Can Kling Bolster Kuaishou’s AI Narrative?

After the market closed on August 19, Kuaishou unveiled its Q2 2026 financial report: total revenue hit RMB 35.54 billion, marking a 1.4% year-on-year increase; adjusted net profit stood at RMB 3.91 billion, a 30.3% decrease from the previous year.

Overall, Kuaishou’s traditional core business is facing comprehensive pressure. For instance, advertising growth has decelerated, live-streaming has seen a downgrade, e-commerce GMV figures remain undisclosed, and Kling makes no mention of ARR (Annual Recurring Revenue).

However, there are a few bright spots: monthly active users (MAUs) soared to 797.3 million, significantly surpassing the market’s prior expectation of 740 million; Kling AI generated RMB 850 million in revenue for the quarter, with a year-on-year growth rate of 240%.

This marks Kuaishou’s inaugural financial report following the completion of its AI strategic pivot.

On the evening of July 2, Kuaishou disclosed in a Hong Kong Stock Exchange filing that it had finalized the independent spin-off financing plan for Kling AI. It plans to raise up to $3 billion in external investment through capital increases and share expansions, valuing Kling AI at approximately $18 billion post-investment, based on a pre-investment valuation of $15 billion.

This represents a downward adjustment from the $20 billion valuation target reported in April when Kuaishou initially planned to spin off Kling AI, reflecting shifts in market expectations for Kling AI.

Nonetheless, Kuaishou still touts it as the largest single financing round for a global video large model company.

Core Business Reduced to a ‘Free Gift’

Since then, Kuaishou has spared no expense in sacrificing profits to fully commit to AI. R&D investment in this quarter surged by 34.7% year-on-year.

Subsequently, the market has re-evaluated Kuaishou, leading to an awkward reality: Kling’s valuation has ‘inverted’ relative to Kuaishou’s.

Currently, Kuaishou’s market capitalization stands at just over $20 billion. Excluding Kling’s equity attributable to the listed company, the market values the remainder of Kuaishou’s business—with annual revenue exceeding RMB 140 billion, nearly 800 million MAUs, and an adjusted net profit margin of 11%—at less than $9 billion.

A mature platform with annual revenue in the tens of billions has seen its subsidiary’s valuation overshadow its core business, posing two practical questions for Cheng Yixiao: Is the market pricing severely distorted, or does Kling’s $18 billion valuation contain bubbles? Can the seemingly dominant (rapidly rising) Kling AI truly underpin Kuaishou’s entire AI growth narrative?

The market’s ‘inverted’ pricing is, in fact, a validation of the ceiling for Kuaishou’s traditional business.

The financial report specifically notes that ‘core commercial revenue,’ encompassing online marketing, e-commerce, and Kling AI, grew by 7.4% year-on-year, far outpacing total revenue growth, implying that the live-streaming business is dragging down overall revenue.

Management attributes this to proactive supply optimization and ecosystem purification. However, the real pressure stems from the industry: Douyin continues to deepen its short-video commercial ecosystem (live-streaming gifts, e-commerce livestreaming) and is encroaching on lower-tier markets; WeChat Channels leverages WeChat’s social graph to strongly divert traffic.

Under this dual squeeze, Kuaishou finds it challenging to achieve greater commercial breakthroughs.

However, as Tiger Sniff analyzes, the strengthening of Kuaishou’s community attributes is noteworthy: dual-purpose private messaging users grew by over 15% year-on-year, and the social graph is becoming a differentiated foundation that sets Kuaishou apart from pure short-video consumption platforms.

More awkward is the qualitative shift in user structure. While Kuaishou’s MAUs reached nearly 800 million this quarter, seemingly bucking the trend, its average DAUs reached 412 million, up just 0.8% year-on-year.

MAU growth significantly outpacing DAU growth indicates that most new users are attracted by Pan-entertainment content such as short dramas and comic dramas. These users exhibit decent stickiness and engagement but have far lower willingness to pay and consumption power compared to traditional core ‘loyal’ users, directly diluting the platform’s overall commercial value.

In simpler terms, while traffic scale has increased, the core paying audience has not, leaving the platform trapped in a dilemma of ‘retaining users but not value’.

Additionally, the low revenue growth rate of 1.4% exposes growth bottlenecks in Kuaishou’s traditional business. In capital market logic, platforms without growth potential are reclassified from ‘growth stocks’ to cash cows or even ‘cigarette butt’ assets (assets with little to no future growth potential).

This is why Kuaishou, despite holding a high-quality core business with annual revenue exceeding RMB 140 billion, an 11% net profit margin, and a massive user base of nearly 800 million MAUs, only commands a price-to-earnings (PE) ratio of less than 4x annualized earnings.

When a company’s core business loses growth imagination, the market will only view it as a complementary chip in Kuaishou’s AI layout. Thus, the essence of Kling’s ‘inverted’ valuation is that Kuaishou’s traditional business fundamentals only justify its current pricing.

The reality Cheng Yixiao faces is that before the AI narrative fully unfolds, Kuaishou’s core business, with tens of billions in annual revenue, is merely a ‘value shell’ carrying Kling AI.

Is $18 Billion an Insurance Policy or an IOU?

Since the core business cannot support the valuation, Kling, valued at $18 billion, must represent the ‘right pricing’.

When Cheng Yixiao spun off Kling, investors included Tencent, Alibaba, and Baidu—a mix of ‘friends and foes’ that each operates AI businesses directly competing with Kuaishou and Kling AI.

They create the illusion of forming an ‘Anti-ByteDance Alliance’ but are actually attempting to add a variable to the race by supporting Kling as an independent third party, minimizing their own costs.

The three giants avoid direct competition; as long as Kling holds the second-place position, it pressures ByteDance and prevents premature market domination. They will not fight Cheng Yixiao for control or fully commit core resources, as they have their own battles to fight. Investing a sum to secure a foothold benefits all parties.

Each has clear calculations: Tencent needs AI video technology to fill content production gaps for WeChat Channels; Alibaba leverages Alibaba Cloud for computing power and integrates its AI capabilities; Baidu seeks video generation scenarios for its Wenxin large model.

The three giants did not coordinate their entry but independently chose the same target after cost-benefit analyses: not necessarily to defeat ByteDance but to ensure ByteDance does not win too easily.

For Kuaishou, this money is a hot potato—even an IOU that must be redeemed by a deadline. After Kling’s independence, its most pressing challenge is the valuation adjustment mechanism.

According to the announcement, Kling AI faces exit clause pressure if it fails to go public on schedule. If Beijing Kling does not complete an IPO by October 30, 2031, investors can demand a buyback at the original price plus an 8% annual simple interest return.

An 8% annualized buyback rate is not low in the primary market, effectively underwriting all investors—winning yields valuation premiums, losing guarantees fixed returns, with nearly all risk transferred to Kling and Kuaishou.

Kuaishou’s potential upside may lie in computing power. CFO Jin Bing revealed that post-independent financing, Kling will shift more toward leasing models, relieving Kuaishou of sole computing power expenses. However, this indicates Kuaishou is transforming Kling from a ‘proprietary asset’ into a ‘controlled company’.

This means Cheng Yixiao must lead Kling AI through the ‘valuation adjustment game’. The stakes and rules are no longer fully controlled by Kuaishou.

If Kuaishou fails to meet the valuation adjustment terms in the next three to five years, Kling AI—today a pillar supporting Kuaishou’s market value—could become a debt crushing the parent company tomorrow.

Who Has Misjudged the Pricing?

Facing the tight countdown of the valuation adjustment, Kuaishou’s breakthrough may lie in the AI short drama sector, currently Kling AI’s only proven commercialization model.

AI technology has drastically lowered content creation barriers, reducing production costs to industry floor levels and reshaping Kuaishou’s content ecosystem. By 2026, the platform’s comic drama reserves are expected to surge to 500,000 titles, with the total supply of live-action and AI short dramas exploding more than fivefold since the start of the year.

Under the IAA (In-App Advertising) monetization model, mass-produced short dramas and comic dramas are no longer just entertainment but a steady stream of standardized ad inventory. The AI-driven content supply surge is the core driver of Kuaishou’s MAU growth against the trend, perfectly filling the traffic gap left by declining traditional businesses.

However, behind the rapid growth lie hidden risks of overcapacity and quality degradation.

Cheng Yixiao has publicly admitted that the industry has moved beyond scale expansion into a quality upgrade bottleneck.

Kuaishou’s short drama sector is now retracing the development path of online literature: rapid market capture through massive content, followed by low-end internal competition where inferior content drives out quality, ultimately forcing a shift toward premium content.

AI can quickly scale traffic but cannot yet support simultaneous upgrades in content quality and user value. The issues of inflated traffic and low value persist.

Relevant institutions have projected figures through 2030. CITIC Securities predicted Kling’s 2030 revenue could approach RMB 40 billion, with a 20% payment rate and a 104% compound growth rate.

However, these figures are based on extreme ideal assumptions: a 20% payment rate rivals Netflix’s premium subscription system, contradicting the industry norm where AI tool users ‘take the free trial and leave’; the doubling growth assumes competitors like Sora and Jimeng remain stagnant.

In the rapidly iterating AI sector, no advantage is permanent. Institutional growth projections cannot offset the real pressure of the valuation adjustment mechanism.

So, can Kling support Kuaishou’s AI narrative?

Cheng Yixiao may want to know the answer more than anyone.

Kuaishou is currently walking a tightrope of extreme balance. Cheng Yixiao chooses to hedge his bets: clinging to the nearly 800 million MAU user base to prevent traditional business collapse while fully betting on the new AI track to avoid the new engine lagging and failing to support the valuation.

His trump card is whether Kling AI-led new businesses can quickly fill the void left by traditional businesses.

What is certain is that when Kling’s valuation grows beyond what the parent company can contain, Cheng Yixiao will face an even starker reality: at the table woven by capital, giants, and valuation adjustment mechanisms, can Kuaishou still hold the center?

References:

Tang Chen Classmate, ‘Cheng Yixiao Must Lead Kling AI Through the Valuation Adjustment Game’

Tiger Sniff, ‘In the End, Kling Shoulders Everything?’