In 1985, Mr. Miyagi tells Daniel LaRusso about the Miyagi-Do karate origins, tracing back to a 16th-century ancestor who learned kung fu from the Han family in China. In the present, Mr. Han, now a kung fu master in Beijing, is the guardian of his great-nephew, Li Fong. After Li’s mother moves them to New York to escape their martial past, Li struggles to adapt, gets involved with Mia Lipani, and clashes with her ex, Conor Day, a local karate champion.

Li is defeated by Conor, haunted by his brother’s death in a tournament. After saving Mia’s father, Victor, from thugs working for corrupt dojo owner O'Shea, Li begins training him for a boxing comeback. When Victor is hospitalized by a rigged fight, Li's hesitation disappoints Mia and his mother.

Mr. Han arrives, pushes Li to face his fears, and enlists Daniel's help to train him in both kung fu and Miyagi-Do karate. Li enters the Five Boroughs Tournament, defeats multiple opponents, and ultimately wins against Conor using an adapted Dragon Kick. He shows mercy, earning Conor’s respect.

In the end, Mr. Han returns to China, and Daniel receives a thank-you pizza from Li, with Johnny pitching a “Miyagi-Dough” pizzeria.