Summary of Key Points
Kuaishou's AI video model, "Ke Ling," plans to be spun off as an independent entity. The pre-investment valuation has been reduced from the initial $20 billion to $15 billion, with potential lead investors including Tencent, Alibaba, and Sequoia. The goal is to restructure the company for a stock reform by 2026 and submit an IPO application in early 2027. The main reasons for the spin-off are as follows: Ke Ling's high operational costs have systematically underestimated its value within Kuaishou, and it needs independent financing to compete effectively against rivals such as ByteDance and Alibaba. Additionally, Kuaishou's core business growth has slowed down, posing challenges to Ke Ling's narrative as a technology company.
Detailed Analysis
1. Why Ke Ling Must Be Spin Offed?
- High Operating Costs: Kuaishou's total capital expenditure for 2026 is expected to be 26 billion yuan, with all of the increase allocated to AI infrastructure. In the first quarter, costs related to Ke Ling's bandwidth and servers increased by 18.4%, and R&D expenses amounted to 3.6 billion yuan, directly eroding Kuaishou's profits (adjusted net profit decreased by 26.3% year-over-year).
- Underestimated Value: As a mature short-video platform, Kuaishou is valued at 1.5 times its sales price (PS). By spinning off Ke Ling as an AI company, it can be priced at a much higher PS, which would be like selling gold as scrap metal.
- Competition Pressure: ByteDance and Alibaba are far stronger than Kuaishou in terms of AI capabilities and funding. For example, ByteDance's Seedance has a 95% market penetration rate in the short-video industry, while Ke Ling only holds 14%. After the spin-off, Ke Ling will have more opportunities to attract investors to support its development.
2. Valuation Reduction from $20 Billion to $15 Billion
The reduction in valuation is not due to poor performance but because the market has shifted from focusing on potential to evaluating actual results:
- Initial Overestimation: The initial $20 billion valuation was more of an "option price" reflecting the scarcity of AI video assets.
- Current Reality: The $15 billion valuation is closer to what investors can realistically expect to recover. They will consider factors such as costs, profitability, potential regulatory hurdles for overseas revenue, and limited investor options (mainly Chinese giants and industrial capital).
- Business Growth: Ke Ling's revenue in the first quarter exceeded 650 million yuan (300% year-over-year), with annual recurring revenue (ARR) reaching $500 million and 60 million global users. However, its growth rate cannot keep up with its high operating costs.
3. Post-Spin-off: Ke Ling's Independence and Kuaishou's Concerns
- Ke Ling's Opportunities: As an independent entity, it can attract strategic investors like Tencent and Alibaba to fund its growth and expand into new markets (especially overseas).
- Kuaishou's Challenges: Kuaishou's core business is experiencing slow growth, with total revenue increasing by only 3.4% in the first quarter and live-streaming revenue declining by 13.5%. Ke Ling is Kuaishou's most valuable AI asset; without it, Kuaishou's narrative as a technology company may weaken.
4. The Competitive Landscape in AI Video
The AI video market has shifted from focusing on technology to emphasizing commercialization and user experience:
- ByteDance's Dominance: With over 80% of the market share and a 95% penetration rate, ByteDance leads in quality and stability.
- User Feedback: Ke Ling is criticized for being expensive and having technical issues (e.g., "three-legged characters" or failed animations).
- Industry Trends: OpenAI's failure with Sora (high costs but low revenue) highlights the need for practical, user-friendly AI solutions.
5. Kuaishou's Internal Reforms
The spin-off of Ke Ling is part of a broader strategic adjustment:
- Organizational Changes: Key executives are being reallocated to focus on AI initiatives, and business units are being restructured.
- AI Integration: CEO Cheng Yixiao emphasizes that AI will drive all Kuaishou's businesses, including recommendations, advertising, and e-commerce. Employees are encouraged to use AI tools to improve efficiency.
- Talent Retention: Key personnel from Ke Ling, such as Zhang Di, are leaving for companies like Alibaba. Kuaishou needs to retain top talent to stay competitive in the AI industry.
Conclusion
The spin-off of Ke Ling is a strategic move aimed at freeing it from Kuaishou's constraints and allowing it to compete more effectively in the AI market. However, its success depends on whether it can attract sufficient funding and outperform ByteDance, as well as on Kuaishou's ability to leverage AI to boost its core business. This move could be a win-win situation if executed correctly; otherwise, both parties may suffer.