Why has KUAISHOU-W become a new representative of AI (applications) in the Hong Kong stock market?

Kuaishou recently led the rise of AI and Hong Kong Science and Technology stocks in the Hong Kong market, mainly due to its earnings report, where the market saw improvements in advertising efficiency driven by AI, as well as optimistic progress in the monetization of Kuaishou AI. Additionally, with cheap valuations, it is a company with a solid bottom and upside potential from AI options.

It is worth noting that the monetization growth of Kuaishou AI has changed the capital market's expectations for China's AI application market. Previously, the Chinese market only focused on AI hardware, and in the context of Alibaba and Tencent being forced to reduce capex in their Q1 reports, the market had been quiet for a long time.

However, in the U.S. market, AI applications have shown explosive growth during this period, with a significant increase in token consumption and rising hourly rental rates for GPUs, indicating changes on the application side. Therefore, Kuaishou's changes have given the market new ideas, but whether this can translate into a new narrative leading China's AI industry still requires observation and more data validation.

Below are comments from Citigroup and Morgan Stanley's Kuaishou roadshow, which include some specific data.

Citigroup:

Kuaishou announced on June 5 that its leading video generation model, Kling AI, achieved an annualized revenue of over $100 million in its 10th month (i.e., March this year) after launch (annualized revenue run rate ARRR = monthly revenue × 12).

1. We believe Kling's monetization capability is performing well, and it is possible that its revenue in 2025 may exceed our current estimate of $100 million.

2. In addition to the continuous improvement in monetization capability, the rapid iteration and upgrade of Kling's versions also help alleviate investors' concerns about Kuaishou's ability to maintain a leading position in the video generation model field.

Given the company's core business is stable, the development prospects of Kling are promising, and the current expected price-to-earnings ratio for 2025 is only 11 times, the valuation is attractive, and we maintain a buy rating.

Morgan Stanley:

We hosted Kuaishou's management during our offline performance roadshow in Hong Kong, and our view of the company became more positive after the meeting. We reiterate that Kuaishou is our top pick in the Chinese digital entertainment sector.

The main focus of investors is the growth prospects of Kuaishou AI and its core advertising/e-commerce business. Given the strong demand in major verticals (advertising, professional content generation), we are more optimistic about Kuaishou AI's monetization prospects and expect strong double-digit revenue growth in the coming years.

For core advertising revenue, we expect that both external and internal advertising monetization will improve, leading to year-on-year growth rates increasing in each quarter starting from Q2 2025.

Kuaishou remains our top pick in the Chinese digital entertainment sector, and we believe it is a relatively low-profile GARP stock (valued at a 10 times price-to-earnings ratio, with an expected compound annual growth rate of 20% for profits in 2026-27), facing healthy competition.

With the rapid growth of users/monetization on Tencent's video account, Kuaishou maintains single-digit user growth and double-digit core revenue (advertising and e-commerce) growth.

We expect the acceleration of advertising business (increasing from 8% in Q1 2025 to 12%/16%/19% in Q2/Q3/Q4 2025) and further monetization of Kuaishou AI to drive stock price increases in the next six months