Tencent-backed short video app Kuaishou seeks to diversify its monetization model to mitigate profitability concerns before its IPO.
Beijing-based Kuaishou sets for a roughly USD5 billion to USD6 billion IPO in Hong Kong on February 5, potentially the largest IPO on Hong Kong Stock Exchange over a year.
However, some analysts have voiced their concerns about how the biggest rival of Douyin could turn its broad user base into profits. In fact, the short video platform hasn't yet achieved profitability and registered consecutive quarterly losses over the past year.
In a filing with the Hong Kong Stock Exchange, Kuaishou's revenue generated from live-streaming grew significantly from CNY7.9 billion in 2017 to CNY31.4 billion in 2019. In the first half of 2020, the sector booked revenue of CNY17.3 billion.
The revenue of online marketing came in at CNY7.2 billion in the first half of 2020, surging 222.5% year-over-year. The online marketing sector accounted for 28.3% of the total revenue in 2020, increasing from only 4.7% in 2018.
These numbers indicate Kuaishou is on the right track to expand its scale and diversify its monetization model beyond virtual gifting.
However, Kuaishou hasn't monetized its users as much as its peers yet. Some advertisers said that the return on investment from marketing on Kuaishou is lower than on Bytedance's Douyin. Because the former has a less competitive algorithm and a relatively narrow user-base focused on lower-tier cities.
The company, which Tencent Holdings owns 21.6% of its stakes, booked a net loss of CNY7.2 billion in the first nine months of 2020, averaging 800 million yuan of losses a month.
Kuaishou blamed the losses on a significant increase in research and development (R&D), brand marketing, and product promotion.
The company believes that it is necessary to continue investing significant resources, including financial resources, in research and development to keep pace with technological advances to make its platform competitive.
"Our monetization method - live streaming, online marketing services, e-commerce, online games and online knowledge-sharing depend on its ability to increase the size of its user base and user engagement. The business environment of the industry is rapidly changing that our platform may become unattractive if we fail to keep up with change in user’s preference or fail to continuously innovate our technologies to design new features," Kuaishou said in IPO prospectus with the Hong Kong Stock Exchange.
The new growth engine of the Kuaishou business was its e-commerce live streaming, which recorded total sales of CNY810 million in the first half of 2020. Its e-commerce still has a long way to go given the fact that it only accounted for 3.12% of total revenue CNY253 billion in the first half of 2020.
However, its live-streaming e-commerce has been criticized by some analysts for an over-reliance on celebrity influencers.
In a local media outlet Qianwang report, investors also worried about Kuaishou's close tie with disreputable influencers. Particularly Xinba, who was found selling fraud on Kuaishou, will ruin the Kuaishou's brand image.
Xinba, the 30-year old influencer, was once considered Kuaishou's top 1 commercial live streamer. After being caught selling counterfeits, he has been fined RMB1 million by Guangzhou's market watchdog after the investigation.
One of Xinba's most well-known cases was selling sugar water as deluxe bird's nest soup - a beauty product and supplement said to improve a person's immune system and help keep young-looking.
Tapping into live streaming has become a hot trend in China this year. More enterprises in traditional sectors found ways to reach out to customers through online channels amid the lockdowns and quarantine measures imposed nationwide to contain the spread.
Kuaishou has also been making a big bet on the sector that has flourished during the Covid-19 pandemic.
In June 2019, Kuaishou invested CNY 3 billion to build a live-streaming e-commerce base located in the Chengdu Hi-tech industrial development zone. It consists of a 5G short video industry base a short video incubator.
However, the live-streaming e-commerce sector may face a political headwind as the Chinese regulator tightens the live-streaming e-commerce.
In November 2020, the Cyberspace Administration of China (CAC) drafted rules to regulate the country's booming live streaming industry.
Under the new rules, CAC requires live streamers to provide their real name identification to the live streaming platform they contracted with. Then the platforms will need to submit regular reports on live streamers to local authorities.
The initiative aims to erase issues in the sectors, such as false and misleading advertisements made by the live streamer. The tight regulation came amid many consumers filing a large number of complaints about live-streaming shopping to the China Consumer Association (CCA). The accusations were divided into a few categories, including low product quality, fake delivery orders, and a lack of after-sale service.
In the "risk factors" section of the IPO prospectus, Kuaishou warned that "intensified government regulation of the short video, live streaming and e-commerce industries in China could restrict our ability to maintain or increase our user base or the user traffic to our platform, which will materially and negatively impact our business operations and financial results."
It also warned that profitability will depend on external factors beyond its control, such as the popularity of short videos, live streaming in China, and the development of another social platform.
The company must continue its investment in sales, marketing, R&D, products, and services to achieve economic scales, attract and attain users. As a result, consecutive losses may be inevitable in the future. They may affect its ability to declare and pay dividends.