Highlights

• 2Q26 results came in within expectations. Revenue increased 1.4% yoy to
  Rmb35.5b, largely as expected. Gross profit margin dipped 4ppt yoy to 52%.
  Non-IFRS net profit dropped 30% yoy to Rmb3.9b, due to increased AI
  investment and R&D spending, in line with our and consensus forecasts.
  Management guided 3Q26 revenue to decline 7.5% yoy and adjusted net
  profit to decrease to Rmb700m (2.2% margin), below our expectations.
   
• Maintain BUY with a lower target price of HK$63.00.
   

Analysis

• Lacklustre 2Q26 top-line growth. Kuaishou Technology’s (Kuaishou)
  online marketing revenue grew 4.4% yoy to Rmb20.6b in 2Q26 (1Q26: +9%),
  driven by solid demand from content consumption, lifestyle services and AI
  applications, alongside resilient e-commerce advertising. However, this was
  lower than the company’s previous guidance of 6-6.5% growth. Livestreaming
  revenue decreased 13.5% yoy (1Q26: -13.5%; 2Q25: +8%). In
  2Q26, revenue from Kling AI surpassed Rmb850m vs Rmb650m in 1Q26,
  representing yoy growth of over 200%.
   
• Core business remains under pressure despite strong Kling growth.
  Kling AI revenue exceeded Rmb850m in 2Q26, implying Rmb600m of
  incremental revenue vs a year ago. Excluding this contribution, we estimate
  Kuaishou’s core revenue would have declined slightly yoy, mainly reflecting
  the 13.5% yoy decline in live-streaming revenue. Assuming Kling’s ~40%
  gross margin, we estimate ex-Kling gross profit declined by more than
  Rmb1.5b, or 8% yoy, mainly due to higher revenue-sharing costs, including
  in-app advertising revenue sharing for free short dramas.