Kuaishou's core business guidance unexpectedly weakens; Morgan Stanley sharply cuts earnings and downgrades to Equal-weight

Overview

The report focuses on Kuaishou's 2Q26 results and its subsequent operating guidance, which was significantly weaker than expected. Morgan Stanley believes the quarterly results themselves were broadly in line with expectations, but that weak macro consumption, tax regulation of live streaming and e-commerce, a high comparison base, and cost pressures are having a deeper impact on the core commercial ecosystem. It therefore sharply cuts its medium-term earnings forecasts, price target, and rating; Kling's valuation optionality can only partially cushion the decline in the core business.

Core views

2Q26 results were broadly in line with expectations, but the business mix has already begun to show pressure. Online marketing services revenue increased 4% YoY, slightly below expectations; other services revenue increased 19% YoY, offsetting part of the shortfall. Growth in total core commercial revenue slowed from 10.7% in 1Q26 to 7.4%, which the report attributes to the macro environment and consumption pressure. User metrics were relatively resilient: with relatively low sales and marketing intensity, MAU increased 12% YoY, while DAU was flat YoY at 412 million. Kling AI revenue increased 31% QoQ to RMB850 million, in line with Morgan Stanley's forecast, despite no major product iteration in 2Q. R&D expenses increased rapidly, mainly because training-related depreciation was reclassified from cost of revenue to R&D expenses; sales and marketing cost controls offset part of the impact, and net profit was broadly in line with management guidance and Morgan Stanley's expectations. The real negative surprise came from 3Q26 guidance. The company expects quarterly revenue to decline 7.5% YoY, including declines of 4.5% in advertising revenue, 10% in e-commerce commission revenue, and 17% in live-streaming revenue; the pressure on e-commerce commissions corresponds to an expected decline of approximately 10% in gross merchandise value in 2H26. Management cited the weak macro environment, the ongoing impact of tax regulation on live streaming and e-commerce, and the high comparison base created by last year's food-delivery competition and government subsidies. Morgan Stanley notes that these factors are not new, but Kuaishou's commercial ecosystem appears more vulnerable than those of its peers. Kling revenue was conservatively guided to remain flat QoQ, and the company may need to wait until the release of a new model before improvement can resume. Earnings pressure is greater than the revenue decline. The 3Q26 gross margin is expected to be approximately 49%, primarily affected by a higher revenue contribution from IAA in-app advertising and increased computing capital expenditures; net profit is expected to plunge from RMB5.0 billion in 3Q25 to RMB700 million, with the margin falling from 14.7% to approximately 2%. Kuaishou accordingly lowered its full-year revenue guidance to a 3.5% YoY decline and halved its full-year profit guidance to RMB8.5-9.0 billion, including a RMB4.0-5.0 billion profit drag from Kling. The company expects the macroeconomic and regulatory impact to persist, with a potential gradual recovery possibly not emerging until 1H27. Morgan Stanley therefore believes an operating inflection point remains at least several quarters away. After incorporating the new guidance, Morgan Stanley cuts its 2026-2028 revenue forecasts by 5.4%, 12.1%, and 13.6%, respectively, due to weaker expectations for advertising, live-streaming, and e-commerce revenue. Factoring in higher revenue sharing and server depreciation, it cuts its gross profit forecasts by 8.3%, 19.7%, and 21.2%, respectively; even slightly lower operating expense forecasts for 2027-2028 are insufficient to offset the revenue reduction, causing diluted EPS forecasts to decline by 41.5%, 68.5%, and 71.4%. The new diluted EPS forecasts for 2026-2028 are RMB2.16, RMB1.40, and RMB1.27, versus previous forecasts of RMB3.7, RMB4.4, and RMB4.5, respectively. The report expects 2026E and 2027E core net profit of approximately RMB14.0 billion and RMB10.0 billion, respectively, and separately states that under macroeconomic and regulatory pressure, the 2027E core business net profit run rate is approximately RMB12.0 billion. The financial forecasts reflect a slow recovery in the core business and rising computing investment. The report expects net revenue to decline from RMB142.776 billion in FY25 to RMB138.186 billion in FY26E, before recovering to RMB140.885 billion and RMB149.498 billion in FY27E and FY28E; corresponding revenue growth rates are -3%, 2%, and 6%. Gross margin is expected to decline from 55% in FY25 to 50% in FY26E, 48% in FY27E, and 47% in FY28E. Live-streaming revenue is expected to decline 16% in FY26E and 6% in FY27E, while online marketing services revenue is expected to grow 0% and 1% over the same periods, and other services are expected to grow 8% and 18%, indicating that growth will depend more heavily on other services. Data center depreciation is expected to rise from RMB5.682 billion in FY25 to RMB13.851 billion in FY28E, while the R&D expense ratio increases from 8.9% to 15.2%, reflecting the ongoing impact of AI and computing investment on margins. On valuation, Morgan Stanley retains its SOTP framework but lowers its price target by 38% from HK$65 to HK$40, primarily due to lower core net profit forecasts; it also rolls the core business P/E valuation base forward to 2027E. The core business continues to be valued at 8 times 2027E earnings, in line with peers. Kling is valued at 18 times 2026E P/ARR, incorporating its latest US$18 billion financing valuation and Kuaishou's 68% post-financing ownership stake; due to competitive concerns, a further 30% holding-company discount is applied to Kuaishou's equity interest in Kling. The risk-reward scenarios also shift lower across the board. The bull-case value is cut 27% to HK$70, corresponding to 10 times 2027E earnings for the core business, stronger-than-expected monetization and potential overseas expansion, and 25 times 2026E P/ARR for Kling; the base case is HK$40, with the core business valued at 8 times earnings and Kling at 18 times P/ARR, while incorporating a potential spin-off and a 30% holding-company discount; the bear case is cut 43% to HK$21, reflecting a weaker macro environment and competition, 6 times earnings for the core business, 15 times P/ARR for Kling, and a 30% discount. Given that weakness in the core business may persist, while Kling retains option value, Morgan Stanley downgrades the rating from Overweight to Equal-weight.

Analysis framework

Morgan Stanley first compares the actual 2Q26 results with management guidance and its own forecasts, then breaks down revenue changes across advertising, e-commerce, live streaming, other services, and Kling. It subsequently flows the new 3Q26 and full-year guidance through its revenue, gross profit, expense, and EPS forecasts. For valuation, it uses SOTP, combining a 2027E P/E valuation for the core business with a 2026E P/ARR valuation for Kling, adjusting for Kuaishou's ownership stake and a holding-company discount, and finally testing the price-target range under bull, base, and bear scenarios.

Methodology notes

• Valuation MethodSOTP Valuation

  Valuation of the core business and Kling segments

  The report values Kuaishou's core business and Kling separately, then incorporates Kuaishou's ownership stake in Kling and a holding-company discount to prevent the core business's earnings decline from obscuring Kling's standalone value.

• Valuation MethodP/E and PEG Valuation

  2027E core business P/E valuation

  The base case values the core business at 8 times 2027E earnings, while the bull and bear cases use 10 times and 6 times, respectively, to reflect differences in profitability, the macro environment, and competition.

• Valuation Method

  P/ARR valuation

  The report values Kling using an annual recurring revenue multiple, applying 18 times 2026E P/ARR in the base case and 25 times and 15 times in the bull and bear cases, respectively.

• Valuation Method

  Bull, base, and bear risk-reward scenarios

  By varying the core business P/E, Kling's P/ARR multiple, and assumptions regarding monetization, overseas expansion, the macro environment, and competition, the report derives valuation outcomes of HK$70, HK$40, and HK$21.

• Corporate Fundamentals and Financial Framework

  Morgan Stanley ModelWare framework

  The report states that its financial metrics are generally based on the Morgan Stanley ModelWare framework, through which changes in business guidance are flowed through to revenue, gross profit, operating expenses, net profit, and earnings-per-share forecasts.

Asset mapping & comparison

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

• Kuaishou Technology (1024.HK)

  The company directly covered by the report; its core commercial business is affected by macroeconomic conditions, consumption, tax regulation, and a high comparison base, while Kling provides standalone valuation optionality.

  Strengths

  MAU increased 12% YoY, and DAU remained stable at 412 million; Kling's 2Q26 revenue increased 31% QoQ to RMB850 million, and its latest financing valuation was US$18 billion.

  Weaknesses

  Core commercial revenue growth slowed, while 3Q26 advertising, e-commerce commission, and live-streaming revenue were all guided to decline YoY, and the profit margin is expected to fall from 14.7% a year earlier to approximately 2%.

  Comparison

  Morgan Stanley believes Kuaishou's commercial ecosystem is more vulnerable to current pressures than those of its peers; the base-case valuation of the core business uses 8 times 2027E earnings, in line with peers.

  Risks

  A more prolonged macroeconomic and regulatory impact, weaker-than-expected advertising and user growth, intensifying competition, rising revenue-sharing and computing costs, and weaker-than-assumed commercialization and competitive performance at Kling.

Key data

• 2Q26 core commercial revenue growth+7.4% YoYBelow +10.7% in 1Q26, reflecting macroeconomic and consumption pressure.
• 2Q26 online marketing services revenue growth+4% YoYSlightly below expectations.
• 2Q26 other services revenue growth+19% YoYOffset part of the shortfall in online marketing services revenue.
• User metricsMAU +12% YoY; DAU of 412 millionDAU was flat YoY, while MAU growth was achieved with relatively low sales and marketing intensity.
• 2Q26 Kling AI revenueRMB850 millionIncreased 31% QoQ, in line with Morgan Stanley's forecast.
• 3Q26 revenue guidance-7.5% YoYAdvertising, e-commerce commission, and live-streaming revenue are expected to decline 4.5%, 10%, and 17% YoY, respectively.
• 2H26 e-commerce GMV guidanceApproximately -10% YoYLeading to an expected 10% YoY decline in 3Q26 e-commerce commission revenue.
• 3Q26 earnings guidanceNet profit of RMB700 million; margin of approximately 2%3Q25 net profit was RMB5.0 billion, with a margin of 14.7%.
• Full-year revenue and profit guidanceRevenue -3.5% YoY; profit of RMB8.5-9.0 billionProfit guidance was halved and includes a RMB4.0-5.0 billion drag from Kling.
• 2026-2028 forecast revisionsRevenue -5.4%/-12.1%/-13.6%; gross profit -8.3%/-19.7%/-21.2%Diluted EPS forecasts were correspondingly reduced by 41.5%, 68.5%, and 71.4%.
• 2026-2028 diluted EPS forecastsRMB2.16/RMB1.40/RMB1.27Previous forecasts were RMB3.7, RMB4.4, and RMB4.5, respectively.
• Price target revisionHK$40, previously HK$65Cut by 38%; the bull, base, and bear scenarios are HK$70, HK$40, and HK$21, respectively.
• Base-case valuation parametersCore business at 8 times 2027E P/E; Kling at 18 times 2026E P/ARRIncorporates Kling's latest US$18 billion valuation, Kuaishou's 68% ownership stake, and a 30% holding-company discount.

Impact & implications

The report believes Kuaishou's issue has shifted from a single-quarter growth slowdown to a medium-term reduction in the earnings capacity of its core commercial business: advertising, e-commerce, and live streaming are all under pressure, while revenue sharing, server depreciation, and AI computing investment further amplify the profit decline. The macroeconomic and regulatory impact may persist until 1H27, implying that an earnings recovery will require at least several quarters. Kling's growth and financing valuation preserve some option value, but are not yet sufficient to offset cuts to core business forecasts; consequently, the rating and all three scenario valuations were lowered.

Risks

• Macroeconomic weakness and the impact of tax regulation on live streaming and e-commerce may persist for longer, further delaying the recovery of the core business.
• Advertising revenue growth may fall below expectations, weakening core commercial revenue and profit performance.
• Revenue sharing, sales and marketing investment, and overseas expansion may cause margins to fall below expectations.
• Intensifying competition or reduced sales and marketing investment may cause MAU growth to fall below expectations.
• Kling faces competitive and commercialization uncertainty, and its investment requirements may continue to create a significant profit drag.

What to watch

• Track whether macroeconomic and regulatory impacts begin to ease gradually in 1H27, as management expects.
• Monitor MAU growth, DAU stability, and whether advertising revenue per DAU can improve.
• Watch whether advertising, e-commerce commission, and live-streaming revenue meet 3Q26 and 2H26 guidance.
• Track the timing of Kling's new model release and whether its revenue can return to growth from flat QoQ performance.
• Monitor whether sales and marketing cost controls can offset pressure from revenue sharing, server depreciation, and computing capital expenditures.
• Watch whether monetization of other services and overseas business expansion exceed expectations.