Elevator Pitch
I rate Kuaishou Technology’s (OTCPK:KUASF) (1024:HK) shares as a Hold.
My prior update for Kuaishou written on August 25, 2022 was focused on the review of the company’s financial results for Q2 2022. In the current write-up, I touch on the recent share sale by a key shareholder of Kuaishou and also assess the company’s near-term business outlook in light of China’s reopening.
I think that this isn’t the time to buy Kuaishou’s shares. The company’s recent management comments in meetings with investors and analysts suggest that it is premature to expect a meaningful improvement in its financial performance for Q1 2023. On the other hand, a key shareholder’s recent share sale indicates that Kuaishou’s current valuations are unattractive. As such, it makes more sense to wait for a more significant correction in Kuaishou’s share price, before considering a potential investment in its shares. Therefore, I choose to award a Hold rating to Kuaishou.
Kuaishou’s shares are listed and traded on both the OTC market and the Hong Kong stock exchange. The three-month average daily trading values for Kuaishou’s OTC and Hong Kong-listed shares were approximately $1.1 million and more than $300 million, respectively, as per S&P Capital IQ data. The trading liquidity for Kuaishou’s OTC shares is reasonable, but investors can also trade in Kuaishou’s relatively more liquid Hong Kong-listed shares with Interactive Brokers or other US stockbrokers providing trading access for international markets.
Share Sale Announcement Led To Meaningful Stock Price Pullback
Kuaishou’s OTC shares (KUASF ticker) and Hong Kong-listed shares (1024:HK ticker) dropped by -10.7% and -6.0%, respectively on January 19, 2023.
On the same day, Kuaishou announced that its controlling shareholder, Reach Best Developments sold shares equivalent to about 1.3% of the company’s shares outstanding at approximately HK$69.06 apiece, which sees Reach Best’s equity stake in Kuaishou decrease to 9.9%. The shareholders of Reach Best Developments’ are Kuaishou’s chairman and co-founder Mr. Su Hua, and his family members.
In the January 19, 2023 announcement, it was highlighted that Mr. Su Hua had made the decision to sell part of his holdings (held through Reach Best Developments) in Kuaishou to fund his personal needs such as “charitable donations, advanced technology exploration and infrastructure investments.”
It is understandable that investors have sold down the shares of Kuaishou given that the key shareholder’s share sale sends a negative signal about the company’s valuations and outlook. While it is reasonable for any investor to monetize his or her shares for monetary reasons, the timing of the share sale does suggest that Kuaishou’s shares might currently be fairly valued.
Even after taking into account Kuaishou’s share price correction on January 19, 2023, the company’s shares have still more than doubled from their one-year trough. Kuaishou’s Hong Kong-listed shares last traded at HK$68.15 as of January 19, 2023 as compared to its 52-week low of HK$31.75 registered in October 2022. KUASF also saw its stock price rise substantially from its one-year bottom of $4.18 to close at $8.61 at the end of the January 19, 2023 trading day.
With respect to valuation multiples, Kuaishou’s consensus forward next twelve months’ price-to-sales multiple has already re-rated from a 52-week trough of 1.25 times in late last year to 2.50 times now as per S&P Capital IQ data.
Although Kuaishou’s price-to-sales ratio appears to be low in absolute terms, the stock is already trading at a hefty premium as compared to its peers. HUYA Inc. (HUYA), Hello Group Inc. (MOMO), and JOYY Inc. (YY) are currently trading at much lower consensus forward next twelve months’ price-to-sales multiples of 0.84 times, 1.04 times, and 1.05 times, respectively.
Also, the market values Kuaishou at a demanding consensus forward FY 2023 EV/EBITDA valuation metric of 47.1 times. Kuaishou is expected to turn around from an EBITDA loss of -RMB2.7 billion for FY 2022 to register a positive EBITDA of +RMB5.0 billion in the current fiscal year, according to S&P Capital IQ’s consensus financial estimates.
In a nutshell, Kuaishou’s current valuations aren’t that appealing following its share price rally in the past few months. The recent sale of shares by a key shareholder lends support to the view that Kuaishou’s shares are fairly valued.
Q1 2023 Guidance Might Fall Short Of The Market’s Expectations
Kuaishou is expected to report the company’s Q4 2022 and full-year fiscal 2022 financial results in late-March this year, based on a review of its prior earnings announcement dates. The company is likely to provide relevant guidance and commentary relating to its Q1 2023 performance at its Q4 2022 earnings call in March 2023.
Considering that China has pivoted away from its COVID-zero strategy and relaxed pandemic restrictions, there are expectations that Kuaishou will witness decent topline revenue growth and narrower losses in the first quarter of 2023. According to the sell-side’s consensus financial projections sourced from S&P Capital IQ, analysts predict that Kuaishou’s revenue will grow by +9.4% YoY in Q1 2023 (in local currency or RMB terms). Also, its normalized net loss per share is forecasted to narrow from -RMB0.88 for the first quarter of 2022 to -RMB0.29 in Q1 2023.
But takeaways from Kuaishou’s recent meetings with analysts and investors suggest that the company’s Q1 2023 guidance might be less favorable than what the market is hoping for.
A January 18, 2023 research report (not publicly available) titled “Awaiting Recovery Of External Ads” issued by Daiwa Capital Markets made reference to a call with Kuaishou on the same day. KUASF noted in its call with analysts from Daiwa Capital Markets that it “has yet to see a material improvement in spending behavior after China’s reopening.”
Separately, Jefferies (JEF) published a report (not publicly available) earlier on January 5, 2023 titled “Key Takeaways From Asia Internet Conference” which summarized Kuaishou’s management presentation at JEF’s recent investor event. In the Jefferies report, it is noted that a key takeaway from Kuaishou’s participation in the early-January 2023 investor event is that “it takes time for consumer sentiment to return to normal.”
In summary, I think that Kuaishou’s Q1 2023 management guidance, which is expected to be disclosed at the company’s upcoming FY 2022 earnings briefing, might not meet the market’s expectations. While I am of the view that China’s reopening and economic recovery will eventually provide a strong boost to Kuaishou’s full-year 2023 financial performance, this might be reflected in Kuaishou’s results for subsequent quarters, rather than Q1 2023.
Concluding Thoughts
Kuaishou’s shares warrant a Hold rating. The intermediate-term outlook for Kuaishou is good, taking into account China’s reopening tailwinds. But Kuaishou might only be able to deliver substantially better financial results in mid- or late-2023, and the stock’s current valuations aren’t that enticing. This explains my decision to keep my Hold rating for Kuaishou.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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