TikTok rival's first-year slump has analysts eyeing recovery

[HONG KONG] A recovery may be around the corner for Kuaishou Technology after Hong Kong's biggest initial public offering of 2021 delivered hefty losses in its first year on the stock exchange.

That's the view of equity analysts who cite the large user base of the rival to TikTok and strong profit outlook in coming quarters as catalysts for a turnaround.

After losing about one-quarter of its market value since the jumbo US$6.2 billion offerings, the stock is now the best "contrarian play in the China Internet space" this year, JPMorgan Chase analysts including Alex Yao wrote in a note initiating coverage with an overweight rating.

"We believe management has changed its growth strategy from absolute growth to quality growth since mid-2021," they wrote, adding that a "more benign competitive environment" is likely to ease margin pressure.

Kuaishou's debut timing was unfortunate, with Beijing's regulatory crackdown on Internet giants throwing the industry into disarray last year. The rout made it the worst-performing IPO stock in Asia over its first year since Xiaomi's in 2018, among deals bigger than US$3 billion.

In the short term, there may be further downward pressure this week as about 103 million shares are allowed to trade following the end of an IPO lockup period to stakeholders. And Tencent Holdings's recent move to cut its stake in Singapore's Sea has sparked speculation that the Chinese giant could do the same with part of its 21 per cent holding of Kuaishou.

Notwithstanding the risks, analysts at China International Capital have a target price for Kuaishou of HK$140, about 60 per cent above the current level, given their expectations for the company to reach 400 million daily active users by 2024.

It had 320 million active daily users during the 3 months ended in September, according to Bloomberg Intelligence, making Kuaishou the second-largest short-video platform globally by user count behind ByteDance's Douyin and TikTok.

"Kuaishou's large and highly engaged user base constitutes a solid, long-term foundation for robust sales growth," BI analysts Matthew Kanterman and Tiffany Tam wrote in a note.

The Beijing Olympic Winter Games could also help the company expand as it is an official broadcaster of events, CCB International Securities analysts Ronnie Ho and Jessie Jing wrote in a note. BLOOMBERG