In V.A.T.S. you instantly do a Critical Hit against your fourth target and beyond.
This perk causes each shot on targets after the initial target to do additional damage, but only applies to a new target in V.A.T.S. Additional shots at the first target do not count towards the chain. At rank 3, every target from the fourth and beyond will be an automatic critical hit. The effect only applies to additional targets, not additional limbs within the same target, and queueing actions "back and forth" across two or more targets does not trigger the effect on the first target.
V.A.T.S. allows only 16 actions to be queued, potentially allowing for 13 critical hits to be delivered. These critical hits do not count towards refilling the critical meter, however.
Settlement turrets and grenades/mines (enemy or player character thrown) count towards targets in the chain.
The name of the perk is a pun on the fighting style Kung fu.
The effects of this perk are actually closer to a Gun Kata, or the idea of a formalized set of choreographed movements based on martial arts and optimized for close quarters gun fighting, an idea popularized in some Hong Kong and American cinema particularly some near future dystopian movies like Equilibrium.