On a towering mountain, a group of mountain goats is hard at work mining when suddenly, Tai Lung arrives, wreaking havoc and destroying their efforts. Meanwhile, Po, having just triumphed over a menacing stingray, is confronted by his mentor Shifu. Instead of taking the conversation seriously, Po is more interested in having fun with the valley's animals. However, after some persuasion, Shifu points out that Po must find a successor to become the new Dragon Warrior, leaving Po feeling quite frustrated.
The next day, the duo observes five candidates showcasing their skills, but Po struggles to make a decision and ultimately lets fate choose for him. This choice infuriates Shifu. On his way back to the palace, Po encounters a thief named Zhen trying to steal valuable items. A spirited battle ensues, and Po successfully apprehends her, resulting in her imprisonment. Later, upon hearing alarming news about Tai Lung's supposed return, he seeks counsel from Zhen, who had given him an important clue earlier.
In a surprising twist during their prison visit, Zhen discloses that Tai Lung is not back but is rather a decoy orchestrated by a sinister shape-shifting sorceress known as the Chameleon. Po initially intends to confront the Chameleon alone but soon learns he cannot do it without Zhen's assistance. Together, they venture to Juniper City, igniting excitement among the villagers, although Po's fathers, Mr. Ping and Li, trail behind with concern for their son’s safety.
As they reach a restaurant, chaos ensues; Zhen attempts to swindle the patrons out of mahjong tiles, leading to a raucous scene that culminates in their narrow escape with a rather inebriated captain steering their boat. During the journey, Po experiences a troubling vision revealing the Chameleon’s true motives. Upon arriving in Juniper City, Po discovers Zhen's reputation as a wanted thief, and the local authorities begin their pursuit. Fortunately, they evade capture by retreating to the Den of Thieves, where Zhen reconnects with Han, a figure from her tumultuous past who offered her refuge.
The following day, they infiltrate the Chameleon's lair, but the villainous sorceress quickly overpowers Po, imprisoning him in a cage. In a shocking betrayal, Zhen relinquishes the staff of wisdom to the Chameleon, revealing her allegiance to her all along. The Chameleon shares her backstory, lamenting that despite her passion for Kung Fu, she was rejected from all training facilities due to her size, forcing her into the world of sorcery. Trapped, Po struggles to escape, and in a desperate attempt, he breaks the ground beneath him, tumbling into a pit inhabited by guards.
Despite the odds stacked against him, Po returns to demand the staff back from Zhen, only to be deceived by the Chameleon’s disguise. The confrontation escalates as the Chameleon harnesses the collective strength of past Kung Fu masters, manifesting a formidable transformation that astounds Po. Zhen, realizing her error, races against time to mend her mistakes and save Po from his perilous situation.
In a touching moment back at the palace, Po confides in his fathers about the importance of change and their guidance bolsters his resolve to confront the Chameleon once more. Zhen, feeling guilty for her earlier choices, rallies the Den of Thieves to unite and face the Chameleon, aiming to rescue Po. In the final showdown, Po admits to Tai Lung that he has lost the staff and feels despondent. The ensuing battle is a fierce display of power, with the Chameleon wielding the might of the masters against Po.
Zhen attempts to join the fray but finds herself in peril as the structure collapses around her. In a clever turn, the Chameleon takes on Po's appearance, but he outsmarts her, ultimately transforming their fight into a dramatic confrontation. With Zhen using the skills she learned from Po, the duo manages to restore balance and thwart the Chameleon’s schemes, sending the captured villains back into the spirit realm with the staff of wisdom.
Upon returning to the Jade Palace, Po enthusiastically announces to Shifu that he has chosen Zhen as his successor. This revelation causes Shifu to spill his tea in shock, prompting him to retreat and meditate away his anxiety. Uncertain about her new role, Zhen hesitates, but with the encouragement of Po and the Furious Five, she begins her training, setting the stage for new adventures ahead.
