(Yicai) July 3 -- Kuaishou Technology said it will spin off Kling AI and raise as much as USD3 billion for the artificial intelligence-based video-generation business at a roughly USD18 billion valuation in what is set to be the single largest financing round in the global video foundation model sector.

Kuaishou signed capital increase agreements with investors yesterday, structuring the transaction in two phases, the Beijing-based short-video platform operator announced the same day. Lead investors will first put in CNY13.8 billion (USD2 billion) in cash for newly issued equity in Kling AI, and then 15 additional investors will inject CNY5.2 billion (USD766 million).

Kling AI may also bring in other investors during the 60-day subscription period, raising up to another CNY1.4 billion (USD206.4 million), bringing the amount to CNY20.4 billion (USD3 billion) and accounting for almost 17 percent of its registered capital after the increase.

Kuaishou’s share price [HKG: 1024] ended little changed at HKD42.60 (USD5.40) in Hong Kong today. The stock has lost a third of its value since the end of last year.

Thirty-four investors subscribed. The lead investors include CPE, Guofang Venture Capital, BlueFive Capital, Zhongguancun Science City Science and Technology Growth Fund, and Citic Securities. The co-investors include Alibaba Group Holdings' cloud computing arm and search engine giant Baidu, as well as major entertainment business Huace Film and TV.

Tencent Holdings also joined through its units Shanghai Qishan Investment and Parallel Mars Investment. Additional participants include the China Internet Investment Fund and Beijing Artificial Intelligence Industry Investment Fund, among other state-backed national and regional funds. Lighthouse Capital was exclusive financial advisor.

Under the shareholder agreement, investors are granted repurchase rights. If Kling AI fails to complete an initial public offering by Oct. 30, 2031, or fails to complete restructuring within an agreed timeframe, investors may require it to buy back their shares at the original cost plus an 8 percent annual simple return, with the parent company assuming joint liability.

Industry insiders said the spin-off is more than a mere financing exercise, it is a strategic necessity for Kuaishou in response to AI infrastructure spending, valuation pressure, and intensifying competition in the generative AI sector. The company has directed nearly all of its capital expenditure toward AI infrastructure, resulting in lower adjusted net profit.

While the independent financing bring Kling AI additional capital, it also puts the company directly into the competitive front line of the rapidly evolving video-generation AI market, the insiders said. Although the USD3 billion should provide sufficient capital for research and development, investors are increasingly focused on profitability and marginal efficiency rather than technical demonstrations, they noted.

Kling AI will quickly need to distinguish itself from other leading video foundation model providers and convert capital resources into substantial cost advantages, the insiders added. The battle is only just beginning.

Editor: Kim Taylor