Monday, May 10, 2021

Kuaishou IPO strengthens China’s biggest rival TikTok

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Gu Jing spends two hours a day filming himself skinning pigs and salting their paws, or popping giant woks full of pork.

He posts these short clips on an app called Kuaishou, China’s biggest rival to ByteDance, which owns TikTok and its Chinese sister app Douyin.

Mr. Gu’s charms have won him 74,000 fans, and many of them have now started to buy his canned pork cuts. “At first, I was just sharing. . . soon people started asking me if I could sell them the food I had shown in the videos, ”explained the 26-year-old, who now earns around 20,000 Rmb ($ 3,100) a month, or double what his compatriots in Hubei in central China make in a year.

Analysts believe that Mr. Gu’s growing fortune reflects Kuaishou’s wider potential. Over 262 million Chinese people use the app an average of 10 times a day, and Kuaishou, which is expected to splashy IPO in Hong Kong this week, is increasingly persuading these users to buy products from its stars online.

The app, which is expected to reach a valuation of over $ 60 billion when it goes public, was launched about a decade ago when investor Fisher Zhang discovered a shy crippling entrepreneur named Cheng Yixiao.

Mr. Cheng himself built programs in his Beijing apartment so that people could create GIFs, small moving pictures, on their smartphones. “He had no motivation to make money at the time, he was doing it out of passion,” Mr. Zhang said. “We wrote him the first check.”

GIF Kuaishou, as it was first called, quickly transitioned to seven-second video clips as smartphones got more powerful and network connections got faster. But the app was a chaotic jumble of amateur clips, mostly selfies or home videos. “Money was running out and user growth was stalled,” Zhang said.

The team solved the problem by recruiting Su Hua, a former Google engineer, who created an algorithm to analyze user behavior and deliver personalized content to viewers. “In one year, the number of users of the company has multiplied by 100,” Zhang said.

Today, Mr. Cheng leads the product, Mr. Su is the general manager, and Mr. Zhang is a manager. His venture capital firm 5Y Capital holds a 16.7% stake before the company goes public.

To make money, Kuaishou adopted live streaming, where hosts entertain viewers for hours on end in real time and hope to earn money by giving them small gifts, like a virtual beer sticker (Rmb1. 5) or golden dragons (Rmb1,400).

These stickers flash on the app screen, showing a fan’s appreciation, as hosts interact and respond to comments. Sales of these virtual gifts, of which Kuaishou takes about 45% off, accounted for 95% of the app’s revenue in 2017.

But the share fell to 62% in the nine months leading up to the end of September and only increased by 10% year-over-year during the period. Analysts said viewers were feeling the pinch because of the coronavirus pandemic.

In response, Kuaishou composed its ads, growing sales of 213% per annum during the period, resulting in a total revenue increase of 49% to 41 billion rmb.

Mr. Zhang said the company will continue to expand its advertising business, noting that it is following in the footsteps of tech giant Tencent, which has slowly increased the ad load of its hugely popular social media platform WeChat. Ads on social platforms contributed 18 billion rmb in the third quarter for Tencent, or 14% of total revenue. Tencent owns a 22% stake in Kuaishou.

Income histogram (RMB m) showing Kuaishou is diversifying its income streams

Kuaishou vs. Douyin

A market cap of $ 60 billion would leave Kuaishou worth about a third of rival ByteDance, which created TikTok, the first truly successful global app to come out of China.

Even though Kuaishou pioneered the short video format, in some ways Douyin, the Chinese version of TikTok, is way ahead. It generates more than three times the ad revenue per user hour of Kuaishou, according to estimates by analysts at Bernstein, for example.

Lillian Li, author of the Chinese Characteristics newsletter, says Kuaishou prioritizes engagement between users and creators, which can create friction for viewers, while Douyin users passively cycle through an endless stream of viral videos.

But fostering closer ties between users and creators on the platform can pay off in other ways, Ms. Li suggested. “You can take them. [the fans] lower in the monetization funnel, so not just ads, but also tips or purchases based on your recommendations, ”she said.

Kuaishou seeks to capitalize on these recommendations from streamers and claims to have sold 333 billion Rmb in merchandise through its app in the 11 months leading up to November 30.

For Mr. Gu, the butcher-creator, sales are roughly equal on Douyin and Kuaishou even though he has six times more fans on Douyin. “The people of Kuaishou are more down to earth,” he said.

Making money from live e-commerce is still in its early days for Kuaishou. The category of his account that owns this unit, and other growing companies, made Rmb 2 billion in the nine months to September 30, or about 5% of total revenue.

The rivalry between the two giants of the short video is fierce. They exchanged lawsuits alleging various wrongdoing, and this month, when Douyin announced he would give 2 billion rmb in Chinese New Year gifts, Kuaishou jumped in days later with a pledge of 2.1 billion rmb.

Ms. Li notes that the two apps converge to some extent as they replicate the best features of each other.

A hiccup in its global ambitions

Kuaishou’s rivalry with ByteDance led him to create an unsuccessful international competitor to TikTok last year.

Zynn briefly surpassed the Android and iPhone app download charts in the United States last year after promising users cash payments for signing up and watching videos. But it was fast quashed by allegations from TikTok stars that their videos were posted on Zynn without their permission.

Google and Apple retired the app and eventually reinstated it after changes were made. Kuaishou’s 867-page flyer does not mention Zynn but notes that “one of our international apps has been temporarily removed from some app stores.” It also ran into problems in India, where four of its apps were banned last year, with more than 200 other Chinese applications.

The international push, along with the launch of Kuaishou Express, a new app that more closely mimics Douyin, helped push up its sales and marketing costs by 256% in the first nine months of last year, resulting in an operating loss of RMB 9 billion. .

Line graph of monthly active users (m) showing that the number of users of Douyin quickly overtook Kuaishou

Mr. Zhang said internationalization remains in the company’s long-term plans. “Chinese companies have competitive advantages, they can go beyond China,” he said, noting that TikTok’s success was a sign of what is possible.

Home regulation

But there are other challenges for Kuaishou at home, as regulators target both the content of live broadcasts and the safety of products sold.

Publication of the National Radio and Television Administration new live streaming rules in November, banning minors from giving gifts and limiting the amount a user can tip, while possibly requiring platforms to hire more censors to moderate content.

Meanwhile, China’s market regulator is targeting food sales on live feeds that fail to meet safety standards, which could potentially affect not only Mr. Gu, but hundreds of thousands of other farmers. selling their homemade products on the app.

Mr. Gu said he was fully licensed and did not worry about the new regulations. “My product is safe,” he says.

Additional reporting by Nian Liu in Beijing

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