Short but very sweet

Founded in 2005, YouTube started out with the motto “broadcast yourself”. Its upload-first, question-later approach made it into an internet sensation. Millions of users flocked to the platform to express themselves. Google forked out $1.65 billion to acquire the start-up just a year later.

Fifteen years on and YouTube has grown into the world’s biggest video platform. Hundreds of hours of content are uploaded to it every minute and it has become a magnet for advertising spending.

Nonetheless it has faced two recurring questions. First, no one knows if it is profitable, as Google doesn’t break out the financial data of its video unit. And second, longer-term fans wonder if YouTube is starting to look like some of the older broadcasters that it set out to challenge. More disaffected YouTubers complain about the increase in advertising. They also suspect that YouTube’s algorithms have been skewed towards mainstream storylines and that the platform is filtering out content that doesn’t conform.

Chinese short-video platform Kuaishou was started by a former Google employee and it had a remarkably similar “broadcast yourself” philosophy. The 10 year-old company’s astonishing growth reached a climax this week when it became Hong Kong’s hottest ever IPO. But interestingly Kuaishou faces a number of similar growth questions to those that have been troubling YouTube’s fans.

How did Kuaishou’s IPO fare this week?

The company’s share price spiked 200% from its offer price when trading commenced this morning, giving the video firm an opening market value of more than $180 billion.

The euphoric debut was expected. Kuaishou sold 365 million shares, or 8.89% of its issued share capital (97.5% of the offer was reserved for institutional investors, who tend to hold onto their allocations for longer).

That means the retail tranche was a mere 9.1 million shares, but more than 1.4 million people subscribed to buy them, with nearly HK$1.28 trillion frozen in the subscription process ahead of the listing. Both numbers are new records.

Investors have been chasing Chinese internet and tech stocks in Hong Kong for a while. The share price of index heavyweight Tencent has nearly doubled over the past 12 months to a record high. Nearly 1.6 million retail investors jumped onto the IPO tranche of Ant Group last year, committing more than HK$1.3 trillion in subscription capital. That record-breaking IPO was then cancelled ahead of its planned debut amid a regulatory crackdown on the fintech sector (see WiC517). Disappointed investors seem to have parked much of the capital in Hong Kong – which has buoyed Kuaishou’s IPO this week.

Kuaishou will raise as much as HK$48.3 billion ($6.23 billion) – an over-allotment option is almost certain to be exercised – making it the largest primary market fundraising since Alibaba’s secondary listing in Hong Kong in 2019.

Who is behind Kuaishou?

The two main founders are Su Hua (chairman and CEO) and Cheng Yixiao (chief product officer).

The 38 year-old Su was one of the top students to graduate from the software faculty at Tsinghua University. The Hunan native later quit the elite college’s graduate school and joined Google in 2006. After spending a year working in Silicon Valley, Su decided to start his own internet venture in China. After more than 30 failed projects, Su was forced to abandon his entrepreneurial dream in 2009 and joined Baidu as a software engineer. He quit two years later and founded a web search app. This time he struck gold as his firm was acquired by Alibaba. Now financially independent, and not wanting to work for another tech major, Su subsequently met Cheng.

Born in Liaoning, Cheng was also a software engineer, graduating from Northeastern University. He worked for Hewlett-Packard and Chinese social media firm Renren before founding GIF Kuaishou in 2011. That mobile app allowed users to create and share animated images – predominantly on Sina Weibo at the time – although Cheng’s longer-term plan was to take more control of the traffic generated by his app and create his own video-based social media community.

Cheng’s idea received an enthusiastic response from angel investor Zhang Fei of Morningside Capital (the venture capital firm was also the earliest backer for smartphone maker Xiaomi and has recently been renamed 5Y Capital). However, according to What is Kuaishou, the company biography published in 2019, Zhang felt that Kuaishou needed a new CEO to complement Cheng’s skills and level of experience. That’s how Kuaishou’s two key founders met – as a pair of “soul mates” who “communicated in software codes”.

Kuaishou has subsequently brought in bigger investors. Almost inevitably, Tencent is involved as the lead investor, with about 20% of the company. Nevertheless Su and Cheng retain control through a dual-shareholding structure which gives the pair nearly 90% of the voting rights on Kuaishou’s board.

How did Kuaishou grow so quickly?

During his time at Google Su must have witnessed the impact of YouTube as a pop culture phenomenon. Similar to YouTube’s “broadcast yourself” mission, Kuaishou’s initial motto was to “embrace all lifestyles”. The newly-launched platform caught on by encouraging ordinary people to chronicle their experiences and showcase their talents on video.

That was in 2011. The hottest social media platform was the Twitter-like Sina Weibo. The internet celebrities, or key opinion leaders (KOL), on that platform were more likely movie stars, business tycoons or outspoken academics. That’s where Kuaishou came in with a new killer app that democratised the spotlight: one that allowed even an illiterate herdsman to produce – or at least enjoy – viral video content with a mobile phone.

In other words Kuaishou, which translates literally as ‘quick hand’, made it possible for grassroots society to join the short-video social media craze that would soon engulf the country.

When Kuaishou launched its short-video service in 2013, many of the early fans were migrant workers or food delivery folk. Its popularity spiked a year later after the company added AI-powered algorithms that helped to push selected content to users. Kuaishou’s daily active users (DAUs) reached a million in July 2014 and mushroomed to 10 million by January 2015. By 2017, when we first reported on the country’s booming short-video sector in WiC383, Kuaishou’s DAUs had already surpassed 100 million.

Kuaishou has since diversified its business, launching a livestreaming service in 2016 and then an e-commerce solution for retailers and KOLs two years later. Its core business has been boosted by the Covid-19 outbreak, however, which forced people to stay at home and spend more of their day on online entertainment. By September last year, daily active users had topped 305 million and they were spending more than 86 minutes a day on Kuaishou’s apps. About a quarter of monthly active users also contribute their own content.

How does it make money?

Adjusted net profit was Rmb10.3 billion at the end of 2019, according to the IPO prospectus, although the company was expecting to record a startling loss of up to Rmb116.7 billion last year. That reversal is down to fair value changes in the firm’s pre-IPO preferred shares (a similar thing happened for ‘everything app’ Meituan when it listed in 2018: see WiC445).

Research from Kuaishou’s IPO sponsors paints a rosier picture, reckoning that the video firm is worth about 35 times its 2022 forecast earnings. That multiple only increased, however, following Kuaishou’s stellar trading debut.

Kuaishou had generated 62% of its Rmb40.7 billion revenues in the first three quarters last year from its fast-growing livestreaming business. These earnings came from sales of virtual items to viewers, who purchase gifts with their ‘Kuai dollar’ to reward their favourite video hosts. In Kuaishou’s ecosystem, Rmb1 is worth about 10 ‘Kuai dollar’. The list of gifts range from a flower (1 Kuai dollar) to a crown (188 Kuai dollar).

This ‘virtual gifting market’ reached Rmb140 billion in 2019 and it is expected to top Rmb400 billion by 2025, Kuaishou forecasts.

The government said in November it would require gift givers and performers to register with their real names. It is also banning minors from tipping and has instructed the platforms to limit the value of virtual presents. Yet in a widely adopted industry practice, for every 100 in virtual currency that is gifted, 20 goes to the Chinese government as tax, 40 goes to the platform (such as Kuaishou) and 40 ends up in the recipient’s account.

Kuaishou generates another 33% of its income from “online marketing services”, such as the display of paid advertisements and sponsored links. However, the most appealing part of its growth story for the investors that bought its IPO is e-commerce. Total gross merchandise value (GMV) of e-commerce transactions on its platform spiked from Rmb96.6 million in 2018 to a whopping Rmb59.6 billion in 2019. And GMV had surged even further to Rmb204 billion in the nine months to September last year.

Kuaishou generated about Rmb2 billion in revenue from its burgeoning e-commerce business, implying roughly a 1% ‘monetisation rate’. The industry average is about 5%, Sina Finance notes, so it remains to be seen whether Kuaishou can squeeze more revenue from e-commerce (such as higher commissions from sales of goods).

The main risk factors?

Kuaishou is the first short-video platform from China to go public. And despite its aggressive valuation, it is not even the biggest player.

The executive order from former American president Donald Trump to ban TikTok in the US has made that Chinese short-video app (and its parent Bytedance) much better known outside China. In China itself, TikTok’s sister app Douyin is the biggest player.

Douyin was only launched in 2016, closing the gap on Kuaishou at warp speed. It now boasts more than 400 million DAUs compared with Kuaishou’s 300 million. The popular news-pushing app Toutiao – also owned by Bytedance – has helped Douyin pick up more customer data, allowing its algorithms to push video content more precisely at its user base. This threat from Douyin was a factor in Kuaishou rushing to IPO before its bigger rival, CBN noted, as it needs to invest in its product to compete.

This month the China Audio-Video Copyright Association also said it had found as many as 155 million videos on Kuaishou that infringed copyright in their background music. It demanded their removal, warning that Kuaishou is likely to be deselected from Apple’s app store if it fails to resolve the copyright issues. Kuaishou has argued that its user agreement puts the onus on the content creators to comply with copyright rules and that they should bear the responsibility.

On the same day, Douyin launched an antitrust lawsuit against Tencent for restricting its users from sharing Douyin content on its messaging apps WeChat and QQ (of course, no such restrictions exist for people wanting to use Tencent-affiliated Kuaishou).

Challenges abound, however, and could weigh on Kuaishou’s short-term prospects. The bigger players in the sector, for instance, have common concerns, especially at a time when larger internet firms are coming in for closer scrutiny from regulators. In 2018 Douyin and Kuaishou were ordered by state censors to remove content deemed “vulgar, violent, gory, pornographic and harmful”. That poses a delicate balancing act: how to keep policymakers onside while winning millions of new customers with lively, topical content.

Questions like these are more pressing in a context when online behaviour can change so quickly and unexpectedly. “The key resource of the internet is attention. It can be focused on large numbers of people like the sunlight, rather than a spotlight just on a certain group of people. That’s the simple logic behind Kuaishou” Su Hua wrote in the platform’s 2019 corporate history book.

But that means keeping his short-video platform laser-focused on wider changes in trends and tastes – which is no easy feat. And while his IPO this week has certainly grabbed the interest of investors, the spotlight may soon shift to a market debut for Douyin – with the Bytedance brand betting on breaking records again with its own Hong Kong listing. n

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