Shares in TikTok’s predominant China rival tumble on development fears

ByteDance’s main competitor in China fell after the company’s losses escalated on growing evidence that users in the country are spending less on live streaming services.

Kuaishou’s short video app is facing increased competition from Douyin from ByteDance, the Chinese version of TikTok, and online shopping groups such as Alibaba and Pinduoduo, who have also driven live-streaming sales of goods.

The company’s shares fell as much as 11.3 percent in Hong Kong on Tuesday, triggering Kuaishou’s market cap by as much as $ 14 billion. Kuaishou’s IPO, backed by Chinese internet group Tencent, raised more than $ 5.4 billion in February.

The Kuaishou results come as Beijing tightened control of the country’s technology sector. The company is one of nearly three dozen technology groups ordered to correct anti-competitive practices. Regulators have also introduced new rules to control live streaming content and limit tips for video hosts.

Kuaishou makes a significant portion of its revenue from cutting the money users pay to shower small gifts to live streaming hosts like virtual beer stickers (Rmb1.5) or “golden dragons” (Rmb1.400).

519.8 m

Kuaishou’s monthly user

Four years ago, the company generated 95 percent of its sales in this way, but in the three months to March this user spending fell by 20 percent compared to the previous year. According to Kuaishou’s earnings report released late Monday, virtual gift sales accounted for just 42.6 percent of total revenue for the quarter.

The growth in the company’s advertising business offset the decline. Sales in this segment increased by 161 percent compared to the previous year. Advertising contributed 50.3 percent to total sales in the quarter.

The total turnover of Kuaishou rose compared to the previous year by 36.6 percent to 17 billion Rmb. However, sales of all three business areas were below the estimates of the Bernstein research group. The miss was especially big for the division that runs Kuaishou’s e-commerce business.

The company’s operating loss in the quarter rose from Rmb 5 billion in the previous year to Rmb 7.3 billion (USD 1.14 billion).

The earnings numbers prompted Wall Street banks, including Morgan Stanley, to lower their stock price targets for Kuaishou. Morgan Stanley analysts said Kuaishou’s increasing investments, larger expected loss for the year, and weaker live streaming revenue contributed to its price reduction.

Live streaming e-commerce, where online hosts advertise products to users, is booming in China as the Covid-19 pandemic resulted in shoppers staying at home and making purchases on their smartphones.

However, the competition with Douyin, Alibaba, Pinduoduo and is fierce.

“We remain more cautious about Kuaishou’s live streaming e-commerce growth,” wrote Bernstein analysts.

Bernstein also pointed to Kuaishou’s rising sales and marketing costs, which accounted for 69 percent of sales. The research group estimated that the amount Kuaishou paid to acquire each new user increased from Rmb 55 in the fourth quarter to Rmb 65 per user during the reporting period.

Kuaishou said it is investing to grow its user base and engagement. The monthly users of its apps reached 519.8 million in the quarter compared to 495.0 million in the previous year.

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