Kuaishou reported inline 1Q25 results: total revenue increased by 11% YoY to RMB32.6bn, and adjusted net profit was up by 4% YoY to RMB4.6bn, both in line with consensus estimate. Kling AI monetization is better than our expectation, generating over RMB150mn in 1Q25. Supported by the upgrade of Kling AI 2.0, we are more upbeat on Kuaishou’s AI monetization and expect Kling AI revenue to surpass RMB700mn in FY25E. Looking into 2Q25E, we forecast total revenue to grow by 12% YoY, with both online marketing and e-commerce revenue growth reaccelerating. We keep our FY25-27E earnings forecast largely unchanged. We maintain our SOTP-derived TP of HK$80.0. Kuaishou currently trades at 10x FY25E non-IFRS PE, offering attractive value vs both sector average/2-year historical average (16x/15x). And the company will further benefit from its AI development in terms of revenue contribution and operating efficiency, in our view. Maintain BUY.
　　Solid revenue growth across business lines. By segment in 1Q25: 1) online marketing revenue increased by 8% YoY to RMB18.0bn (55% of total revenue), primarily driven by the external marketing services, within which marketing spending from mini games/local services industry grew by over 30/50% YoY. Closed-loop marketing services faced pressure in 1Q25, mainly due to the high-base effect and increased subsidy to SME merchants. 2) Other services revenue grew by 15% YoY to RMB4.8bn (15% of total revenue). E-commerce GMV was up by 15% YoY to RMB332.3bn, driven by growth of both MPUs and GMV per user (+7% and +8% YoY respectively). 3) Live streaming revenue grew by 14% YoY to RMB9.8bn (30% of total revenue), mainly due to healthy development of content ecosystem and refined operations. For 2Q25E, we expect total revenue to increase by 12% YoY, with online marketing/others/live streaming revenue up by 13/21/6% YoY respectively.
　　Accelerating AI monetization. Kling AI accelerated its monetization and generated over RMB150mn in revenue in 1Q25, which is better than our expectation. Supported by the upgrade of Kling AI 2.0, we now expect Kling AI to generate c.RMB700mn revenue in FY25E (c.1% of total revenue). Kuaishou also integrated AI into its marketing solutions, driving up efficiency and conversion. Average daily advertising spending on AIGC marketing materials reached RMB30mn in 1Q25, and total marketing spending through UAX placement solutions accounted for over 60% of total external marketing spending in 1Q25, up from c.55% in 4Q24.
　　Increasing AI investment. Adjusted NPM was down by 1ppt YoY to 14.0% in 1Q25, mainly due to the step-up of AI investment and increased income tax. R&D expenses grew by 16% YoY to RMB3.3bn in 1Q25, equivalent to 10.1% of total revenue (1Q24: 9.7%). Overseas business achieved positive operating profit for the first time in 1Q25. Looking ahead, we expect adjusted NPM to be largely flat YoY at 15% in 2Q25E, as the operating leverage is largely offset by the increase in AI investment.