Keep's Loss Narrows Significantly, How Far from Profitability?

On August 23rd, Keep announced its latest semi-annual report. After reviewing the entire document, the author believes that this report card is sufficient for Keep to counter some market skepticism.

In the first half of the year, Keep achieved a revenue of 1.037 billion yuan, a year-on-year increase of 5.4%, which is quite an achievement in the context of sluggish domestic demand.

Most importantly, the profitability data continues to improve. In the first half of the year, Keep's adjusted net loss was 160 million yuan, a significant reduction of 28% compared to 223 million yuan in the same period of 2023. The adjusted net loss margin narrowed from 22.7% to 15.5%, a reduction of 7.2 percentage points year-over-year. At the same time, the company's gross profit was 477 million yuan, a year-on-year increase of 12.7%, with a gross margin reaching 46%, an increase of 3 percentage points compared to the same period last year.

For a long time, the biggest skepticism about Keep in the capital market has come from its profitability. From an investment perspective, marginal changes are more important than static data. The continuous narrowing of the loss ratio in recent years reveals that Keep's profitability is significantly improving.

At the same time, the company's operational level is also commendable. The average monthly active users and average monthly subscribing members are 29.66 million and 3.28 million, respectively, showing a slight increase compared to the same period last year. However, the membership penetration rate has increased from 10.2% last year to 11.1%. This means that the proportion of paying users on the platform is gradually increasing.

Advertisement

It can be said that Keep achieved comprehensive and quality growth in the first half of the year. However, compared to the surface data, the author believes that the deeper business logic is what investors interested in Keep should pay attention to.

01

What is Keep doing?

To understand why Keep can achieve such high-quality growth, the first thing to understand is: what is Keep doing?

Looking at the business structure, Keep's revenue sources are mainly divided into three major segments: self-branded sports products, online membership and paid content, and advertising and others.The private-label sports product business, which served as an early source of revenue for the company, has always contributed the vast majority of Keep's revenue. However, this situation began to change in 2023. Starting in the first half of 2023, online memberships and paid content experienced rapid growth, and for the first time in the second half of last year, they surpassed the income from private-label sports products. Keep gradually formed a dual-wheel drive pattern with two major businesses. Looking at the financial report for this quarter, the proportion of the company's various businesses has become more balanced and stable.

In fact, as the dividends of the internet industry gradually fade, the traditional model that relies on a large user base to drive advertising revenue growth is becoming less effective. Especially for platforms like Keep, which are specifically built for sports enthusiasts, it is more important to leverage their own advantages than to compete in monthly active or daily active user numbers. By increasing the willingness of the user group to pay and exploring more commercial value, they can achieve long-term growth.

This also puts higher demands on Keep's content service capabilities.

On one hand, Keep deepens the professionalism of its content vertically, continuing to expand cooperation with top fitness influencers such as Pamela, Ouyang Chunxiao, Han Xiaosi, and Anna, thereby solidifying its professional content advantage.

On the other hand, Keep enriches the content categories horizontally, providing a comprehensive sports experience from niche to trendy, from beginner to advanced, and continuously refreshing exclusive content for members.

Through its horizontal development and vertical deepening in content, Keep's commercial value has also been continuously realized. The financial report shows that in the first half of 2024, Keep's platform revenue from online memberships and paid content was 437 million yuan, accounting for 42.1%, and the average monthly revenue per monthly active user in the first half of 2024 increased by 5.0% year-on-year.

While improving online layout and promoting the construction of a high-quality content ecosystem, Keep is also actively deploying in the offline market, promoting the combination of software platforms and smart hardware.

In the first half of this year, Keep's private-label sports products contributed revenue of 501 million yuan, accounting for 48.3%, a year-on-year increase of 7.5%.

In my view, the ability to achieve steady growth, on one hand, stems from the high cost-performance ratio of the company's own-brand products. Huatai Securities stated that it randomly selected some of the best-selling products in the Keep store, and the price ratios compared to similar styles of Lululemon and Nike were 29.7% and 42.9%, respectively.

In today's new consumer era, consumers tend to be more rational and conservative, with mainstream consumers pursuing value for money. Keep's higher cost-performance ratio products can take over part of the market share of "big brands" and establish a certain consumer mindset, thereby driving the revenue growth of this business.More importantly, it stems from Keep's comprehensive expansion in terms of demographics, categories, scenarios, functions, and attributes, building upon its past foundation. In the first half of this year, Keep has seized the trend of outdoor sports. In the newly released 8.0 version of its app this year, it has expanded into a broader range of outdoor sports scenarios and increased the number of sports categories it covers to over 60. At the same time, based on its previous product matrix, Keep has further expanded its sports and consumer product categories.

This means that Keep can serve a wider range of sports enthusiasts, and its increasingly open nature also implies more possibilities for commercialization. Judging by the current results, Keep has achieved this and done quite well.

It is evident that this online fitness platform, which was initially incubated to provide professional fitness training content, is currently making a comprehensive "four-in-one" layout based on "hardware devices - training plans - fitness equipment - health food."

Keep attracts traffic with sports and fitness content, promotes consumption with products, and strengthens stickiness with social interaction, constructing a complete commercial closed loop and achieving diversification in business and commercial monetization. This also gives Keep more synergistic advantages in the sports and fitness industry, helping its value to be continuously released.

02

Why is Keep's long-term value worth a high regard?

From a business logic perspective, the online fitness platform is the fulcrum of Keep's business, and it is with this fulcrum that there are more possibilities for subsequent commercialization. Just like building a house, the more stable the foundation, the higher the building can be. The strength of this fulcrum is related to how high Keep's future growth ceiling can be.

With economic development and the increase in per capita GDP, people's pursuit of health and quality of life will also increase accordingly. According to data from China Insights Consultancy, the scale of China's fitness population is continuously rising, and it is expected that by 2027, the penetration rate will reach 32.9%, with more than 460 million people participating in fitness. Coupled with the increase in per capita consumption, the scale of China's fitness market will exceed 2 trillion yuan.

At the same time, thanks to the improvement of mobile internet infrastructure, online fitness platforms can meet people's needs for fitness anytime and anywhere. A large number of online fitness platforms have emerged, but in the end, Keep has become the industry leader, with a stable market share at the top. So, if we continue to extrapolate from the current node, can Keep maintain its current market position in the long term? The author believes that it is highly likely.Firstly, Keep has become synonymous with fitness platforms, a brand momentum that Keep has capitalized on over the past decade by seizing the internet dividend. Now that the internet dividend period has passed and the burn money approach is no longer viable, for the pioneers who have benefited from the mobile internet dividend, this is an almost unreplicable advantage.

However, leading brand momentum can only solve the problem of getting users "to come"; whether users can "stay" on the platform ultimately depends on two other factors: content and operation.

The richness and professionalism of content are important levers for Keep's success, and they continue to grow. As of June this year, the total number of exclusive courses for members on the Keep platform has increased to 5,595, a 136.47% increase compared to the same period last year.

Compared to the "large and diverse" nature of short video platforms, Keep's "small and refined" approach better meets the differentiated needs of fitness enthusiasts. Although you can almost find any category of videos you want on short video platforms, the audience is the general public, and the needs addressed are diverse, which inevitably means it cannot be comprehensive in a sufficiently segmented and vertical field. Users who want to pursue more detailed goals such as muscle building, fat reduction, and body shaping will eventually have to go to fitness platforms like Keep to find answers.

In addition to content advantages, user operation may be Keep's real trump card, and it best reflects whether a platform truly understands its users.

After all, fitness is just a lifestyle, and many times users' needs often go beyond the simple act of exercise itself, involving psychological, social, and other aspects.

For example, users upload their exercise data to the platform to receive feedback and analysis for scientific guidance in fitness. This process is akin to "beating monsters and leveling up" in games, and the immediate satisfaction brought by data motivates the next training session. Keep's smart exercise equipment addresses this need by summarizing daily exercise data into a dynamic personal profile, like a game account that one nurtures and grows, allowing the "counter-intuitive" behavior of fitness to also gain an "addictive" feeling.

Furthermore, many users want to gain a sense of belonging and achievement in their exercise. Keep introduces various events and activities to enrich the user experience, and even innovatively provides users with physical medals, making "showing off medals" a social method for young people. This unique emotional value has also contributed to the increase in user stickiness on Keep.

After all, a platform that truly understands its users will naturally win them over.Conclusion

As the entire internet industry enters its second half, the competition over scale and quantity is no longer the focus. How to achieve cost reduction and efficiency enhancement, as well as improve profitability, has become the common pursuit of internet companies.

Keep has set an example for the entire sports and fitness platform, with the narrowing losses initially verifying the feasibility of Keep's dual-engine model of "sports content + technology". Founder Securities also pointed out in its research report that Keep is rapidly narrowing its losses, and it is expected that profitability can be achieved after a 24-year transition.

Although Keep's valuation has been continuously suppressed since its listing due to the liquidity issues in the entire Hong Kong stock market, as the expectation of the Federal Reserve's interest rate cut becomes higher and higher, this issue is expected to be alleviated. Coupled with the continuous positive growth in performance, the certainty of value repair should also increase accordingly.