Continuing from where the first film left off, Wing Chun master Ip Man and his family move to Hong Kong in the early 1950s after their escape from the Japanese. There, he desires to open a school to propagate his art, as well as make his living, but he has difficulty attracting students due to his lack of reputation in the city. One day, a young man named Wong Leung (Huang Xiaoming) appears and promptly challenges Ip to a fight to test him, but is easily defeated in a brief bout. Leung leaves humiliated, only to return with some friends to gang up on him. Ip beats them as well. Stunned and impressed by his skills, Leung and his friends become his first students, bringing more disciples to help the school thrive. Ip later encounters his old friend Chow Ching-chuen (Simon Yam), and his son Kong-yiu while out shopping; Chow had apparently suffered a gunshot wound to the head from the Japanese. As a result, he suffered brain damage that has affected his memories, leaving the pair of them destitute. Ip is saddened by his friend’s fate and offers to help Kong-yiu take care of his father, providing him with a job at a newspaper agency run by a friend.
Meanwhile, Leung is caught pasting leaflets promoting Ip’s school by some Hung Ga students. One of them challenges Leung to a fight and loses, but his friends take Leung hostage in revenge, hoping to extort money from his master. Ip receives word of the kidnapping and goes to the local wet market as appointed, but the meeting ends in a confrontation with a growing mob of Hung Ga students. Ip and Leung fight their way outside to meet Jin Shanzhao (Fan Siu-Wong) — the martial artist and former bandit in the first film — who comes to their rescue with his own gang. Renowned Hung Ga master, Hung Chun-nam (Sammo Hung), arrives to break up the fight. Ip introduces himself, and Hung informs him that to set up his own school, he must be subjected to a ceremony where he must be challenged by the city’s Kung Fu masters. Ip, Leung and Jin are subsequently arrested by Fatso (Kent Cheng) for disturbing the peace, but they each manage to make bail and are released. Hung is then shown to be acting as a collector for the other masters and himself as part of a protection racket, headed by Superintendent Wallace, a corrupt officer in the Hong Kong police