Q3 2025: Structural Moats Support Long-Term Positioning; Maintain Buy at HK$101 (Lowered from HK$112)

Q3 2025 Highlights

1. Delivered record user metrics in 3Q25 with daily active users (DAUs) reaching 416.2 million, representing the third consecutive quarter of record highs. Monthly active users (MAUs) reached 731.1 million, up 2.4% YoY. Average daily time spent per user reached 134.1 minutes, growing 1.4% YoY. The company's ability to sustain profitability growth now depends entirely on monetization density gains rather than user volume expansion.

2. Total revenue grew 14.2% YoY to RMB 35.6 billion in Q3 2025, slightly accelerating from Q2's 13.1%. The revenue composition showed balanced diversification, with online marketing services contributing 56.5%, live streaming 26.9%, and other services (primarily e-commerce and Kling AI)—accounting for 16.5%.

   • Online marketing services revenue (56.5% of revenue) grew 14.0% YoY to RMB 20.1 billion. 

   • Live streaming revenue (26.9% of revenue) grew modestly at 2.5% year-over-year to RMB 9.6 billion, facing structural headwinds from competitive market dynamics and shifting user consumption patterns toward short-form video. 

   • Other services (16.5% of revenue) - primarily e-commerce and Kling AI - grew 41% YoY.  E-commerce GMV reached RMB385.0 billion, up 15.2% YoY, reflecting improved repeat-purchase frequency and user stickiness. Kling AI generated over RMB300 million in quarterly revenue, establishing a meaningful foothold in the generative AI SaaS space. Kling AI, the company's video generation model, generated over RMB 300 million in quarterly revenue

3. Net profit surged 37% YoY to RMB4.5 billion (from RMB3.3 billion in 3Q24), demonstrating pronounced operational leverage.

4. Generated free cash flow to firm of RMB2.4B, based on enterprise value (Market Cap + Net Debt - Non-Operating Assets) of RMB217B = annualised cashflow yield of 4.4% - acceptable for a growth platform. Operating cashflow was RMB7.7B, CAPEX increased to RMB5.3B (1H25: RMB7B) and 2025 CAPEX amount is expected to grow in high double digits driven by AI infrastructure.

5. Kuaishou is embedding AI across all revenue segments and operational workflows—content moderation, recommendation algorithms, customer service, and fraud detection.

My View: Investment Thesis – Sustained

1. The core flywheel remains intact post-3Q25: increasing platform time spent drives incremental content creators and shops, which in turn increase marketing revenue and GMV density. This quarter validated the thesis—DAU hit a record 416 million, user time spent increased, and both marketing and e-commerce GMV expanded materially. Business moats in content network effects and livestreaming infrastructure remain wide and durable.

2. AI: Ecosystem moat maintainer, not necessarily a direct revenue driver: The market often misses the fundamental value creation mechanism: AI's primary role is to increase platform time spent, which cascades across all business segments (content creation, livestreaming, e-commerce). This multiplier effect is precisely why AI capex, while elevated, remains accretive despite generating minimal direct revenue.

3. AI capex functions as matintenance, not optional. If Kuaishou underinvests in content moderation AI, recommendation algorithms, and operational automation while competitors accelerate, the platform would lose engagement velocity—eroding the flywheel itself. Conversely, the scale of AI benefits compounds across interconnected business lines: personalized recommendation improves user retention (livestreaming), content discovery aids creator supply (driving marketing demand), and operational AI (customer service, fraud detection) reduces friction across all segments. Small competitors lack this distribution advantage and cannot amortize AI capex across multiple monetization channels, creating a structural moat.

4. However, AI investments face a critical downside risk: competitive AI spending escalation. If Douyin or other competitors significantly accelerate their AI infrastructure investments, Kuaishou may face pressure to match or exceed these outlays to preserve engagement and monetization velocity. This creates a potential capex arms race where industry-wide AI spending accelerates beyond current guidance, materially compressing free cash flow and delaying margin expansion. Management guidance of mid-to-high double-digit capex growth in FY25 could easily extend into FY26–FY27 if competitive dynamics intensify, structurally lowering returns on incremental capex deployment.

5. Despite these execution risks, valuation remains compelling. Kuaishou is forecast to expand revenue at 8% CAGR through 2030 while growing adjusted net profit at 17% CAGR—a 2.1x profit/revenue growth multiple driven by margin expansion. The market prices Kuaishou at only 15x TTM PE, applying the Graham formula (Fair P/E = 8.5 + 2 × earnings growth) implying the street is pricing in merely 3–4% structural earnings growth—a significant margin of safety even accounting for downside risks.

6. That being said, I am lowering YE2025 intrinsic value estimate to HK$101 from prior HK$112, primarily reflecting (1) elevated AI capex burn to maintain competitive moats and (2) normalization of the effective tax rate to 25% commencing in 2026. Despite this conservative reset, valuations remain undemanding, pricing in neither the margin expansion thesis nor the structural moats underpinning long-term competitive positioning.