Ip Man and his family move to Hong Kong in the early 1950s after their escape from Fushun. There, Ip desires to open a school to propagate his art, as well as to make his living, but he has difficulty attracting students due to his lack of reputation in the city. One day, a young man named Leung Sheung appears and promptly challenges Ip to a fight, but is easily defeated. 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 Ip's first students, bringing more disciples to help the school thrive.
Leung is later caught posting promotional posters for the school by some Hung Gar students. One of them challenges Leung to a fight and loses, but his friends take Leung hostage in revenge and demand a ransom from Ip. Ip goes to the local wet market as directed, 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 — the martial artist and former bandit in the first film — who comes to their rescue with his own gang. The students' master, Hung Chun-nam, arrives to break up the fight. Ip introduces himself, and Hung informs him that before setting up a school, he needs to attend a special fighting ceremony to test his skill. Ip, Leung and Jin are subsequently arrested by Officer Fatso for disturbing the peace but are later released on bail. Hung and Fatso are then shown to be acting as reluctant collectors for the martial arts schools (including Hung's) as part of a protection racket headed by Superintendent Wallace, a corrupt officer in the Hong Kong police.
Ip attends the ceremony and defeats his first challengers, and then strikes a draw with the last challenger, Hung. Ip is allowed to keep running his school on the condition that he pay the monthly protection fees, but he declines. Hung thus has his students loiter in front of the Wing Chun school and harass