Kling AI grows rapidly, but Kuaishou's weak core businesses keep earnings under pressure

Overview

This report reviews Kuaishou's 2Q26 results, focusing on Kling AI's rapid commercialization and pressure across the three core businesses of advertising, e-commerce, and live streaming. Deutsche Bank believes that the AI business's product leadership and revenue growth provide long-term valuation support, while weak near-term consumption, high capital expenditure, and pressure on core monetization will weigh on revenue and profit.

Core views

Kuaishou's 2Q26 results were broadly in line with expectations: total revenue was RMB35.5 billion, up 1.4% YoY and 5.4% QoQ; core commercial revenue rose 7.4% YoY. Adjusted net profit was RMB3.9 billion, with an adjusted net margin of 11.0%, down 30% YoY. Profitability was affected by both investment and gross-margin pressure, with gross margin declining from 55.7% in 2Q25 to 51.6%; R&D expenses rose 34.7% YoY due to AI investment and related training expenses, while sales and marketing expenses fell 5.5% YoY as promotional activities decreased. Kling AI is the report's clear highlight. Its 2Q26 revenue exceeded RMB850 million, up more than 200% YoY; the report summary cited 240% YoY growth and 31% QoQ growth. Kling AI 3.0 introduced native 4K and one-click cinematic video generation, while Kling 3.0 Turbo improved quality and efficiency; the company also launched Kling MCP and Kling CLI. Deutsche Bank believes that faster model iteration, expansion of the creator ecosystem, and broader commercialization are the key upside drivers. Kling AI's strong product positioning and the expanding AI video market could make it a more important valuation driver in the future. In contrast, pressure across core businesses is broad-based. In e-commerce, management expects only a gradual recovery in consumption, with spending tilted toward necessities and merchants placing greater emphasis on certainty rather than traffic expansion; therefore, marketing and commission revenue remain under pressure. The report expects 3Q GMV to decline by a high-single-digit percentage YoY; operational priorities will shift toward highly committed merchants, smarter ad placements, and better supply quality. In advertising, weak macro visibility, a high comparison base, and fluctuating client budgets are expected to pressure advertising in the second half, with the report forecasting a 5% YoY decline in 3Q advertising revenue. Although AI is improving targeting, ROI, and automation, while short dramas and lower-penetration verticals offer structural growth opportunities, weak near-term demand remains dominant. 2Q online marketing services revenue was RMB20.6 billion, up 4.4% YoY; spending on AIGC short-video marketing materials rose more than 70% YoY, and client penetration of net transaction ROI in closed-loop advertising increased from 45% in 1Q26 to 55% in 2Q26. The live-streaming business remains in an adjustment phase. 2Q live-streaming revenue was RMB8.7 billion, down 13.5% YoY and up 2.3% QoQ. The company continues to improve ecosystem quality through better supply, richer content, and AI innovation rather than pursuing short-term growth. Deutsche Bank expects this adjustment to continue weighing on performance and forecasts a 17% YoY decline in 3Q live-streaming revenue. Traffic and AI infrastructure provide some support: average MAU and DAU were 797.3 million and 412.3 million, up 11.5% and 0.8% YoY, respectively; more than 92% of employees were actively using internal AI Agent products as of June 2026, and AI-generated code accounted for 60% of the R&D team's code. Other services revenue was RMB6.2 billion, up 18.5% YoY, mainly driven by Kling AI. The company repurchased approximately 43.3 million Class B shares in 1H26 and through the latest practicable date, for total consideration of approximately HK$1.97 billion. Given weakening core businesses and FY26 capital expenditure maintained at RMB26 billion, Deutsche Bank expects continued near-term pressure on revenue and margins, lowering its FY26 revenue forecast by 6% and adjusted net profit forecast by 48%. The bank cut its target price to HK$56 based on DCF valuation but maintained its Buy rating. Its rationale is that near-term core-business pressure coexists with Kling AI's rapid growth and long-term commercialization potential, the latter of which could make a more significant valuation contribution as the AI video market expands.

Analysis framework

The report first compares 2Q26 actual results with expectations, then breaks down the sources of growth and pressure across Kling AI, advertising, e-commerce, and live streaming, and incorporates management's comments on consumption, client budgets, and operational adjustments to form its 3Q view. Valuation uses DCF to derive the target price from future cash flow and cost-of-capital assumptions.

Methodology notes

• Valuation MethodDCF Discounted Cash Flow

  DCF Valuation

  The report values the company by discounting future cash flows, using a 10.5% WACC, a 2.5% risk-free rate, a 5% equity risk premium, and a 2% perpetual growth rate, resulting in a target price of HK$56.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Kuaishou (1024.HK)

  Kling AI's rapid growth and commercialization expansion provide upside optionality, but weak advertising, e-commerce, and live streaming constrain near-term revenue and profit.

  Strengths

  Kling AI revenue is growing rapidly, with native 4K, cinematic video generation, and efficiency-enhancing capabilities; MAU grew 11.5% YoY.

  Weaknesses

  Gross margin is declining, R&D investment is rising, and advertising, e-commerce, and live-streaming businesses are all under pressure.

  Comparison

  Kling AI maintains a Tier 1 position.

  Risks

  Macroeconomy, competition, business-efficiency execution, content creators and e-commerce merchants, and other operational and regulatory risks.

Key data

• 2Q26 Total RevenueRMB35.5 billionUp 1.4% YoY and 5.4% QoQ.
• 2Q26 Adjusted Net ProfitRMB3.9 billionDown 30% YoY, with an adjusted net margin of 11.0%.
• 2Q26 Gross Margin51.6%Below 55.7% in 2Q25.
• Kling AI 2Q26 RevenueMore than RMB850 millionUp more than 200% YoY; the report summary cited 240% YoY growth and 31% QoQ growth.
• Online Marketing Services RevenueRMB20.6 billionUp 4.4% YoY in 2Q26.
• Live-streaming RevenueRMB8.7 billionDown 13.5% YoY and up 2.3% QoQ in 2Q26.
• FY26 Forecast RevisionsRevenue forecast cut by 6%; adjusted net profit forecast cut by 48%Reflecting weak core businesses and capital expenditure maintained at RMB26 billion.
• 3Q ForecastGMV down by a high-single-digit percentage YoY; advertising revenue down 5% YoY; live-streaming revenue down 17% YoYBased on weak consumption, fluctuating advertising budgets, and live-streaming ecosystem adjustments.

Impact & implications

The report believes Kuaishou's near-term performance will continue to be affected by weak core monetization businesses, AI investment, and capital-expenditure pressure; however, Kling AI's revenue growth, product upgrades, and commercialization expansion could become increasingly important valuation support as the AI video market develops.

Risks

• Macroeconomic risks may continue to weigh on consumption, advertising budgets, and e-commerce demand.
• Competitive risks may affect the market position of the platform and AI businesses.
• Business-efficiency execution risks may affect the effectiveness of operational adjustments and AI commercialization.
• Risks related to content creators and e-commerce merchants may affect supply and monetization.
• Other operational and regulatory risks may affect business performance.