Kuaishou's core businesses face near-term pressure, but BofA reiterates Buy and remains positive on Kling AI momentum

Overview

This report reviews Kuaishou's second-quarter results and outlook. BofA believes that the consumer environment, tax-compliance policies, and a high base in 2025 have placed core businesses such as live streaming, advertising, and e-commerce in a temporary trough in 2026, leading to substantial cuts in earnings forecasts and the target price. However, progress in Kling AI revenue, potential model upgrades, and expectations that pressure on core businesses will ease in 2027 support the maintained Buy rating.

Core views

Kuaishou's second-quarter revenue was RMB35.5 billion, up 1% year on year and in line with market expectations; excluding live streaming, revenue grew 7%. Adjusted net profit was RMB3.9 billion, down 30% year on year, with an 11% net margin, also broadly in line with expectations. By segment, online marketing revenue rose 4% year on year, below expectations; live streaming revenue fell 13.5%, in line with expectations; and BofA estimates e-commerce commission revenue grew 5%, above expectations. Kling AI revenue increased to RMB850 million, also in line with market expectations. The company has spent HK$5 billion year to date on share buybacks and dividends, representing roughly a 3% shareholder return yield, and the report notes the company's commitment to increasing shareholder returns. The report attributes weak core businesses to three factors: a weaker consumer environment; the impact of tax-compliance policies on e-commerce merchants and live-streaming businesses; and a high base created by 2025 subsidy policies for instant retail and AI applications, as well as elevated advertising spending. Based on a weaker outlook for live streaming, advertising, and e-commerce, BofA cuts adjusted net profit forecasts by 83% for 3Q26, 47% for full-year 2026, 24% for 2027, and 5% for 2028. The report forecasts 2026 revenue to decline 3% year on year and adjusted net profit to fall 56% year on year to RMB9.011 billion; adjusted net profit is then expected to recover to RMB14.888 billion in 2027 and RMB20.565 billion in 2028. The report's core view is that pressure in 2026 is primarily temporary and should ease in 2027. The AI business is the key support for the report's positive stance. BofA expects Kling AI's 2026 revenue to reach the market consensus estimate of RMB3.5 billion and believes near-term catalysts will come from model upgrades. If upgrades improve instruction following, multimodal capabilities, image quality, agent capabilities, and short-drama content generation, they could lift Kling revenue and ease market concerns about AI video competition. Kuaishou has completed most of its RMB26 billion capital expenditure in the first half of 2026, and aims to maintain positive free cash flow in the second half of 2026. The report also emphasizes that AI has been embedded in Kuaishou's content and traffic, advertising, and e-commerce services, with commercialization benefits representing a potential source of medium- to long-term improvement in core businesses. On valuation, BofA lowered its target price from HK$63 to HK$53, primarily reflecting major cuts in net profit forecasts rather than a reduction in valuation multiples. The target price uses a sum-of-the-parts valuation: HK$23 per share in net cash; HK$21 per share for core businesses, valued at 6x 2026E adjusted P/E with reference to the average of Chinese online social and e-commerce peers; and HK$22 per share for Kling AI, valued at 35x 2026E P/S with reference to the average of global AI creative and productivity peers. After adding the components, a 30% holding-company discount is applied to reflect the liquidity discount of unlisted businesses. Kuaishou's stake in Kling is 68%, and the valuation implies a standalone Kling valuation of US$18 billion. The report believes Kuaishou's 2027E EV/EBITDA of only 4x is not demanding, and therefore maintains its Buy rating despite the target-price cut.

Analysis framework

The report first compares second-quarter revenue, profit, and segment performance with market expectations, then lowers annual earnings forecasts based on operational changes in live streaming, advertising, and e-commerce. It subsequently evaluates AI business growth support through Kling AI's revenue, product upgrades, and capital-expenditure progress, and uses a sum-of-the-parts approach by adding P/E-based core-business valuation, P/S-based Kling AI valuation, and net cash per share, then applying a holding-company discount to derive the target price.

Methodology notes

• Valuation MethodSOTP Valuation

  Kuaishou's core businesses, Kling AI, and net cash per share are valued separately, with a holding-company discount applied to the aggregate value.

  This method distinguishes the valuation logic for mature core businesses and the AI business; the report applies a 30% discount after aggregating per-share values to reflect the liquidity discount of unlisted businesses.

• Valuation MethodPE/PEG valuation

  Core businesses are valued at 6x 2026E adjusted P/E.

  The report references the average valuation multiples of Chinese online social and e-commerce peers, deriving a value of HK$21 per share for core businesses.

• Valuation MethodPS valuation

  Kling AI is valued at 35x 2026E P/S.

  The report references the average valuation multiples of global AI creative and productivity peers, deriving a value of HK$22 per share for Kling AI.

Asset mapping & comparison

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

• Kuaishou (1024.HK)

  Core businesses face near-term pressure, but Kling AI growth and AI commercialization are viewed by the report as medium-term value support.

  Strengths

  Kling AI is one of the leading global AI video-generation applications, with rapid revenue growth; Kuaishou embeds AI in content and traffic, advertising, and e-commerce services; the company is committed to increasing shareholder returns.

  Weaknesses

  Online marketing was below expectations and live-streaming revenue declined; the consumer environment and tax compliance affect e-commerce and live-streaming monetization; capital expenditure is high in 2026.

  Comparison

  Core-business valuation references the average level of Chinese online social and e-commerce peers; Kling AI valuation references the average level of global AI creative and productivity peers.

  Risks

  Tighter regulation, AI investment costs, AI video competition, Kling revenue missing elevated expectations, macroeconomic and geopolitical risks, major shareholder sell-downs, and tax-policy impacts could all weigh on performance.

Key data

• Second-quarter revenueRMB35.5 billionUp 1% year on year, in line with market expectations; up 7% year on year excluding live streaming
• Second-quarter adjusted net profitRMB3.9 billionDown 30% year on year, with an 11% net margin, in line with market expectations
• Kling AI second-quarter revenueRMB850 millionIn line with market expectations
• Online marketing revenueUp 4% year on yearBelow expectations
• Live-streaming revenueDown 13.5% year on yearIn line with expectations
• E-commerce commission revenueEstimated to increase 5% year on yearAbove expectations
• 2026 adjusted net profit forecastRMB9.011 billionDown 56% year on year; cut 47% versus the previous forecast
• Earnings forecast revisions3Q26/full-year 2026/2027/2028 cut by 83%/47%/24%/5%, respectivelyReflecting weaker live-streaming, advertising, and e-commerce businesses
• 2026 capital expenditureRMB26 billionMost was invested in the first half of 2026
• Target priceHK$53Lowered from HK$63; based on SOTP valuation
• Kling AI 2026 revenue forecastRMB3.5 billionIn line with market consensus expectations

Impact & implications

The report believes that a near-term operational trough will weigh on 2026 revenue, profit, and free cash flow, requiring a target-price cut; however, it does not change its positive view of Kuaishou's AI deployment. If Kling model and product upgrades drive revenue growth, AI further improves advertising and e-commerce monetization, and pressure on core businesses eases as expected in 2027, the report believes these factors will support Kuaishou's valuation thesis.

Risks

• Tighter live-streaming e-commerce regulation could affect platform operations.
• Rising AI investment costs could weigh on profitability and cash flow.
• Intensifying competition in AI video generation could affect Kling AI.
• Slower Kling AI revenue growth or failure to meet elevated expectations could create downside risk.
• Macroeconomic and geopolitical risks could affect consumption and monetization.
• Shareholding reductions by major shareholders such as Tencent could pose a risk.
• Tax-related policies that increase merchant tax burdens could affect Kuaishou platform monetization.

What to watch

• Whether Kling AI model upgrades improve instruction following, multimodal capabilities, image quality, agent capabilities, and short-drama generation, while driving revenue growth.
• Whether Kling AI's 2026 revenue can reach the consensus expectation of RMB3.5 billion.
• Whether online marketing, live streaming, and e-commerce commission businesses can improve in 2027 as pressure on core businesses eases.
• Whether Kuaishou can maintain positive free cash flow in the second half of 2026.
• AI's actual contribution to advertising and e-commerce monetization in core businesses, and progress in unlocking Kling's value.