Kuaishou reported 2Q25 results: total revenue was up by 13% YoY to RMB35.0bn and adjusted net profit grew by 20% YoY to RMB5.6bn, 2% and 11% ahead of Bloomberg consensus estimates, mainly thanks to the solid e- commerce business (GMV +18% YoY) and better-than-expected AI monetization (Kling AI revenue surpassing RMB250mn). For 3Q25E, we expect total revenue to grow by 13% YoY, driven by the strong momentum of e- commerce business and resilient growth of online marketing business. We slightly raise our FY25-27E earnings forecasts by 0-1% to reflect the positive development on the AI front. We raise our SOTP-derived TP to HK$84.0 (previous: HK$80.0). We are upbeat on Kuaishou’s AI development and monetization, given its SOTA visual generation model, strong product capability, and abundant use cases. Maintain BUY.
　　Accelerating growth of core commercial businesses. By segment in
　　2Q25: 1) online marketing revenue grew by 13% YoY to RMB19.8bn.
　　Revenue from external marketing services delivered solid growth driven by strong demand form content-consumption, local services and automobile sectors. Closed-loop marketing service revenue was also up YoY, thanks to the increasing demand for omni-platform marketing solutions; 2) other services revenue increased by 26% YoY to RMB5.2bn, 4% ahead of consensus estimate, mainly driven by both e-commerce and AI revenue contribution. E-commerce GMV grew by 18% YoY to RMB359bn, fuelled by growth of paying users and increase in repeat purchase frequency; 3) live streaming revenue grew by 8% YoY to RMB10.0bn. Looking into 3Q25E, we forecast total revenue to grow by 13% YoY, with online marketing/others/live streaming revenue +13/36/5% YoY respectively.
　　Solid progress on the AI front. AI continued to drive business growth: 1) Kling AI revenue surpassed RMB250mn in 2Q25, and we expect the full- year revenue from Kling AI to reach c.RMB950mn in FY25E (1% of total revenue); 2) the company launched OneRec, an AI recommendation model which improved user time spent and retention rates through recommending short video content; 3) Kuaishou also leverages AI to better understand users’ behaviours and enables generation of marketing materials tailored to users’ interests, increasing conversion rates and driving low single-digit growth in online marketing revenue.
　　Steady margin despite step-up of AI investment. Adjusted NPM
　　improved by 1ppt YoY and 2ppts QoQ to 16% in 2Q25 despite the step-up of AI investment (R&D expenses +21% YoY), mainly thanks to the strong operating leverage. Given the strong monetization of Kling AI, management expects FY25 Kling AI related capex to double from the previous budget at the beginning of the year. That said, management still expects non-GAAP NPM to be largely stable YoY in FY25. The company declared a special dividend of HK$0.46 per share (c.1% dividend yield), and will continue to give back to shareholders through dividend and share repurchases.