Kuaishou Technology ($1024)

Ladies and gentlemen, thank you for standing by welcome to Kuaishou Technology Q1 Financial Results Conference Call. Please note that English Samtani interpretations will be provided from management in prepared remarks, the English line will be in listen-only mode. And this meeting is being recorded. Now I'll turn the call over to Mr. Matthew Zhao, VP of Capital Markets and IR at Kuaishou.

Thank you, operator. Good evening, and good morning to everyone. Welcome to Quester Technology Q1 2026 Financial Results Conference Call. Joining us today are Mr. Yixiao Cheng, our Co-Founder, Chairman and CEO and Mr. Bing Jin. Before I start, please note that today's discussion maintain forward-looking statements, which involve a number of risks and uncertainties. Actual results and outcomes may differ from those discussed. . The company does not undertake any obligations to update any forward-looking information except as required by law. All important information about this call including forward-looking statements regarded to the company's public information on our first quarter 2016 results announcement ending March 31, 2020 issued earlier today. During today's call, management will also discuss certain non-IFRS financial results. These are provided for additional information and should not replace IFRS-based financial results for a definition of non-auto financial measures a reconciliation of IFRS to non-air results and related risk factors, please refer to our Q1 2020 results announcement. For today's call, management will use Chinese as the main language, a third-party interpret will provide suntan interpretation in prepared remarks session and a consecutive interpretation during the Q&A session. Please note that English notation is for convenience purpose only. In case for any discrepancy, management statements in their original statement will prepaid. Lastly, unless otherwise stated, all currency units mentioned are in RMB. Now I hand the call over to Yixiao.

Welcome to Kuaishou's Q1 2016 Earnings Conference Call. In Q1 2026 complex and evolving market environment, we continue to advance our AI strategy execution, clean AM and its global leadership in multi-module video generation and AR technologies continue to enhance the vitality of our content ecosystem, expand monetization and improved organized insurance efficiency. In Q1 2016, the average DAUs on Kuaishou reached RMB 413 million total revenue increased by 3.4% Y-o-Y to RMB 33.7 billion. Revenue from our core commercial business, including online marketing services and other services, primarily e-commerce, increased by 10.7% Y-o-Y, adjusted net profit reached RMB 3.4 billion with an adjusted margin of 10%. Clean AI demonstrated strong momentum, driving our second growth curve, sustain its global leadership in model capabilities and product experience while achieving rapid monetization growth. In Clean an generated revenue of over RMB 650 million, representing a Y-o-Y growth of more than 300%. Next, I will walk through the details of our major business plans in Q1 2026. First, our AI strategy and the progress of our large video generation model, clean AI. In Q1, Clean AI continued to advance its mission of empowering everyone to after capitating stories with through ongoing model iteration intelligent product operates and deeper penetration across the professional scenarios, Clean Air further reinforces global leadership in AI video generation modern technology level in February 2026. We launched the Clean AI 3.0 model series, built on an all-in-one product framework, the Clean 3.0 model series was full multi-model impose out spanning tax, images, audio and video, integrating video understanding generation and adding 1 streamlined workflow. While supporting video generation of up to 15 seconds, the ClinI3.0 Model Series delivers highly flexible story board control and a more precise semantic alignment incorporating 17 audio video generation capabilities with strong subject consistency to further extend the boundaries of AI story talent. Product level lab agent to move upgrade the creative experience from stand-alone tools to an intelligent agent-driven system with features including multiturn conversational editing and a multi-prospective intelligent short adventure. In addition, Clean AI launched the team plan supporting real-time collaborative creation for up to 15 members and enabling creators to efficiently manage concentration workflows among teams. Recently, we launched a baseball Live effect, which once again ignited global creation frenzy and swap across social media platforms worldwide. This viral had propelled the clin AI to the top of the overall app store charge in 42 countries including Germany and Brazil. Glen has continued to focus on cores of professional creators across the full and television, advertising, e-commerce and gaming sectors, supporting common production with end-to-end industrial-grade capabilities and driving meaningful cost reduction and efficiency improvement. Kling AI was used in the creation of a selected virtual scenes and visual effects to a heat Chinese historical drama was into low shares in the highway series house of David clean air support generation of hundreds of high-quality shops, including brand shines and complex battle sequences demonstrating its exceptional strength in commercial film and television production. With broader adoption across professional creative scenarios, plans commercialization has accelerated. In Q1 of 2026, Kling AI generated revenue of over RMB 650 million, representing growth of more than 300% year-over-year. In March, lens annualized return run rate reached approximately USD 500 million. We made continued solid progress advancing the research and development of our general purpose models and in deploying a driven enhancement across all our commercial and organizational ecosystem the general purpose multi-model level release the CAD coder PV2 and agent coating model with the strong capabilities from Naphat came online reasoning and agent execution. That is comparable with the mainstream according to such as Claude code. It has been trained and optimized for open fall and is capable of navigating complex real-world action workflows -- in terms of the environment for our commercial ecosystem, we continue to deepen the application of generative recommendation large models and intelligent bidding models in online marketing services scenarios driving roughly 4% growth in domestic online marketing services revenue in Q1. To optimize our generative recommendation large models, we incorporate multi-model aligned advertising in banks by combining value where supervised learning with ranking guided reinforced learning, we improved the quality of material recognition candidates that -- we also enhanced inference through model optimization at inference stage for the improving model performance. For e-commerce business scenarios, the new generation generative search framework on surgery was fully rolled out across e-commerce search narrows in Q1. Through tech innovation, we have introduced a self distribution generative search framework based on latent space reasoning and enhanced models inference capabilities and the search experience without incurring additional inference costs and/or service latency, which drove incremental GMV growth of approximately 3% in our e-commerce search business. at our organizational ecosystem retirement level caused the proprietary coding to Coface has prime AI generated called penetration to 50%. It's also evolved into a company-wide general purpose at on to my expanding its use in errors from engineering coding to broader employee-facing scenarios. It now empowers functions across R&D, product operations, data statenhance the overall organizational efficiency. Second, user growth and content ecosystem. Q1 average DAUs on casual average of RMB 413 million, and MAU reached RMB 722 million, average daily time spent per user remained relatively stable by providing differentiated premium content, our traffic mechanism and expanding social interaction scenarios around Chinese New Year, we offer users a higher quality and more heart warming online community with distinctive actual characteristics. In refining our distribution mechanism, we balance user experience with monetization efficiency, resulting in increased exposure for premium content. In terms of user growth quality, we further refined operations across all channels, but integrating user acquisition spending with monetization scenarios and continuing to elevate our user retention strategies, we successfully improved user growth ROI. During the 2026 Chinese New Year holiday, we created an emergency online spring test we experience to drive high-quality user growth through innovative, interactive features and incentive premium content matrix, achieving a few new historic NDAs. In terms of conic ecosystem, we launched a series of retitrate content IPs, including bishopring Festival Golar you have the horse, Grandstage, the Northeast compania leverage in Kling AI, we released generated a Chinese New Year animation for players, show gallon. These initiatives foster vibrant festive atmosphere users amplifying the parity and influence of coastal native content. Users social interactions increased significantly during the Cinema campaign. The number of payers using our social injection product, grew by 25% compared with the pre-spring festival period. and the number of users stand in private messages increased by 15%. These initiatives are fostered vibrant festive atmosphere for users while amplifying the popularity and influence of quasi-native content data showed that our 2026 New Year program is generally over 15 billion live streaming views and more than 250 billion views and over 6.5 billion cumulative lags per pound user growth and reinforce using my share for pricing brands. Third-line marketing services. Q1 revenue from online marketing services reached JPY 19.6 billion, up 9.3% Y-o-Y with revenue from domestic online marketing service has grown by more than 10% year-over-year. In Q1, the content consumption, lifestyle services and AI application sectors were the primary drivers of our non-e-commerce marketing services revenue and the content consumption sector reduced production costs and lowered the great threshold for Comicyle short plays, driving rapid growth in content supply and related marketing demand. As of the end of March 2026, Paco's daily marketing spend on Kuishouomicyle short plays exceeded RMB 20 million. Within the lifestyle service sector where clients primarily operate on a lead-based model, we advanced more refined industry operations across 20 verticals, including health care, industrial and agricultural materials, education and automotive. By tailoring our solutions to the conversion characteristics of different industries, we help merchants improve customer acquisition efficiyrove incremental advertising spend across these sectors. At the same time, we help the merchants reach potential customers more efficiently and improve user conversion rates through product upgrades. In addition, during the Chinese New Year period, demand for marketing placement in the AI application vertical was strong. We effectively captured relevant budgets and optimize the conversion outcomes contributing to AI application clients increased marketing spend and commitment to our platform. In Q1, we accelerated penetration of AI across diverse online marketing services covering the full preplacement in placement and post placement life cycle. This improved client placement experience and drove growth in total spending from online marketing services. In preplacement, the generation of AI marketing materials enable merchants to produce materials at a lower cost and more efficiently. As of March, AIGC short video marketing material spending contributed 10% of total short video online marketing spending on our platform. At in placement stage, our universal auto placement solutions became the dominant placement tool adopted by most online marketing clients. During the quarter, we added a new AI agent feature to UAX placement solutions. learning from the best practice in placement optimization, creative generation and adding across verticals, our UAX placement solutions automatically assisted our advertising teams with tasks such as ad unit creation and management, improving overall placement efficiency and post placement stage AI-driven analytics automatically reviewed the performance data and provided timely feedback to clients, reducing many operational workloads. Meanwhile, digital employee solutions offer 24/7 automated responses, enabling clients to handle consuming parts in real time, especially during periods such as overnight hours when human support is limited. e-commerce merchant services, we further advance and deepen our omni domain traffic synergy strategy through improved coordination between organic and commercial traffic pools, enhancing e-commerce traffic exposure and business growth of brand merchants. In Q1, we onboarded an increasing number of brand merchants and small and medium-sized merchants. The number of active merchants using marketing placements increased by 33% Y-o-Y and brand advertising spend increased by 42% Y-o-Y, supporting GMV growth for brand merchants self-operated business across omni-domain scenarios. Meanwhile, AI capabilities have been fully integrated across our end-to-end e-commerce marketing placement workflows. We coordinated efforts of user interest in AI agent, creative selection AI agent and bidding selection AI, both marketing placement precision and efficiency improved. On the product side, with continuous upgrades, our omni platform marketing solutions accounted for a greater share of our total spending from e-commerce marketing services and became the primary placement offering for our e-commerce marketing services. Our net transaction ROI product help merchants optimize their net transaction GMV, enabling more stable settlement outcomes. In Q1, client penetration rate reached 45% across industries and meaningfully reduced product return rates. Meanwhile, our full store hosting model allow merchants to overcome single product placement constraints through one click storewide placement, freeing up manpower. Fourth, e-commerce -- we will advance our e-commerce strategy through 3 key upgrades, prioritizing paying user growth, supply acquisition and deeper integration of e-commerce and commercialization traffic. This will enable merchants to better capture the end-to-end synergies across omni-domain scenarios, amplifying growth momentum. In Q1 by seeing advancing strategy, our e-commerce business achieved a sustainable healthy growth. We remain committed to strengthening omni domain traffic synergies and refining operations across the full buyer life cycle to drive long-term growth in our e-commerce supplier base. In Q1, on the supply side, we prioritized onboarding rent merchants and new merchants, while further improving the quality of product supply in the first quarter. For brand merchants, we continue to advance our voyage initiative we should launch in the fourth quarter last year, targeting top-tier brands across diverse verticals to support them on multiple fronts, including traffic corporations and brand building. In the first quarter driven by incremental growth from new brand merchants and Braathens contribution to overall e-commerce GMV and commercialization continued to increase, maintaining strong year-over-year growth. Meanwhile, existing merchants continue to scale and stabilize their operations while strengthening the house of resilience of e-commerce supply ecosystem. New merchant acquisition, we work closely with our service providers across on targeted priority industrial zones nationwide. In Q1, the number of new merchants onboarded in the industrial zones increased by 41.8% Y-o-Y. In addition, in collaboration with the industry teams and SME merchants teams were actively empower new ventures to thrive across our full life cycle from onboarding and early growth scaling through a mix of merchant incentive programs, operational tools and business safeguards and marketing initiatives. In Q1, the number of SME merchants grew leading to a healthy merchant structure and a more diversified supply. In Q1, we further improved our KY ecosystem structure. This enhances the supply of high-quality e-commerce content, and we continue to strengthen support for mid-tier KOLs. In January, we launched a treasure streamer small line initiative, leveraging platform resources to identify and support outstanding cloud across verticals and help them scale. We further refine our incentive policies, which significantly improve KOI streaming frequency. In Q1, the number of average daily active streamers hosting live sections with over 10,000 folders grew 10.1% year-on-year. In power KOLs, we began working with distribution and industry initiatives and providing top term merchants and KS with diversified monetization growth on our opportunities by expanding the reach of high-quality prep with a distinctive collateral e-commerce characteristics for a broader user base. The subsidy initiative is such a blockbuster initiative, along with continued optimization of distribution product allocation capabilities, we improve the efficiency of KOL product metric. In addition, we hosted offline matchmaking events between merchants and KOLs and introduced tiered services for KOLs at different levels. enabling high precision distribution in Q1, the number of merchant metrics in the distribution increased by 47% year-over-year, but the number of active cars participating in distribution grew by 23.5% worldwide. Our omni domain e-commerce operations ecosystem continued to show strong growth momentum as we strengthen coordination between cone-based and shelf-based scenarios through intelligent subsidies and refined operations across the full user life cycle. We achieved end-to-end efficiency improvement from product recommendation to repeat purchase bio stable and sustainable growth foundation for merchants. Cone-based scenarios continue to serve as the important driver of user demand as user consumption habits increasingly extended to browsing served shopping mall exploration or dominate domain consumption mindset among users have gradually taken shape. In Q1, e-commerce intend driven search TV grew 11% year-over-year, while new and returning buyers in the shopping malls increased by approximately 6% in March indicating the strong activity in neutropenia rather supply drove increase in purchase frequency among an shelf-based e-commerce users. AI capabilities, we deliver tangible operating efficiency gains for merchants and per user experience, leverage of large model capabilities. We comprehensively upgraded the shopping decision-making process. to end-to-end empowerment standing user latent demand innovation, search engagement, guided shopping and live streaming rooms and finally, subsidy distribution built on large model technologies, we launched an upgraded search experience by introducing an AI agent-based one-stop intelligent shopping system. With this upgraded search revolver from user initiative, product lookup to an AI-led product significantly improving search conversion efficiency in additional leveraging AI to empower sales operations, we optimize the process of started shocking and live streaming rooms last ring scenario is a real-time product highlight summarization and AI-powered autorihosting feature generated over $10 million in incremental GMV per day per merchants. Next, regarding our live streaming business. In Q1, live streaming revenue reached 0.5 billion. We remain ceded to the health of live streaming ecosystem as our core priority focusing on supply quality improvement on enrichment and innovation to build a sustainable life streaming ecosystem for long-term growth. We'll continue to support high-quality content categories such as premium go black streaming and strengthened professional operations of talent agencies, solidifying financial bloodstreaming supply. On the product and technology front, AI capabilities following our live streaming rooms, AI, including AI interaction, assistance, additional Avatar solutions. And our private messaging improved the streamers service efficiency and enhance the viewer engagement experience. Kling AI video generation strength is significantly power live spring deration accelerating rollout and enriching creative expression while boosting user relines to pay in Q1, the universe series go with the customizable specialties users reached 1.1 million. In content, we launched a diverse range of live streaming interactive features during the build engaging live stream scenarios, the casual master line with series of future overall AI digital human streams generated by KAI, interacting with users through our experience and attracting nearly 50 many users who actively participate. At the same time, we further strengthened our gaming content ecosystem during the Chinese New Year, we launched a Spring Festival player Carnival campaign, partnering with over 50 game developers and collaborating with major game is to roll out exclusive content and user benefits. Moreover, our eSports business, a key strategic pillar of our gaming system achieved a breakthrough in April cease the King Pro late camperships driving a further evolution of the gaming system. Finally, about our overseas business progress. In Q1, we continuously explore high-value growth strategies for our overseas business while running to market changes with business resilience in terms of traffic, continue optimizing user acquisition efficiency and a user gross mix to commodity ecosystem rooted in real life. Meanwhile, we further expanded the content verticals favored by our core users to deepen their engagement Brazil or key market services development and maintenance average use and average daily time spent per DAU quarter-over-quarter. From marketing services. We consistently strengthened our advertising product capabilities by leveraging to fully our and marketing workflows, improving placement efficiency and the performance stability for clients. At the same time, we capitalize on our strength at content platforms, localizing commercial creatives to unlock incremental advertising budgets particularly from core sectors led by cross-border suppliers. Our e-commerce business in Brazil achieved a solid year-over-year growth in GMV and order volume in the first quarter, but spent in key categories and high-quality product supply, we grew conversion and repeat purchase rates meanwhile through assisted content production and content reformation, we continue to optimize operational efficiency and profit generating arability. In summary, confronting many challenges and regions tests, we remain steadfast in our core ad strategy breaking through barriers with our deep tech and ecosystem strength. Looking ahead, we will navigate uncertainties with long-term resolve continued steepening II integration to long-term value for all stakeholders unlock new growth together. And that concludes my remarks. Thank you. I'll hand it over to Jin Bing.

Thank you, Yixiao. In Q1, we continued to advance our strategy and made meaningful progress leveraging our leading capabilities, we deepened our environment of pesos client and business system delivering healthy steady growth across both our operational metrics and financial, we continue to broaden the application of EI large models across business narrow. So further optimizing user experience to enhance our talefficiency for our business partners. At the same time, is rely realizing its commercial value as the company's second growth curve. In Q1, the group's total revenue reached RMB 33.7 billion, with revenues from our core commercial business, which includes online marketing services and other services, primarily e-commerce grew growing 10.7% year-over-year. Notably, Kling generated revenue of over RMB 650 million, representing a year-over-year growth of more than 300%. Adjusted net profit was RMB 3.4 billion, with an adjusted net margin of 10%. While continuing to scale our investment in AI, we maintain the group's overall profitability and our operational cash flow at a healthy level. Now let's take a closer look at our Q1 financial performance. Our total revenue grew 3.4% year-over-year to JPY 34.7 billion in Q1. The increase was mainly driven by growth across our online marketing service, e-commerce and clean AI businesses. Online marketing services revenue increased 9.3% to RMB 19.6 billion in Q1 from RMB 18 billion in the same period last year. This growth was primarily driven by the accelerated generation of AI across diverse online marketing services in areas which use marketing material generation cost for clients and optimize the placement experience that will also improving conversion efficiency and driving higher spending by our marketing clients. Revenue from other services, including our e-commerce and clean businesses reached RMB 5.6 billion in Q1, up 15.9% from RMB 4.8 billion in the same period last year. The increase was mainly driven by the continued expansion of our Kling AI business by continuously refining clean AI's foundation models and developing more innovative features. We have broadened this adoption across professional creative scenarios accelerating its commercialization. In Q1, our live streaming revenue was RMB 8.5 billion, we consistently cultivate high-quality content offerings, expanding live streaming scenarios and leverage AI empower innovations to develop a rich and healthy live streaming ecosystem and diverse high-quality content. Cost of revenues increased 11.1% year-over-year to RMB 16.5 billion in Q1, accounting for 48.8% of total revenue. The increase was mainly due to higher revenue sharing costs and revenue growth as well as incur bandwidth expenses, server custody costs and depreciation of the property and equipment and right-of-use assets and monetization of intangible assets. Basec on the above, our gross profit was RMB 17.2 billion in Q1 compared to RMB 17.8 billion in the same period last year. Gross profit margin was 51.2% compared to 54.6% in the same period last year. Turning to expenses in Q1 selling and marketing expenses were RMB 10.3 billion compared to RMB 9.9 billion in the same period last year. Selling and marketing expenses slightly increased to 30.6% of total revenue from 30.4% in Q1 last year, primarily attributable to increased spending in promotion activities. R&D expenses increased 9.8% year-over-year to RMB 3.6 billion, accounting for 10.7% of total revenue. The increase was mainly due to higher employee benefit expenses, including share-based compensation expenses and increase in investments in AI. Administrative expenses were RMB 770 million compared to RMB 830 million in the same period last year, primarily due to a decrease in employee benefit expenses, including related share-based compensation expenses. The group level net profit for Q1 was RMB 2.9 billion. Group level. Adjusted net profit was RMB 3.4 billion with an adjusted net margin of 10%. Our balance sheet remains robust. Cash and cash equivalent, time deposit, financial assets and restricted cash totaled RMB 117.7 billion as of March 31, 2026. Net cash generated from operating activities in Q1 was RMB 3.1 billion. Additionally, we actively delivered on our commitment to shareholder returns based on market conditions as of today, we had repurchased approximately HKD 854 million. or around 17.96 million shares, representing about 0.42% of our total shares outstanding for 2026. Looking ahead, we will continue to prioritize user needs and remain to investing in AI leveraging our leading capabilities that will further boost the vitality of our economy ecosystem and monetization, reinforcing our competitive edge in the average manage market and creating long-term value for our users, partners and shareholders. This concludes our prepared remarks. Now we can open the call for Q&A.

[Operator Instructions] The first question comes from Kenneth Fong of UBS.

[Foreign Language] And congrats on very robust growth on Kling. I have a question on Kling AI. This commercialization progress in first quarter has exceeded expectations, what are the main drivers behind this strong revenue growth? What are the reason use case and primary application scenario for Corning? And how should we assess the future application projects for the video generation of large language models.

Thank you for the question. In Q1 2026, Kling AI generated revenue of over RMB 650 million, up more than 300% year-over-year. In March 2026, the ARR of Kling AI was approximately USD 500 million. For those who recall, our ARR stood at USD 100 million in March of last year. So it's increased by nearly fourfold in just 1 year. The rapid revenue growth was driven by both corporate API services and paid subscriptions from prosumers. The number of paid prosumer subscribers and their monthly ARPU increased rapidly. From the retention perspective, our corporate clients and paid consumer subscribers maintained healthy retention trends. and scoring Clean A robust technology and the product capabilities in professional creative scenarios. This has translated into strong user stickiness, providing a solid function for claim AI's long-term sustainable revenue growth. Kling AI is viewed mainly for professional creative scenarios, spanning advertising, marketing, film, television and short plays and gaming. In advertising and the marketing scenarios, Clean AI covers the entire visual production life cycle. Early in the ideation phase, it rapidly generates near final demos that turn creative concepts into tangible visuals. Those same visuals carry through to guide the final production shoot. Kling AI's model capabilities maintained strong ad character and product consistency across different things and camera angles, offering advertisers reliable visual support to establish a coherent creative tone. In film, television and short play scenarios in can be embedded into the entire factoring workflow from script breakdown and concept design for characters intelligent storyboarding and final video generation. enabling a highly automated creation process that significantly reduces production time lines and costs. The AI short film paper smartphone, which went to virulin early April this year and accumulated over 1 million online bills was produced by 2 nonprofessional film creators in just 3 days using Kling AI. The creators leverage clean AI to generate almost all visual elements covering the full pipeline from story boring to final cut. In gaming scenarios, Kling AI supports the project initiation is by turning concept upward into dynamic previews sanitary considerable time producing the animated move forward. Kling AI also supports downstream production by generating assets such as green box renders, in-game narrative sequences and castings. In terms of the outlook for the applications of large video generation models, we have already seen a compelling signal so far this year. AI generated short plays have shown strong momentum with AI technologies driving multi-poincreases in content supply. We have also reasons to believe that as large video generation models continue to achieve breakthroughs professionally generated content, PGC supply, including films, is likely to hit a pace of breakout growth. This would bring only a dramatic expansion in high-quality professional content supply, but could also enable the integration of more personalized and interactive elements into content. -- such as brand users own identities and personalities into the continent itself. This level of highly personalized content consumption could fundamentally reshape the relationship between users and content. Against this backdrop, Kling AI is well positioned to unlock substantial commercialization potential. Overall, we are highly confident in clean AI and broader AI video generation sector. and we will continue to invest in Kling AI's computing power and talent development.

The next question comes from Lincoln Kong of Goldman Sachs.

So my question is, other than Kling AI, what are the other areas we have seen progress on AI front this quarter, especially like agents, et cetera.

In Q1 2026, we continue to -- we also made solid progress in leveraging AI to empower our business ecosystem and improve organizational efficiency. At the beginning of the year, a such as open core attracted widespread attention. I'd like to take this opportunity to highlight the progress we've made with AI agents in different scenarios. In e-commerce marketing services, we launched end-to-end AI agents covering user interest in inference creative production, product selection and a marketing decision. In the user interest inference stage, we'll reach AI-generated recommendation to consolidate user behaviors on the platform into representations that are interpretable by models. We expanded the breadth of user interest understanding and harnessed behavioral sequences to uncover deeper user consumption patterns. In the creative and product selection stage, our AI agent to help merchants identify materials and products with higher potential to become blockbuster items, offering greater exposure through traffic allocation and ultimately improving the ARPU of material placement. In the bidding decision inference stage or agent to leverage historical data, intraday traffic trends and traffic pricing across different scenarios to predict optimal bidding strategies, ensuring stable and efficient ad placement. By empowering merchants to achieve their full day ROI targets, we effectively macerate the overall marketing placement scale. Tailored for the local services scenario, we have launched 3 specialized agents. The target user is exploration add the deeper conversion agent and the sales agent. The target users agent leverages the capabilities of RMs to gain a profound understanding of lead-based product and services. by inferring users later needs based on their behaviors on the platform, it significantly improves the conversion rates and the cost stability of clients' marketing placement. The deep conversion agent utilizes the long context understanding capabilities of RMs to accurately graft user intent. It optimizes model performance specifically towards deep conversion goals. They're about boosting the efficiency of lead conversion. Finally, the sales agent integrates merchant-specific and industry knowledge bases. This enables us to respond to customer inquiries like a professional service representative. Handle multiturn conversations, even achieve fully autonomous end-to-end workflow management. In terms of organizational empowerment, My Flicker, the upgraded version of CodeFlicker has become the AI work companion for quetial employees. It integrates multiple industry-leading large models and processes core capabilities of a general-purpose agent, including proactive response, reasoning and planning and memory. Furthermore, it can leverage skills to invoke to our vertical agents to handle various complex tasks. We're committed to continuously embedding AI capabilities into employees' daily work and arrows, significantly elevating their overall work experience. In summary, we will continue to accelerate the deep integration of AI into our business operations and organizations, creating greater commercial value and growth opportunities for both the company and our partners.

The next question comes from Thomas Chong of Jefferies.

Management for in my question. We have seen companies completed the indication of e-commerce and commercial profit in Q4 last year. Then the results of the integration we see so far in Q1, how should we think about the monetization in e-commerce for the full year 2026.

Thank you for your question. The integration between e-commerce and commercial traffic was fundamentally designed to align our e-commerce with e-commerce advertising distribution. To be more specific, First, marketing placement helped merchants amplify their advantages in acquiring traffic within e-commerce. Second, high GPM merchants with strong operating performance, we're also able to secure more advertising traffic. Following this integration, we achieved increases in e-commerce traffic, our buyer base and a number of merchants across omni domain scenarios. In Q1, e-commerce commercialization traffic maintained high single-digit growth. effective marketing initiatives are continuously stimulated and expanded e-commerce fire interest, driving a more than 20% year-over-year increase in the number of e-commerce monthly active paying users attributable to marketing. While the number of active merchants using marketing placements show strong growth momentum, increasing by nearly 40% year-over-year. This mechanism has amplified the scaling leverage available to brand merchants, enabling them to achieve breakthroughs in operational scale while contributing to a healthier merchant structure. As mentioned earlier, we launched the Voyage initiative last year, benefiting from focus this year on brand acquisitions and traffic synergy. GMV generated for brand merchants across omni domain scenarios increased by more than 25% year-over-year, while advertising spending rents under the voyage initiative increased by 42% year-over-year. As the macro consumption environment has yet to show significant recovery and compliance policies have weighed on operational efficiency for certain merchants on our platform in the near term. We'll continue to strengthen the foundational capabilities of our intelligent placement solutions, including our omni platform marketing solutions and our food store hosting. We are further rolling out our traffic integration mechanism, and we'll focus our resources on introducing high-quality products and content supply while consistently offering traffic support to brands and merchants with balanced profiles, we're capable of and committed to sustainable long-term operations. Although in the near term, our overall e-commerce monetization rate growth may get impacted slightly, we see this as an opportunity to strengthen our merchant ecosystem. Over the long run, we believe the structural adjustment to the merchant ecosystem will lay a solid foundation for a healthier and more sustainable development of our business ecosystem.

The next question comes from Miranda Zhuang of Bank of America Securities.

My question is about the AI video content. So the AI comics on short place have been growing very fast recently. How does management view the drivers for this trend and how do we think about the growth sustainability into the future.

Thank you for the question. As you noted, in Q1, marketing spend on comic shore place grew more than 10x year-over-year and more than 150% quarter-over-quarter. As of the end of March, the peak of daily marketing spend on facial comic style short plays exceeded RMB 20 million. The core driver behind this growth is AI's ability to substantially lower production costs, enabling can supply to expand rapidly and subsequently driving stronger consumption and marketing placement demand. First, on the supply side, AI has significantly reduced production costs and lower the barrier to entry for creators. AI can now handle multiple stages of production, including capture design, storyboarding, special effects and dubbing and post-production editing. It eliminates the needs for actors, filming locations and production equipment, which is significantly shortening the production cycle to just 3 to 4 weeks. Pobeda shows that the production cost of a single AIM comic style short play ranges from 80,000 to 150,000 approximately 70% lower than traditional short plays. This cost advantage has lowered the entry barrier for creators and studios driving rapid expansion in content supply. According to third-party data, around 47,000 AI comical shore plays were released in March alone, surpassing the 33,000 short plays that were released over the entirety of 2025. In Q1 2026, the average daily number of comic style short plays with active marketing placement on Quito platform grew by 25% quarter-over-quarter. This massive supply expansion has propelled growth in marketing spending on iconic style for plays. Second, on the demand side, AI comic short style short plays not only cater to codes of existing Folies but also expanding to broader user segments, especially in grams such as fantasy, Sensia and science fiction, AI coming software players can transcend the cost constraints and technical eliminations of live action production therefore, meeting more diverse content consumption needs. Beyond broader industry needs, the case growth of AI coming so short play on pet is also closely tied to our continued effort in this category. First, as early as 2025, we began to closely track and invest in this emerging segment. We provided 100 million-scale traffic support and cash incentives while laying the groundwork early for both content supply deployment and commercialization. Second, on the supply side, we have been continuously developing the UGC ecosystem to bring more creators and more small and medium-sized ties into iconic style for plate. We're also helping connect novel copyrights with comic adaptation resources so that high-quality IP can be turned into high-quality AI comic style short play content more efficiently. Meanwhile, Kuaishou already has a mature client consumption on the commercialization ecosystem. This allows us to better support the growing content supply, distribute quality content more effectively and further amplify their commercialization potential. Looking ahead, we remain optimistic about the continued growth of AI comic style shore place, and we expect to see robust growth in the medium term. Third-party data projects that the market size for AI comical plays in China will exceed $30 billion in 2026 and surpassed $85 million by 2030. At Kuaishou, we are well positioned with a vibrant user ecosystem industry-leading video generation models and mature capabilities in content distribution and commercialization. As such, we're confident that through the deep synergies between content and technology, we will drive sustained growth in AI comic style short plays on our platform. Thank you. Maybe the last question, please, operator.

The last question comes from Xueqing Zhang of CICC.

My question about financials. Management share of cash flow management policy and what are the plans for CapEx and the shareholder returns going forward. And this can have any impact on the company's cash flow position?

The company has consistently adhered to a prudent capital management strategy, maximizing capital efficiency while ensuring safety and liquidity. We still expect CapEx of approximately $26 billion this year, and currently, there is no update to this guidance. We expect the majority of the total capital expenditures will be incurred in the first half of this year. In addition, we have taken proactive measures to build advanced procurement and inventory buffers among a rising computing power prices. This is a deliberate step to manage market volatility, allowing us to better control procurement costs for giving resources when prices move upward. We consistently prioritized the creation of sustainable long-term value for shareholders. We remain firmly committed to our proactive shareholder returns policy. Through a combination of sustained and stable dividends, share repurchases and other diverse mechanisms, we deliver tangible returns to our shareholders for their trust and support. This demonstrates our firm confidence in the positive development of our business over the long term and our strong cash flow generation. Building on an annual dividend of HKD 3 billion this year, we will continue to actively repurchase shares. We expect total shareholder returns in 2026, including dividends and shareholder repurchases to increase compared to last year with an overall shareholder return yield of around 4%. In terms of cash flow, even with RMB 26 billion in CapEx, we still aim to maintain positive free cash flow at the group level for the full year. By executing higher precision targeted investments, we aim to unlock greater profitability growth in the future. As we firmly invest in our AI strategy, we will strictly manage financial risk, to attain a healthy cash reserve ensuring a solid financial structure to safeguard our long-term high-quality growth in the AI era. Thank you, operator. That's the end of the Q&A session.

Thank you once again for joining us today. If you have any further questions, please connect our Capital Market and Investor Relations team at any time. Thank you.