Summary of Key Points
After raising nearly $3 billion in funding, Kailing AI, a subsidiary of Kuaishou, has a post-investment valuation of $18 billion, which is nearly on par with Kuaishou's current market value of $18 billion (about HK$140 billion). If we deduct the value of Kuaishou's 68% stake in Kailing (about $12 billion), the market value of Kuaishou's traditional short-video business would be only $6 billion. Even considering Kuaishou's cash reserves of RMB 120 billion, the traditional business is essentially “free.” If Kailing goes public as planned by 2027, its market value could potentially exceed that of Kuaishou’s parent company. This is not unprecedented in Chinese internet history, but Kuaishou’s traditional business still has competitiveness and a strong synergistic effect with Kailing, so the outcome may not necessarily follow the same path as Sina and Weibo.
Breakdown and Analysis
1. Current Situation: Is Kailing’s Valuation Outpacing Kuaishou, Making the Traditional Business a “Freebie”?
Kuaishou’s stock price plummeted by 15% after the release of its second-quarter financial report, leaving its total market value at HK$140 billion (about $18 billion). Coincidentally, Kailing AI just raised $3 billion, and its post-investment valuation is also $18 billion. The situation is even more striking:
- Kuaishou holds 68% of Kailing, worth about $12 billion;
- After deducting this, the market value of Kuaishou’s traditional short-video business is only $6 billion (one-third of Kailing’s valuation);
- Including Kuaishou’s cash reserves of RMB 120 billion (about $16.5 billion), the actual value of the traditional business is almost negligible. In other words, when you buy Kuaishou’s stock, you are mainly acquiring Kailing’s equity and cash, effectively getting the traditional business for free.
Of course, the valuation in the primary market should not be taken too seriously (for example, the valuation during fundraising is negotiated between investors and the company and may not reflect the actual market value after listing), but this comparison is quite alarming: what was once the main business has now become a secondary asset of the subsidiary.
2. Historical Lessons: When a Subsidiary Outpaces the Parent Company, the Outcome is Usually One of Separation or Withdrawal
There are many examples in internet history where a subsidiary’s value exceeds that of its parent company, and the outcome is usually one of the following:
- Sina and Weibo: After Weibo’s IPO in 2014, its market value quickly surpassed Sina’s. By 2021, when Sina was privatized, its market value was only $2.5 billion, while Weibo’s was over ten times that (4 times Sina’s).
- South African Newspapers and Tencent: South African Newspapers was Tencent’s largest shareholder, but Tencent’s market value was more than ten times higher. Investors found it more profitable to buy Tencent directly, as buying South African Newspapers meant indirectly holding Tencent’s shares at a discounted price.
This “strong subsidiary, weak parent” structure is unstable; the parent company’s value is dependent on the subsidiary. Investors are not willing to pay for the secondary equity. If Kailing’s IPO is successful, Kuaishou may face a similar situation to Sina: it either has to spin off Kailing or see its own market value further diluted.
3. Is It Reasonable for Kailing to Be More Valuable than Kuaishou?
Kailing’s current revenue is a fraction of Kuaishou’s (850 million in the second quarter compared to Kuaishou’s $35.5 billion), but the capital market looks to the future:
- Kailing’s Advantages: The AI sector is booming, and Kailing is growing rapidly (200% year-over-year), with most of its paid users overseas (in film production, marketing, etc.), offering significant potential.
- Kuaishou’s Strengths: Its traditional business is not a declining industry; daily and monthly active users are still increasing, ad revenue grew by 4%, and net profit increased by 5% quarter-over-quarter. The decline in gross margin is mainly due to taxes and distribution costs (not a sign of declining competitiveness). The 34.7% increase in R&D spending (related to AI) indicates that Kuaishou is investing in innovation.
In short, the capital market is focusing on Kailing’s future prospects, while Kuaishou’s current performance is undervalued. However, it will take a long time for Kailing to match Kuaishou’s profitability (for example, it would need to increase its revenue tenfold to reach Kuaishou’s level).
4. Kuaishou and Kailing: Not Rivals, but Partners
Although Kailing’s valuation is close to that of Kuaishou, they are not competitors; rather, they complement each other:
- Kuaishou’s Support for Kailing: Kuaishou’s creators are among Kailing’s first users, providing a wealth of data for training its models.
- Kailing’s Boost for Kuaishou: AI can reduce content production costs and improve advertising efficiency (similar to how Tencent and Meta use AI). Cheng Yixiao also mentioned at the performance report that AI is driving the growth of Kuaishou’s comic and short-story content, contributing to ad revenue growth.
This synergistic relationship is unique to Kuaishou and Kailing, as Sina’s portal business has declined, while Kuaishou’s traditional business is still thriving and can benefit from Kailing’s technology.
5. Will a Subsidiary Outpace the Parent Company in the Future?
Kailing’s financing agreement includes a commitment to go public (by 2031, with plans for 2027). Given current trends:
- The capital market’s enthusiasm for AI remains high (Kailing’s valuation of $18 billion is evidence of this).
- There is limited confidence in Kuaishou’s traditional business (as reflected in the stock price drop).
If Kailing’s valuation continues to rise during its IPO, and Kuaishou’s traditional business shows weak growth, it is possible for a subsidiary to surpass its parent company in the Chinese internet industry. However, Kuaishou is not completely at a disadvantage; it can strengthen its collaboration with Kailing to revitalize its traditional business through AI or adjust its capital structure to avoid a similar outcome to Sina’s.
Conclusion
Kailing’s valuation catching up with Kuaishou is a result of the AI sector’s momentum and the differentiated valuation of traditional and emerging businesses. Whether a subsidiary will eventually surpass its parent company depends on Kailing’s growth rate and Kuaishou’s ability to transform its traditional business. Regardless, this is a vivid example of the “transition from old to new drivers of growth” in the Chinese internet industry.