Kling growth and potential spin-off enhance Kuaishou's valuation optionality, rating upgraded to OW

Overview

This report focuses on the value optionality of Kuaishou Technology's (1024.HK) Kling generative AI video business. Morgan Stanley believes Kling is still delivering nonlinear ARR growth amid intensifying competition, and a potential spin-off could unlock Kuaishou's underappreciated AI asset value, so it upgraded the rating to Overweight and raised the SOTP target price to HK$65.

Core views

The key view is that Kling's model iterations and adoption by professional users in advertising, short dramas, and other use cases are driving rapid ARR expansion; a potential spin-off may improve the capital market's valuation framework for Kuaishou; growth in the core e-commerce and live-streaming businesses remains weak, but the valuation has already been sufficiently discounted; the current share price decline instead offers a better re-entry opportunity.

Analysis framework

The report uses an SOTP valuation framework, separately valuing the core business and Kling. The core business is valued at 8x 2026E P/E, while Kling is switched from EV/sales to EV/ARR, using a 20x 2026 year-end ARR multiple and applying a 30% holding-company discount to Kling's valuation.

Methodology notes

• Valuation frameworkSOTP

  sum-of-the-parts valuation

  The report separately values Kuaishou's core business and Kling generative AI video business to more clearly reflect Kling's potential spin-off and the independent value of the high-growth AI business.

• Valuation multipleEV/ARR

  enterprise value / annual recurring revenue

  The report considers ARR more forward-looking than revenue and suitable for high-growth, globally competitive AI models or AI-native applications; Kling uses a 20x 2026E ARR multiple.

• Valuation multipleP/E

  price-to-earnings ratio

  The core business is valued at 8x 2026E P/E, in line with 8-9x 2026E P/E for live-streaming and e-commerce peers, to reflect macro, regulatory, and competitive pressure.

• Research systemMorgan Stanley ModelWare

  internal estimation framework

  Unless otherwise stated, the report's metrics are based on the Morgan Stanley ModelWare framework and research estimates.

Asset mapping & comparison

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

• Kuaishou Technology (1024.HK)

  Research subject

  Strengths

  Kling provides high-growth AI video business optionality, the core business valuation is already low, and a potential spin-off could unlock value.

  Weaknesses

  The e-commerce and live-streaming businesses are affected by macro conditions, regulation, and competition, leaving core growth momentum weak.

  Comparison

  The core business valuation references 8-9x 2026E P/E for live-streaming and e-commerce peers; Kling's ARR multiple is below those of Zhipu and MiniMax.

  Risks

  Intensifying competition in Kling, uncertainty around the spin-off, pressure on core-business profitability, and weaker-than-expected growth in advertising and MAU.

• Kling

  Kuaishou's generative AI video business and potential spin-off asset

  Strengths

  ARR rose rapidly from US$240mn to about US$500mn, with growth driven by model iteration and adoption among professional users.

  Weaknesses

  It still faces competition from Seedance and others, and the TAM for video-generation multimodal models may be smaller than that of foundation models.

  Comparison

  The report uses a 20x ARR multiple, below Zhipu's 60x and MiniMax's 30x, to reflect competition and TAM discounts.

  Risks

  ARR growth falling short of expectations, slower model capability iteration, weaker customer adoption, and a widening spin-off discount.

Key data

• Target priceHK$65.00SOTP target price raised by 18%, mainly driven by a higher Kling valuation.
• Bull caseHK$96.00Assumes 2026E Kling ARR of US$1bn, a 25x Kling ARR multiple, and a 10x core business P/E.
• Bear caseHK$37.00Assumes 2026E Kling ARR of US$500mn, a 15x Kling ARR multiple, and a 6x core business P/E.
• Kling 2026 year-end ARR forecastUS$840mnThe main text uses US$840mn, while the risk-reward page also mentions an estimated year-end figure of about US$860mn.
• Kling valuationUS$16.8bnBased on a 2026 year-end ARR of US$840mn and a 20x EV/ARR multiple, then applying a 30% holding-company discount.
• Core business valuationUS$25bnThe core business valuation is unchanged, using 8x 2026E P/E.
• Kuaishou core business trading valuationabout 5x 2026E P/EAfter excluding Kling valuation and loss contribution, the report views the valuation as distressed-level.
• Earnings forecast revisions2026-2028 revenue forecasts raised by 0.6%/2.1%/4.2%, EPS revised by -0.9%/0.4%/0.6%The revenue uplift mainly comes from a larger Kling contribution, while the EPS impact is limited.

Impact & implications

If Kling continues to validate ARR growth and moves toward independent financing or a spin-off, Kuaishou's valuation narrative could shift from a low-growth platform business to a 'core cash flow + high-growth AI optionality' story. This would increase market attention on independent pricing for Kling and may also ease the pressure on overall valuation from slower core-business growth.

Risks

• Kling faces competition from Seedance and others, which could lead to market share or pricing pressure.
• The core e-commerce and live-streaming businesses are affected by macro conditions, regulation, and competition, and growth may remain subdued.
• MAU growth may come in below expectations due to competition or a pullback in sales and marketing.
• Advertising revenue growth and improvement in ad revenue per DAU may underperform expectations.
• Spending on sales and marketing, revenue sharing, and overseas expansion may pressure margins.
• The potential Kling spin-off is still in the evaluation stage, and the transaction structure, timing, and valuation all remain uncertain.

What to watch

• Whether Kling ARR can approach the US$840mn to US$860mn range by end-2026.
• The impact of Kling 3.0, Omni versions, and subsequent model iterations on paid conversion and professional-user adoption.
• Progress on a potential spin-off, independent financing, or organizational incentive arrangements.
• Kuaishou's growth and margin performance in e-commerce, live streaming, and advertising within the core business.
• The impact of competitors such as Seedance and other AI video models on Kling's market share.
• Whether the market begins to reprice Kuaishou using SOTP or standalone AI asset valuation.