First Read China Internet Sector Expert series: Video generative AI We hosted a call with an expert from a leading domestic video generative AI platform. Takeaways: Kuaishou's all-in strategy in video genAI underpins Kling's ongoing leadership The expert ranked video genAI performance as Kuaishou Kling > Sora 2 > Veo3 > Seedance based on his team's internal testing results. Kuaishou's Kling stands out with stronger prompt learning capability, relatively longer duration video generation and more precise cont ...

November 19, 2025 05:17 PM GMT Kuaishou Technology | Asia Pacific M Update 3Q25 in line but outlook is weaker than expected; stay EW Reaction to earnings Unchanged In-line Modest revision lower Impact to our thesis Financial results versus consensus Direction of next 12-month Source: Company data, Morgan Stanley Research 4Q revenue outlook and early color on 2026 are both slight shy of market expectations, though cost control can help profit. 3Q25 results came in line with our estimates: See 3Q25 results su ...

20 November 2025 | 6:55AM HKT Equity Research Kuaishou Technology (1024.HK) 3Q25 Earnings Review: AI driving value across ecosystem; fine balance between step-up investments and margin expansion; Buy 1024.HK 12m Price Target: HK$83.00 Price: HK$63.50 Upside: 30.7% Kuaishou reported a profit beat in 3Q, helped by disciplined cost efficiency. Post the mgmt. call, we view the 4Q25 guidance as largely in-line with earlier expectation on ads/GMV growth, while the profit outlook has been raised due to effective S ...

Group 1 - Fal achieved a remarkable growth from $2 million to $100 million in ARR within a year, supported by a recent $250 million funding round led by Sequoia and KP, with a valuation exceeding $4 billion [2][4][5] - The company pivoted from data processing products to AI generative media cloud services, recognizing a significant user pain point during the GPU crisis and the emergence of Stable Diffusion [4][6][8] - Fal's strategic decision to focus on image and video generation rather than LLMs was based on the belief that the image market is a growing net market, unlike LLMs which compete directly with established giants like Google [8][9] Group 2 - The company adopted a PLG (Product-Led Growth) and sales strategy, starting with self-service for developers and then identifying high-potential customers for sales follow-up [15][18] - Fal's marketing strategy resonated with developers by creating relatable brand elements, such as themed merchandise and live demonstrations of new models [19][22] - The company identified opportunities in the AI ecosystem, suggesting the need for platforms that can scale AI data collection and labeling, as well as vertical advertising solutions [24][25] Group 3 - The article discusses the current perception of AI as a potential bubble, with 54% of fund managers believing it has entered a bubble phase, yet a detailed analysis by Coatue suggests otherwise [26][29] - Coatue's analysis indicates that current valuations, while high, are not excessive compared to historical bubbles, and the concentration of capital in tech giants is justified by their diversified business models [32][36] - The projected growth for AI revenues is significant, with expectations of reaching $1.9 trillion by 2030-2035, indicating a robust long-term outlook for the industry [52][54] Group 4 - The article emphasizes the importance of effective pricing strategies for AI products, highlighting that simplicity and clear value communication are crucial in early stages [68][69] - It suggests that founders should focus on co-creating business cases with clients during POCs (Proof of Concept) to demonstrate value effectively [74][76] - The need for continuous iteration of pricing strategies is highlighted, as the AI market evolves rapidly, necessitating frequent reassessment [72][79] Group 5 - Sandy Diao discusses the pitfalls of being overly data-driven in growth strategies, advocating for a balance between data insights and contextual understanding [82][84] - The concept of the power law of distribution in growth is introduced, where a small number of channels drive the majority of growth, emphasizing the need to identify core growth drivers [88][90] - The article concludes with insights on when to hire growth leaders, suggesting that early-stage companies should integrate growth strategies from the outset to address product-market fit challenges [92][93]

Performance Overview - Baron International Growth Fund gained 6.04% in Q3 2025, underperforming its benchmark MSCI ACWI ex USA Index which appreciated 6.89% [3] - Year-to-date performance shows the Fund at 24.85%, slightly below the benchmark's 26.02% [4] - The Fund's performance remains ahead of the Proxy Benchmark on a year-to-date and one-year trailing basis [3] Market Drivers - The initiation of a Federal Reserve easing cycle and enthusiasm for AI-related investments were key drivers of global equity returns during the quarter [7][32] - Ongoing uncertainty regarding U.S. tariffs may clarify in the current quarter, but a global central bank easing cycle is evident [7][32] - The shift in U.S. trade and immigration policy, along with accommodative monetary policy, is expected to impact global inflation dynamics [7][32] Sector Performance - Poor stock selection in the Information Technology sector, particularly due to Constellation Software Inc.'s share price correction, was a significant detractor [8] - Favorable stock selection in the Materials sector, driven by positions in global security and sustainability themes, contributed positively [8] - Weak stock selection in Consumer Staples and Communication Services also negatively impacted performance [8] Geographic Performance - Underperformance was noted in Poland, Japan, and Israel, while favorable stock selection in Australia and China partially offset these losses [9] - The Fund remains optimistic about China's AI potential and structural growth story in India, despite recent underperformance [9] Top Contributors and Detractors - Top contributors included Lynas Rare Earths Limited, argenx SE, and Lundin Mining Corporation, with Lynas benefiting from geopolitical tensions [10][11][13] - Key detractors were Constellation Software Inc., InPost S.A., and ODDITY Tech Ltd., with Constellation facing uncertainty around AI impacts and leadership changes [14][15][16] Recent Investment Activity - New investments included Nomura Holdings, EssilorLuxottica SA, Pony AI Inc., and GDS Holdings Limited, reflecting a focus on high-conviction ideas [24][25][26][27] - Increased exposure to existing positions such as Lundin Mining Corporation and Japan Exchange Group, while exiting positions in less favored stocks [29] Outlook - Strong performance is expected from global markets, particularly in Europe, driven by increased defense and infrastructure spending [30][31] - The Fund anticipates continued growth in China and Korea, with many holdings poised for significant earnings improvements [31] - The competitive landscape in AI is evolving, with China emerging as a formidable player alongside U.S. technology giants [34][35][36]

Summary of Conference Call on China Internet Equities Industry Overview - **Industry**: China Internet Equities - **Key Focus**: AI applications and quick commerce (QC) trends Key Trends in Consumer AI Applications 1. **Concentration of Top Players**: - Chatbot applications are primarily dominated by ByteDance and DeepSeek, with Tencent having a smaller share [1][7] 2. **Impact on Traditional Search**: - Baidu (BIDU) has seen a decline in young user engagement, attributed to a shift towards AI-native and social apps. However, user engagement for those aged over 40 remains stable due to increased traffic to AI search [1][7] - Daily time spent on AI-native apps is approximately 10 minutes, indicating limited impact on traditional search and productivity apps [1][7] 3. **Emerging AI Applications**: - ByteDance's Jimeng leads in video generation app users, while Ant's healthcare AI assistant AQ has entered the top 10 AI-native apps. Education AI apps are also gaining traction among Chinese users [1][7] 4. **Integration of AI into Existing Apps**: - Alibaba's (BABA) Quark app saw over 50% of users engaging with its AI features post-integration, while Tencent's QQ Browser, with a larger user base, is experiencing slower AI plugin development [1][7] Quick Commerce (QC) Competition 1. **Market Resilience**: - Meituan (MT) has shown resilience in QC, with a slight improvement in weekly session share from August to early October, while Eleme and JD have seen declines [2] 2. **User Growth and Engagement**: - Taobao added 47 million year-over-year daily active users (DAU) in September, surpassing JD's 34 million and MT's 8 million. Despite seasonal tapering, 23% of Taobao's monthly active users (MAU) and 18% of JD's are utilizing QC [2] 3. **Expansion in Lower-Tier Cities**: - Taobao's merchant percentage compared to MT increased from 58% in January to 72% in October, driven by growth in lower-tier cities. Approximately 64% of Eleme's new merchants are from tier 3 and below cities [2] 4. **Rider Capacity Trends**: - Taobao experienced significant year-over-year growth in daily active crowdsourcing (+80%) and priority riders (+30%) in Q3 2025, while MT's priority riders decreased by 6% [2] In-Store Competition - **Douyin's Competitive Edge**: - Douyin Laike's MAU surpassed MT's in the second half of 2024, particularly excelling in lower-tier cities, while MT remains strong in top-tier cities. Competition intensified since March 2025 due to Douyin's increased investment in top-tier cities [3] Investment Recommendations - **Preferred Stocks**: - Tencent and Alibaba are recommended for their AI potential, both rated as "Buy" [7] Additional Insights - **User Engagement Metrics**: - MAU of AI-generated content applications reached 287 million in September [8] - **Market Dynamics**: - The competitive landscape is evolving with significant shifts in user engagement and merchant coverage, particularly in the context of lower-tier city expansion and AI integration [2][3] This summary encapsulates the key points discussed during the conference call, highlighting the competitive landscape and emerging trends within the China Internet Equities sector.

Summary of Earnings Call for China Games & Entertainment Sector Industry Overview - The Games & Entertainment sector has shown strong year-to-date (YTD) performance, with most companies experiencing growth between 60-100% [1][2] - Recent performance has diverged since the second quarter results, indicating potential volatility [1] - Future growth is expected to depend on earnings delivery, upward revisions in earnings per share (EPS), and new growth engines, particularly in AI initiatives [1] Key Companies Discussed NetEase (NTES) - **Rating**: Buy - **YTD Performance**: +69% - **3Q Metrics**: Game revenue increased by 18% year-over-year (YoY), operating profit up 23% YoY, and deferred revenue up 22% YoY [4][17] - **Catalysts**: 1. Progress in AI integration into existing and new games [4][17] 2. New game testing and launch timelines [4][17] 3. Potential primary listing in Hong Kong [4][17] - **Outlook**: Expected to enter a new product cycle with two blockbuster titles targeted for launch in 2026, which could significantly impact revenue and market perception [21] Bilibili (BILI) - **Rating**: Buy - **YTD Performance**: +63% - **3Q Metrics**: Advertising sales up 20% YoY, game revenue down 16% YoY, operating profit at RMB646 million, up 137% YoY [8][32] - **Catalysts**: 1. New game "Sanguo Ncard" testing in late October with a launch expected by Chinese New Year 2026 [8][33] 2. AI initiatives rolling out in the Bili community [8][33] - **Outlook**: Anticipated reversal of game revenue decline and integration of AI to enhance advertising and user engagement, with operating profit margin expected to reach 10% by 4Q25 and 15%+ in 2026-27 [38][36] Kuaishou - **Rating**: Buy - **YTD Performance**: +86% - **3Q Metrics**: Advertising revenue up 13% YoY, GMV up 15% YoY [9][51] - **Catalysts**: 1. Updates on Kling revenue guidance and monthly grossing trends [9][51] 2. Capex and AI revenue outlook for 2026 [9][51] - **Outlook**: Expected to deliver in-line results for 3Q25, with focus on AI integration and eCommerce growth despite competition [56][52] Tencent Music (TME) - **Rating**: Buy - **YTD Performance**: +100% - **3Q Metrics**: Music service revenue up 23% YoY, average revenue per user (ARPU) up 11% YoY [9][10] - **Catalysts**: 1. Completion of Ximalaya deal and business consolidation [10] 2. Upside potential from SVIP and enhanced content offerings [10] - **Outlook**: Continued growth expected from the proliferation of the fans economy and K-pop resurgence in China [10] iQIYI - **Rating**: Neutral - **YTD Performance**: +8% - **3Q Metrics**: Subscription revenue down 3% YoY, adjusted operating profit at -RMB22 million [10][11] - **Catalysts**: 1. Details on new drama policy and potential regulatory tailwinds [11] 2. Updates on secondary listing in Hong Kong [11] - **Outlook**: Challenges remain with subscription growth and profitability, requiring close monitoring of policy impacts [11] Additional Insights - The gaming industry is projected to grow at a low teens percentage YoY in 2025, driven by a loosening of game supply regulations [3] - AI initiatives are expected to enhance advertising effectiveness and user engagement across platforms, particularly for Bili and Kuaishou [3][36] - The easing of content regulations is anticipated to positively impact companies like IQ and TME, potentially fostering a more supportive environment for international artists [3] Conclusion The China Games & Entertainment sector is poised for continued growth, driven by strategic initiatives in AI, new game launches, and regulatory support. Companies like NetEase, Bilibili, and Kuaishou are expected to leverage these opportunities to enhance their market positions and financial performance in the coming quarters.

Summary of Earnings Preview for 3Q25 Industry Overview - The report focuses on the **China Internet and Other Services** sector, particularly the **online entertainment** and **OTA (Online Travel Agency)** segments, indicating an overall solid set of results expected for 3Q25 amid trade tensions [1][2]. Key Companies and Forecasts NetEase (OW) - Forecasted **15% growth** in game revenue and **26% growth** in Non-GAAP profit [3]. - Strong performance of FWJ's free-to-play version noted, though difficult to quantify due to its PC game nature [3]. - Limited upward revision in 2025 revenue consensus post-2Q earnings suggests potential upside risk [3]. Tencent Music Entertainment Group (TME) (OW) - 3Q forecast aligns with guidance, with upside risk for other music revenue due to concert seasonality [4]. - Key focus for 3Q25 earnings will be 2026 profit guidance, with a consensus of **Rmb11.2 billion** [4]. - Absolute profit is prioritized over margin due to uncertainty in concert contributions [4]. Trip.com Group Ltd (TCOM) (OW) - Bottom-line forecast is at the higher end of guidance range, with expected minimal YoY OPM contraction (~1ppt) in 3Q [5]. - Slight OPM expansion anticipated in 4Q from a low base, critical for evaluating 2026 consensus forecast [5]. - Competition from Fliggy highlighted as a key focus [5]. Tongcheng Travel Holdings (OW) - Expected **13% core OTA revenue growth** and **14% profit growth** [6]. - Management's comments on synergy from the Wanda Hotel Management acquisition are anticipated at the full-year result rather than in 3Q [6]. Kuaishou (EW) - 3Q guidance is in line, with expectations to raise full-year profit guidance by **3-5%** [7]. - Kling's performance remains a market debate, with increasing competition noted [7]. - Traffic and monetization changes under the new OneRec AI recommendation model are deemed crucial [7]. Bilibili (EW) - Forecasting **20% growth** in ads and a **16% decline** in game revenue [8]. - Expected **8% non-GAAP net margin** (Rmb613 million profit), with upside risk due to a relatively low base [8]. Important Focus Areas for 3Q Earnings - **NetEase**: Revenue and grossing to gauge FWJ's new run rate [12]. - **TCOM**: 4Q margin guidance as a checkpoint for potential normalization of overseas marketing intensity [12]. - **TME**: Detailed 2026 outlook expected due to good visibility [12]. - **Kuaishou**: Traffic and monetization growth to evaluate the new AI recommendation system [12]. Financial Highlights - **Kuaishou**: Expected total revenue of **Rmb35.391 billion**, with a **14% YoY growth** [16]. - **TCOM**: Anticipated net revenue of **Rmb18.193 billion**, reflecting a **15% YoY growth** [20]. - **TME**: Projected total revenue of **Rmb8.230 billion**, with a **17% YoY growth** [18]. Conclusion The earnings preview indicates a generally positive outlook for the online entertainment and OTA sectors in China, with several companies expected to outperform amid competitive pressures and market dynamics. Key financial metrics and growth forecasts suggest potential investment opportunities, particularly in companies like NetEase, TME, and TCOM.

Core Insights - The era of video generation tools is coming to an end, and a platform era is emerging, where the ability to establish a complete "generation-editing-distribution-monetization" chain will define the next generation of content industry and AI platforms [1][3][27] Industry Overview - OpenAI launched a new short video social application called Sora, which allows users to generate up to 10 seconds of AI-generated videos using text prompts, emphasizing a shift towards a TikTok-like content feed interface [1][2] - The AI video generation market has seen rapid growth, with the global market size surpassing $5 billion in 2024 and an expected annual growth rate of over 120% by 2026 [4][9] Competitive Landscape - The competition in AI video is shifting from algorithmic capabilities to ecosystem control, focusing on who can dominate content entry points and manage the underlying distribution and computational power [3][12] - Domestic AI video companies are rapidly catching up, with several models ranking highly in global evaluations, indicating a competitive landscape [5][8] Challenges and Limitations - Current AI video products often remain in demonstration stages, lacking integration into standardized production processes in industries like film and advertising [9][10] - High costs associated with generating quality videos (ranging from $30 to $50 per minute) hinder scalability and adoption in traditional production environments [9][10] - The lack of a seamless distribution and monetization pathway for generated content limits user retention and overall effectiveness of AI video tools [10][11] Strategic Directions - The future of AI video lies in creating a platform that integrates generation, distribution, and monetization, transforming AI content into a sustainable production tool rather than a one-time use product [11][18] - Chinese companies are focusing on embedding AI video capabilities directly into existing production workflows, contrasting with the model-driven approach of many Western firms [14][15] Future Outlook - The integration of AI video into established content distribution systems in China presents a significant opportunity for creating a new content industrial system, potentially setting global standards [18][24] - As the industry evolves, the roles within the content production ecosystem will shift, with creators becoming content operators and platforms acting as new "content factories" [22][23]

Summary of Kuaishou Technology Conference Call Company Overview - **Company**: Kuaishou Technology - **Industry**: Digital Entertainment in China Key Points and Arguments Growth Outlook 1. **Kling Video Generation Model**: Kling is recognized as the leading video generation model globally, with a total addressable market (TAM) for video production estimated at US$140 billion. AI is expected to penetrate 20-30% of this market in the near term, driving sequential revenue growth in the second half of 2025 due to key product upgrades [1][4][8]. 2. **AI Impact on eCommerce and Advertising**: The integration of AI is enhancing eCommerce and advertising growth through improved recommendations and conversion rates. Kuaishou's diverse eCommerce formats, including short videos and live streaming, are expected to support significant growth for both small and medium enterprises (SMEs) and brand merchants [2][15]. 3. **User Engagement and Growth**: User engagement has increased, with time spent on the platform growing by 8% in Q2 2025. The user base continues to expand, particularly in southern China, while sales and marketing expenses are being optimized [3][17]. Financial Performance 4. **Valuation and Profitability**: Kuaishou is viewed as one of the most undervalued AI stocks globally, with projected price-to-earnings (P/E) ratios of 14x and 11x for FY25 and FY26, respectively. The company is expected to achieve a profit compound annual growth rate (CAGR) of 20% from 2026 to 2027 [4][16]. 5. **Advertising and eCommerce Revenue Growth**: Kuaishou is under-monetized in its advertising and eCommerce segments, with expectations of faster growth than the overall advertising market. The forecasted CAGR for advertising and eCommerce commission revenue is 13% for 2026-2027 [15]. Product Development 6. **Product Optimization Focus**: The near-term focus includes improving video realism and controllability, with long-term goals centered on personalization. Recent upgrades have led to revenue acceleration, particularly with features like "first and last frame sync" [8][9]. 7. **AIGC Material Generation**: The use of digital human technology for low-cost live broadcasts and automated short video marketing materials is expanding, with daily consumption reaching RMB 30 million. The proportion of AI-generated content in domestic advertising is expected to rise, enhancing efficiency and meeting large-scale marketing needs [13]. User Demographics and Market Strategy 8. **User Demographics**: Daily active users from younger generations increased by 7.9% year-on-year, while high-income groups saw a 12% increase. The penetration rate in northern China remains stable, with southern regions experiencing higher growth rates [17]. 9. **Growth Strategy**: Kuaishou's strategy includes optimizing influencer incentives, providing subsidies for brand products, and leveraging national policies to enhance local supply chains and eCommerce traffic without compromising user experience [12][14]. Risks and Challenges 10. **Competitive Landscape**: Competition from Douyin and other video accounts poses risks to Kuaishou's market share and monetization potential. Regulatory risks include tighter content scrutiny and potential divestment by Tencent, which could impact share prices [18]. Conclusion Kuaishou Technology is positioned as a top pick in the China digital entertainment sector, with strong growth prospects driven by AI integration, user engagement, and monetization strategies. However, it faces competitive and regulatory challenges that could impact its performance.