A Kuaishou app interface on a mobile phone, Yichang, Hubei province, China, January 20, 2021. Kuaishou is preparing for an IPO in Hong Kong.

Costfoto | Barcroft Media | Getty Images

GUANGZHOU, China – Shares in Chinese short video app company Kuaishou will begin trading in Hong Kong on Friday, marking the beginning of his life as a publicly traded company.

Kuaishou valued its shares at Hong Kong $ 115, which was at the top of its range. The IPO raised Hong Kong dollars 41.28 billion ($ 5.32 billion).

It’s another win for the Hong Kong Stock Exchange, which has managed to attract a number of high profile Chinese tech listings.

But what is Kuaishou and how does it make money? CNBC goes through the company’s business model.

What is Kuaishou doing?

The company was founded in 2011 and started as a mobile app called GIF Kuaishou that allows users to create animated images called GIFs (Graphics Interchange Format).

The short video and social media platform was launched in 2013, followed by live streaming in 2016.

Kuaishou’s apps now have 769 million monthly active users.

It is also starting to move into other areas like e-commerce.

How does Kuaishou make money?

Kuaishou posted sales of 40.68 billion yuan ($ 6.2 billion) for the nine months ended September 30, 2020 – an increase of 49% year over year.

However, the company made a loss during that period, reporting an adjusted net loss of 7.24 billion yuan as marketing costs skyrocketed.

Kuaishou said it had 262.4 million daily active users for its app in the first nine months of 2020, up from 165.2 million in the same period in 2019. Monthly paying users increased from 48.5 million in that Period to 59.9 million.

The company makes money from its users in a number of ways.

1. Live streaming: The main sales driver is the live streaming business. This includes users buying Kuaishou virtual items to give to their favorite streamers. Live streaming revenue brought in 25.31 billion yuan in revenue for the first nine months of 2020, which is around 62% of total revenue.

2. Ads and Online Marketing: Kuaishou also makes money online marketing or advertising, which grossed 13.34 billion yuan in the nine months ended September 30, up more than 200% year over year. This corresponded to around 32% of total sales.

3. E-commerce and games: The Chinese tech company has also started getting involved in e-commerce and mobile games. Users can purchase items from online streamers through the Kuaishou app. Kuaishou said it facilitated transactions worth 204.06 billion yuan in the first nine months of 2020 through its app – an increase of more than 1,100%. Not all of it will translate directly into revenue for Kuaishou.

Risks to Kuaishou

The Kuaishou IPO comes at a time when the Chinese authorities are tightening control over the technology sector. China’s state market regulator published a draft antimonopoly rules for digital platforms last year.

In November, the Chinese government also introduced live streaming shopping rules that include restrictions on user spending and restrictions on purchases by minors.

The markets in which we operate are highly competitive and we face significant competition …

“Given the strong regulation of internet business in China, increased government regulation of the short video, live streaming and e-commerce industries in China could also limit our ability to maintain or increase our user base or traffic on our platform will be significantly and have a negative impact on our business and financial results, “warned Kuaishou in its IPO prospectus.

The company is also a competitor to Douyin, the Chinese version of the short video sharing app TikTok, operated by internet giant ByteDance. Douyin has 600 million daily active users versus 262.4 million Kuaishou users.

Tencent, a major investor in Kuaishou, has also introduced its own short video feature in its WeChat messaging app. The competition is also increasing.

“The markets in which we operate are highly competitive and we face significant competition from internet companies operating content-based social platforms, online marketing companies and e-commerce platforms in China,” said Kuaishou.

“If we do not compete effectively, our business, financial, earnings and prospects can be materially and adversely affected.”