Analysis | How Kuaishou, Hong Kong’s hottest IPO in 2021, became a cautionary tale of overexuberance in Chinese tech stocks

In the broader crash of Chinese tech stocks, Kuaishou has become the worst-performing listed firm in this market
Kuaishou has lost about 80 per cent of its value even though it has not been a direct target of Beijing’s crackdown on China’s internet industry

Kuaishou

Tracy Quin ShanghaiandXinmei Shenin Hong Kong

Published: 8:30pm, 9 Aug, 2021

Why you can trust SCMP

Kuaishou Technology, operator of China’s second-largest short video-sharing app, gave investors plenty to cheer about earlier this year when it launched the most sought-after initial public offering in the annals of Hong Kong’s stock market – drawing subscriptions of 1,204 times what was on offer.

Those who managed to get shares at the offer price of HK$115 received a windfall when the stock started trading at HK$338 on February 5, offering subscribers a return of 190 per cent on their investment. Shares of Beijing-based Kuaishou, which posted a net loss 116.6 billion yuan (US$18 billion) in 2020, reached a peak of HK$417 two weeks after its trading debut, giving the company a valuation of more than US$160 billion.

Fast-forward to Monday and investors are now counting their losses, as Kuaishou shares closed down 2.83 per cent to HK$82.50, or one-fifth of its peak price six months ago.

Retail investor Li, who wanted to be identified only by her surname, said she bought Kuaishou shares at HK$391. “I’m now staying away from tech stocks because of the regulatory issues [in China’s internet industry],” said Li, who described her investment in Kuaishou as “a mistake”.

02:01

What is Kuaishou? Understanding China’s video-sharing app

Major investment houses, including the likes of Fidelity and Invesco, are also smarting from the rapid decline in Kuaishou’s share price.

In the broader crash of Chinese tech stocks, which saw trillions of dollars in market value evaporate, Kuaishou has lost about 80 per cent of its value even though the company has not been directly targeted by Beijing in the latest crackdown on China’s internet industry. That made it the worst-performing Chinese tech stock in today’s market.

By comparison, the share price of Tencent Holdings declined about 40 per cent from its mid-February peak. Shares of Alibaba Group Holding, owner of the South China Morning Post, lost about 37 per cent from its high in October last year, while shares of Meituan fell about 50 per cent from its peak earlier this year.

The dramatic decline in Kuaishou’s share price reflects a broad change of mentality among investors in China’s tech stocks, according to Carlton Lai, an analyst at Daiwa Capital Markets. “The company’s IPO in February coincided with a very strong bull market,” Lai said. “Now, many investors are completely avoiding China’s internet sector because of regulatory uncertainties.”

China’s live-streaming video market faces scrutiny amid ‘vulgar content’

Compared with the antitrust investigations of Alibaba and Meituan, the cybersecurity review of Didi Chuxing and the current clampdown on China’s off-campus education providers, Kuaishou has so far not been the subject of intense regulatory scrutiny.

Recent developments, however, could see regulatory pressure build up.

China’s top state propaganda organs, which decide what people can read and watch in the country, recently urged better “culture and art reviews” in the country. They said this can be partly achieved by limiting the role of algorithms in content distribution, a policy move that could translate into higher compliance costs for online content providers such as Tencent, Kuaishou and ByteDance, which owns hit short video-sharing apps TikTok and Douyin.

Kuaishou’s algorithm enables its platform to distribute short video clips and online influencers’ streaming video content to hundreds of millions of viewers across mainland China.

Tighter controls over algorithm recommendations would hit “the heart of Kuaishou’s short-form videos business”, Daiwa’s Lai said. “Any major changes to its recommendation engine could have a significant effect on its user growth and engagement.”

Live-streaming now the best-paying job for new Chinese graduates

While Kuaishou’s 300 million daily active users are about half the number of those on Douyin, its revenue is just about a quarter of privately held ByteDance’s 236.6 billion yuan sales in the same period, reflecting a disadvantage in monetising traffic flows.

In May, Kuaishou reported first-quarter revenue of 17 billion yuan, up 37 per cent from a year earlier. But its net loss widened to 57.8 billion yuan that quarter, compared with 30.5 billion yuan a year ago, because of a 44 per cent increase in sales and marketing expenses.

Some online influencers on Kuaishou have complained about their difficulty in generating sales on the platform.

Live-streaming video host Zheng Liuping, based in the city of Yiwu in eastern Zhejiang province, started uploading short videos on Kuaishou in 2017 to become one of the platform’s earliest content creators. Zheng said he is now spending less time on Kuaishou, where he has about 300,000 fans, because the platform’s top influencers receive the lion’s share of user traffic, leaving only a small amount of business for small content creators like him.

Kuaishou retreats from US market after failing to take on TikTok

Kuaishou’s heavy losses have raised questions about the company’s business model.

“If it cannot compete with [ByteDance] in terms of user base, I don’t think the business model will work out given the expanding losses,” said Zhang Yi, chief executive of Shenzhen-based iiMedia Research.

Kuaishou did not immediately respond to a request for comment.

Earlier this month, the company took down its app Zynn, a clone of TikTok, from Apple’s US App Store, which showed that the dominant position of the ByteDance-owned app in the American market is too tough to beat.

Kuaishou, co-founded by entrepreneurs Su Hua and Cheng Yixiao, is also grappling with an influx of rivals, from up-and-comers like Bilibili to larger internet peers like Tencent, even as the firm expands beyond its roots in video content.

On Friday, the official social media account of Kuaishou published a list of songs that appeared as an attempt by the company to assuage the concerns of investors. The titles of the songs, when read from top to bottom, formed two sentences that said: “Friends, please calm down and face the irrational fluctuation. Things ebb and flow, like the tide, but tomorrow will be better.”