs for information acquisition and entertainment during fragmented time periods. Additionally, short video content production and distribution are convenient, making it inherently suitable for UGC (user-generated content). Instant gratification + low-threshold interaction have made short videos the top traffic pool on the internet in just four years.

As of June 2020, the monthly active user base of short videos in China reached 852 million, with an internet penetration rate of 73.9%. The extremely rapid growth in user scale highlights the absolute traffic dominance of short video formats.

Short videos are known as an 'attention black hole,' occupying the longest user engagement time.Due to the low threshold for watching short videos, the continuous and intense 'instant gratification' has a certain addictive quality, making short videos the attention and time black hole of contemporary internet. They not only attract a massive number of users but also retain them within the platform for extended periods. As of Q2 2020, short videos surpassed instant messaging apps (such as WeChat/QQ), becoming the 'top-tier' mobile app in terms of traffic.

2) Kuaishou occupies a leading position in short videos, with a large user base that holds monetization potential.

If users are the most valuable asset for internet companies, then Kuaishou indeed possesses a vast goldmine.

Kuaishou is a leading player in short-form video, occupying an absolute dominance in user scale and market share.Since 2017, Kuaishou's user base has grown rapidly, increasing from 136 million in 2017 to 482.9 million by Q3 2020, securing its position as the absolute leader in the short-form video space. In terms of user penetration, Kuaishou's monthly active users account for approximately 60% of the short-video user base.

In terms of user time spent, Kuaishou's daily active users' session duration has been increasing significantly.According to the prospectus, Kuaishou's daily active users spend an average of 85.3 minutes per day on the platform, which still lags behind industry benchmarks (due to differences in statistical methods). The relatively lower user engagement time is related to the platform's positioning. Unlike platforms that focus on premium content to attract users, Kuaishou prioritizes user interaction and community atmosphere over highly addictive content designed to maximize time spent on the platform.

Going forward, content diversification and geographic expansion will continue to drive user growth.In terms of content, Kuaishou has recently been bringing in professional MCN agencies and celebrity influencers, breaking through its traditional content boundaries while expected to steadily grow both user scale and average usage duration. Regarding user demographics, Kuaishou previously relied heavily on growth from users in northern regions and lower-tier markets. However, in 2021, expanding into southern and first- and second-tier markets could become a key strategic focus, further broadening its user base.

The large user base and high engagement levels form an important foundation for Kuaishou's monetization efforts, and represent the most critical asset accumulated during its first decade.

Reason for optimism #2: A 'decentralized' ecosystem built on strong user interactions and stickiness creates a competitive moat.

1) A decentralized traffic distribution model that encourages long-tail UGC creators.

"Embrace every kind of life" is the most fitting summary of Kuaishou App's core values.

Since its establishment, Kuaishou’s content platform has not overly interfered with user-generated content. Instead, it provides a 'universal sunshine' approach to traffic allocation for videos and live streams, offering high levels of tolerance for various styles, tones, and tastes in content.

For content distribution, Kuaishou employs a 'decentralized' algorithm logic.So-called decentralization ensures that content from non-influencers and non-key opinion leaders (non-KOLs) in the long-tail user base also receives recommendations and exposure, avoiding excessive focus on a small number of top content creators. To this end, Kuaishou has even introduced the 'Gini coefficient' to algorithmically limit traffic for videos with excessively high play counts, distributing more exposure opportunities to a broader range of content creators.

The decentralized algorithm has effectively increased the enthusiasm of Kuaishou users to produce content.According to data from Kuaishou's prospectus, videos with over 500,000 views account for only 30% of total traffic, while the remaining 70% of traffic is evenly distributed among the majority of regular content creators. Additionally, 26% of monthly active users are content producers. Besides recommendation traffic, Kuaishou places greater emphasis on a semi-acquaintance distribution model through social 'follow pages' and 'local industry' features.

2) A strong 'buddy' atmosphere builds a solid moat through social relationships

Long-tail users who receive 'attention rewards' naturally become more motivated to participate in content creation.As such, Kuaishou is better suited for building a community with a strong social atmosphere. Data shows that there are over 9 billion mutual follows among Kuaishou users, with short videos and live streams garnering 2.2 trillion likes and 173 billion comments.

Social relationships based on content provide unique value to Kuaishou users.Compared to pure content platforms, social relationships represent a rarer value. In addition to gaining satisfaction from consuming content, Kuaishou's "Lao Tie" community also allows users to obtain social identity and group belonging. Social relationships often have significant network effects, which accumulate over time, while the cost of migration is relatively high.

Therefore, social relationships also bring unique user stickiness and competitive advantages to Kuaishou.On one hand, through these social connections, user retention and platform engagement can be improved, enhancing users’ loyalty and stickiness to the platform; on the other hand, trust and mutual recognition are more naturally formed within social and community networks, which will help Kuaishou’s live streaming tipping and e-commerce businesses thrive.

Investors and audiences in first- and second-tier cities may not fully understand the fascination and pursuit of "Lao Tie culture" in lower-tier markets.

After all, those who haven’t heard the music cannot comprehend the joy of those immersed in dance.

Reason 3 for optimism: Kuaishou vs Douyin - Differences in core values create coexistence opportunities.

1) Core values: "Embrace every kind of life" vs "Witness a better life."

All differences between Kuaishou and Douyin stem from their differing core values.

Kuaishou’s core value lies in "embracing every kind of life," where content representing any style or taste is given full expression, with traffic distributed as fairly as sunlight.

Douyin’s core value focuses on "witnessing a better life," showing clear preference for "beautiful" and "trendy" content. Thus, Douyin invests more operational and distribution resources into blockbuster and high-quality content.

Kuaishou started as a GIF creation and sharing tool. In its early days, it attracted a large number of users who were not good at text-based expression but had a strong desire to express themselves through simple tools and inclusive traffic distribution, forming its initial user base. Later, due to its compatible style and equitable traffic distribution, many broadcasters from YY Voice, such as MC Tianyou and Paipaiqi, who carried the 'brotherhood' vibe, flocked to Kuaishou, creating a community atmosphere that prioritized personas over content.

From its inception, Douyin has been based on the themes of 'trendiness' and 'beauty,' giving absolute traffic support to high-quality content. Its content orientation primarily targets young people in first- and second-tier cities, with 'sophistication' and 'blockbuster hits' as the main focus. Additionally, in terms of content distribution, Douyin mainly uses an automatic full-screen waterfall flow model, where users don't need to make choices; they simply rely on algorithms to deliver high-quality content accurately.

2) Who is stronger: Douyin wins in traffic, Kuaishou wins in social interaction

In terms of monthly active user scale, Douyin has the advantage in traffic.According to QuestMobile statistics, in the first half of 2020, the combined user base of Douyin's main app and Lite version reached 601 million, while Kuaishou's main app and Lite version reached 551 million. In terms of MAU scale, Douyin holds the advantage.

In terms of user engagement time, Douyin also has a clear overall advantage.The average monthly usage time per user on Douyin's main platform reached 1,569.5 minutes, significantly higher than Kuaishou's main platform at 1,162.6 minutes. However, in the Lite version, Kuaishou Lite surpasses Douyin both in user scale and engagement time. Kuaishou Lite's content distribution and style are more similar to Douyin's and may become the key driver for Kuaishou's future traffic growth.

Kuaishou's core strength lies in its stronger sense of community.As mentioned above, decentralized distribution, minimal content interference, and user-generated content result in a stronger sense of participation and presence for users within the Kuaishou platform. Compared to the majority of users on Douyin who consume content created by a small number of top creators, Kuaishou’s dense community atmosphere represents a key competitive moat and differentiator.

Douyin's daily active users spend slightly more time on the platform compared to Kuaishou, but Kuaishou users exhibit a much higher level of enthusiasm for content creation.According to iResearch data, content creators on Kuaishou account for about 26% of monthly active users, while the corresponding figure for Douyin is less than 20%.

Data shows that Kuaishou's average like-to-comment ratio (likes/comments) is 13.05, far lower than Douyin's average of 42. Comments have stronger interactive and social attributes compared to likes, indicating that Kuaishou has a more pronounced social interaction atmosphere. However, objectively speaking, likes serve as an important reference for identifying user preferences and precisely delivering content. Douyin collects denser feedback data, which naturally aids in more accurate content targeting.

3) Coexistence Space: Unchanging foundation, blended styles

We believe that due to differences in underlying values, Kuaishou and Douyin may coexist over the long term.The spotlight on a better life and the decentralized world cater to users' needs across different dimensions and psychological aspects. Despite recent competition in user scale and time spent, as long as their core values remain distinct, the two platforms are likely to maintain symbiotic development within the short video sector.

In terms of user demographics, Kuaishou's user profile skews more towards lower-tier cities.Kuaishou has a larger user base in third- and fourth-tier cities but is at a clear disadvantage in second-tier and above cities. In contrast, Douyin boasts a significantly higher proportion of users in first-tier and new first-tier cities. The difference in user city profiles directly reflects the tone and atmosphere of the two platforms. Additionally, Douyin's user age structure skews younger, with overall higher spending power.

Furthermore, Kuaishou is gradually diversifying its content operations and distribution.On one hand, Kuaishou version 8.0 and its Lite version introduced a '精选' waterfall flow mode, emulating Douyin’s automatic loop playback, offering users a more immersive short video experience.

On the other hand, since 2019, Kuaishou has launched the '光合计划,' bringing in professional content producers such as MCN agencies, gaming content creators, and media accounts. Additionally, Kuaishou is progressively introducing celebrities like Jay Chou, Yang Mi, and Dilraba, who come with their own fanbases, aiming to shed the 'rustic' label and expand into southern markets and first- and second-tier cities.

The proportion of overlapping users between Kuaishou and Douyin is increasing, with the current overlap nearing 50%. Although Douyin and Kuaishou cater to different user demands, their content categories are gradually diversifying, leading to a symbiotic relationship. On the other hand, due to Kuaishou's unique positioning in core values, it has managed to maintain its competitive edge against Douyin. In the long term, these two major platforms will likely coexist for the foreseeable future.

4. Reason for optimism 4: Live streaming and advertising shake off the 'slow hand' image, accelerating the realization of commercial value

1) Kuaishou is no longer passive; strong forces push forward commercialization

User growth has entered a slower phase, making commercialization the core focus for Kuaishou’s next stage. Before 2019, Kuaishou was truly a 'slow company,' maintaining a passive stance towards both user growth and monetization. However, with Douyin's aggressive entry into the market and Kuaishou's impending IPO, the pace of growth and commercialization significantly accelerated.

In mid-2019, founders Su Hua and Cheng Yixiao released an internal letter pointing out the 'passive' drawbacks within Kuaishou and set a target of surpassing 300 million DAU. Kuaishou gradually transitioned into a more aggressive phase. During 2020, when short video traffic growth slowed down, Kuaishou's commercialization process steadily picked up speed. Ma Hongbin, who previously led Kuaishou to achieve 300 million DAU, took charge of commercialization efforts.

In terms of revenue structure, live streaming rewards currently make up the majority of Kuaishou’s revenue, but the proportion of advertising revenue is rapidly growing. Before 2017, Kuaishou’s revenue sources were extremely limited, relying heavily on virtual gift rewards during live streams. In recent years, Kuaishou's revenue mix has diversified, now encompassing live streaming + online marketing + other (such as e-commerce live streaming). By the first nine months of 2020, live streaming rewards accounted for only 62% of revenue, indicating a healthier and more diverse revenue composition.

In terms of revenue per MAU, if Kuaishou continues to diversify its monetization methods, there remains substantial room for user monetization. Based on Douyin's estimated revenue of 130 billion RMB in 2019, each MAU generated approximately 277 RMB in revenue. Considering Kuaishou's recent emphasis on advertising and e-commerce live streaming, there is still significant potential to unlock the commercial value of individual users.

2) Live streaming business: The 'relationship-driven consumption' in the Lao Tie community

Decentralized distribution combined with social networking naturally fosters a sociable atmosphere, with live streaming rewards being the most direct method of monetization.Within Kuaishou's strong community-based platform, it is inherently suited for streamers to monetize via private domain traffic and 'personal branding.'

In fact, in its early development stage (before 2016), Kuaishou was mainly a short-video production and sharing community without a clear path to monetization. During this period, many broadcasters directed their private-domain traffic followers to YY for live streaming and tipping. After accumulating a sufficient user base, Kuaishou opened its live streaming feature in 2016 and by 2017 had become the world's largest standalone live streaming platform.

When it comes to live streaming payment rates, the enthusiasm of 'bros' is extremely high.As of June 2020, Kuaishou's paying live streaming users reached 64 million, accounting for 13% of monthly active users. The decline in the payment ratio in the first half of 2020 was mainly due to the rapid increase in Kuaishou’s Lite version user base. The rise in user numbers effectively drove the growth of the live streaming tipping business.

In the long term, live streaming business is expected to maintain steady growth, primarily driven by the expansion of the user base.After launching its live streaming tipping business in 2017, Kuaishou's average revenue per paying live streaming user per month remained around RMB 50, and gradually declined from 2018 onward. Considering that showrooms and gaming live streaming models have already been extensively developed, future growth in revenue contribution per user is expected to be limited, with overall live streaming business likely growing steadily alongside total user scale.

3) Online marketing business: Rapid growth may become a new pillar in the next three years

Advertising and marketing is currently Kuaishou’s second-largest revenue source, which has experienced rapid growth over the past three years.Kuaishou's advertising business began to grow rapidly in 2019. By 2020, its revenue scale reached RMB 13.343 billion, representing a year-on-year growth rate of 212.67%. It has now become Kuaishou's second-largest business pillar, accounting for 32.8% of its total revenue.

Short video format remains at the forefront of attracting traffic and capturing user attention, leaving ample room for marketing monetization.Compared to other platforms, Kuaishou's advertising business still has significant room for expansion. Comparing 2019 advertising revenues of various companies with Kuaishou, the average advertising revenue contributed by each monthly active user on Kuaishou was only about RMB 22.4, showing a considerable gap compared to Douyin (a conservative estimate) and WeChat. Growth in per-user value is expected to become an important driver for Kuaishou's advertising monetization in the future.

The monetization value of ads per user is relatively low, primarily due to the platform's tone and insufficient ad operations.Firstly, in terms of the platform's tone, the willingness of high-cost advertisers, especially premium brands, to invest is low due to the content style and a relatively niche user structure. Additionally, Kuaishou previously focused on dual-column content, giving users some power to choose whether to watch ads, which results in less effective ad placement compared to single-column short videos. These two reasons lead to a lower ad value per monthly active user for Kuaishou.

As Kuaishou gradually 'breaks out of its shell' and introduces a single-column playback format, its advertising and marketing business is expected to maintain high growth in the future.Kuaishou has recently been enriching its content, operations, and distribution. While maintaining diversity, it is striving to shed the 'rustic' label and continuously upgrading marketing tools like the 'Magnetic Engine' and 'Merchant Accounts.' Combined with Kuaishou's private domain traffic and social features, it provides various ad monetization models. The potential for ad monetization is expected to be released over the next three years.

Five, reason for optimism 5: live-stream e-commerce, holds enormous opportunities but monetization still needs validation.

1) Live-stream e-commerce is not a false demand; the market size reaches trillions.

The year 2020 can be considered the first year of live-stream e-commerce, with a massive GMV validating the demand for this model.Driven by phenomenal hosts like Li Jiaqi, Weiya, and Xinba, the GMV (gross merchandise value) of live-stream e-commerce in 2020 is expected to reach a trillion-yuan scale, proving the rationality of this form of e-commerce.

Compared to traditional image-and-text-based e-commerce, live-stream e-commerce offers four main advantages:First, it provides an intuitive product recommendation; users can learn about more product options through the host’s recommendations and explanations. Second, common promotional tactics in live-stream e-commerce, such as 'flash sales,' essentially trigger impulsive buying significantly. Third, the product-selling hosts usually have distinct personas, differing from traditional store customer service, making transactions easier due to the trust associated with social interaction. Fourth, live-stream e-commerce often involves 'volume procurement,' offering clear price advantages.

2) The Lao Tie community, why is it naturally suited for live-stream e-commerce

Kuaishou became the world's second-largest GMV live-stream e-commerce platform in 2019, emerging as the fourth major player in China's e-commerce landscape.According to Kuaishou's prospectus, the total transaction value of Kuaishou’s e-commerce reached RMB 204 billion in the first nine months of 2020, ranking just behind Taobao, JD.com, and PDD Holdings, firmly establishing itself among the leading players in China’s internet e-commerce sector.

The rapid development of Kuaishou's live-stream e-commerce business benefits from its advantages in three key areas: people, goods, and setting.In terms of people:The strong community atmosphere on Kuaishou fosters trusted influencers who bring a sense of authenticity; their semi-acquaintance style of product promotion makes it easier to gain trust and facilitate transactions.In terms of goods:In its early stages, Kuaishou integrated third-party shopping platforms such as Taobao and JD.com, accessing a rich supply chain of products that enabled rapid growth in sales volume.Field aspect:Kuaishou provides diverse tools for product promotion, such as 'Kuaishou Mini-Shops' and 'Live Shopping Carts,' while intentionally bringing in more MCNs specializing in live-streaming to alleviate the dominant position of top influencer families in product promotion.

Despite the rapid growth in GMV, the monetization rate of Kuaishou's live-streaming e-commerce still needs to be validated.According to the prospectus, Kuaishou's live-streaming e-commerce revenue is included under 'Other Businesses,' which totaled RMB 2.025 billion in revenue for the first nine months of 2020, accounting for only 5% of total revenue. Even if all 'Other Services' revenue is considered to stem from e-commerce operations, the upper limit of the monetization rate remains below 1%, showing a significant gap compared to e-commerce platforms like Taobao and PDD Holdings.

Thus, while Kuaishou's e-commerce business boasts an enormous overall scale with rapid growth, its monetization capabilities remain to be seen.

Summary: Positioned in a golden track, commercialization still has room for growth.

Overall, Kuaishou operates in the absolute forefront of the short-video industry, quickly iterating through multiple technological transformations and securing a leading position in terms of user scale and stickiness.

After capturing the high ground of traffic and attention, there is still substantial room for progress in its commercialization process.

Currently, Kuaishou generates RMB 109 per user, which shows a clear disparity when compared to internet giants Tencent and Facebook. If we consider Facebook’s per-user revenue as the ceiling, Kuaishou has the potential to increase its per-user revenue by over 50%.

Based on the upper limit of Kuaishou's IPO price, the company’s market value is approximately RMB 397.1 billion, equivalent to about RMB 822.2 per user, significantly lower than the younger social video platform Bilibili and noticeably behind giants like Facebook and Tencent.

At this point in time, we believe that Kuaishou is a company with tremendous potential, possessing a highly engaged user base that fosters vast opportunities for commercialization. As the first publicly-listed short-video platform, the scarcity of this asset also ensures that Kuaishou will attract considerable attention from investors post-IPO.

However, risks are worth noting:On one hand, Tencent and ByteDance are continuously ramping up their presence in the video space, with Kuaishou facing fierce market competition and technological shifts at every turn; on the other hand, Kuaishou's e-commerce profitability remains uncertain, and its long-term value still requires time to be validated.

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