Company Reports

Bilibili’s second-quarter earnings exceeded our expectations, and management provided upbeat guidance for the third quarter following the successful launch of its new mobile game. We lifted our near-term estimates but leave the bulk of our long-term assumptions intact, as the success of one game doesn’t change our long-term outlook for Bilibili’s game business. As a result, we maintain our USD 34 (HKD 266) per share fair value estimate and view shares as undervalued.

History was made when Wukong: Black Myth became the second most popular game on Steam, yet several questions about its implications remain unanswered. Here, are some of our thoughts.

There have long been complaints that app stores take too big a share of in-app purchases, but nothing has managed to shake the 30% take-rate standard over the past decade. However, Bloomberg’s recent report on Huawei's talks with Tencent to establish a lower-than-industry share of 20% for in-game purchases provides hope for a reset. This move also reinforces our call for higher profitability for gaming companies over the long run. Although the Huawei HarmonyOS mobile operating system currently represents a small percentage of smartphones in China, the potential lowering of its app store fee to 20% could pressure other mobile app platforms to follow suit.

Bilibili generates revenue through five major sources: 1) advertising; 2) mobile games; 3) live streaming; 4) subscriptions; and 5) e-commerce. We believe that the advertising business (as part of its YouTube-like video sharing website) is the most important asset for the company’s long-term success.

Bilibili’s first-quarter earnings were in line with our estimates, and management maintained its breakeven plan by the third quarter of this year. Overall, we maintain our USD 34 (HKD 266) fair value estimate, and continue to believe shares are undervalued.

Bilibili's fourth-quarter earnings were above both our and LSEG consensus estimates, thanks largely to aggressive cost-cutting measures. Management's outlook for 2024 points to even deeper cost reductions than we anticipated. Concerns in the market regarding engagement metrics seem unfounded; we attribute the quarter-on-quarter volatility primarily to seasonality. We are maintaining our $34 fair value estimate for the no-moat company. This valuation is based on our confidence that Bilibili will get to a 20% operating margin in the long term, primarily through operating leverage. Trading at just around $10 now, the share are very undervalued, in our view.

Bilibili generates revenue through five major sources: 1) advertising; 2) mobile games; 3) live streaming; 4) subscriptions; and 5) e-commerce. We believe that the advertising business (as part of its YouTube-like video sharing website) is the most important asset for the company’s long-term success.

We lowered Bilibili’s fair value estimate by 11% to $34 as management cut revenue guidance following the removal of Pretty Derby from Chinese mobile app stores because of language translation issues. Despite rising near-term uncertainties related to the gaming segment, the firm keeps its breakeven timeline unchanged, so we see no reason to alter our long-term assumptions materially. Although shares are trading at a significant discount to our fair value estimate, we believe concerns over the timing of Pretty Derby’s return and the firm’s near-term gaming pipeline could continue to pressure share price performance. Hence, investors may be able to collect the shares at more attractive prices.

No-moat Bilibili's second-quarter earnings slightly exceeded our and Refinitiv's consensus expectations, but management lowered its full-year revenue guidance by 8% due to a delay in the launch of Pretty Derby. That said, with the firm keeping its breakeven timeline unchanged, we see no reason to alter our long-term assumptions. Overall, we maintain our $38.20 fair value estimate. While Bilibili's shares are undervalued, our preferred picks remain NetEase and Tencent, given their better visibility on long-term prospects.

Bilibili generates revenue through five major sources: 1) advertising; 2) mobile games; 3) live streaming; 4) subscriptions; and 5) e-commerce. We believe that the advertising business (as part of its YouTube-like video sharing website) is the most important asset for the company’s long-term success.

Bilibili generates revenue through five major sources: 1) advertising; 2) mobile games; 3) live streaming; 4) subscriptions; and 5) e-commerce. We believe that the advertising business (as part of its YouTube-like video sharing website) is the most important asset for the company’s long-term success.

No-moat Bilibili's first-quarter earnings mildly exceeded our and Refinitiv's consensus expectations, and management maintained its 2023 revenue guidance and reaffirmed its margin expansion plan. Overall, we are maintaining our $38.20 fair value estimate, and we continue to believe shares are undervalued. We believe the current market valuation (price to 2023 sales multiple of 2 times) indicates that the market underestimates 1) long-term ad revenue contribution from the video-sharing platform and 2) more operating leverage as the top line grows.

Bilibili posted a narrower fourth-quarter loss than the Refinitiv consensus estimate. Adjusted net loss came in at CNY 1.31 billion, 8% better than consensus of CNY 1.42 billion. Weak revenue guidance for 2023 (midpoint calling for 14% revenue growth) is due to management's plan to pull back on low-margin businesses, such as esports, content sublicensing, and e-commerce. Combined with other cost-cutting initiatives, management expects adjusted net loss to halve in 2023, positioning the firm to break even sooner than our previous forecast. However, despite plans to reduce costs over the next several quarters, we do not believe this warrants major changes to our long-term assumptions. Therefore, we retain our $38.20 (HKD 300) fair value estimate. Despite a 10% rally in share price after the earnings release, we still find the shares to be undervalued as of March 3, 2023, We believe the current market valuation (price to 2023 sales multiple of 2.5 times) indicates that the market underestimates 1) the long-term ad revenue contribution from the video-sharing platform; and 2) more operating leverage as the top line grows.

We believe the latest regulatory announcement from the U.S. should help add investor confidence in Chinese ADRs. The Public Company Accounting Oversight Board in the U.S. said on Dec. 15 it had gained full access to inspect and investigate firms in China. Before this, investors feared the Holding Foreign Companies Accountable Act could force hundreds of Chinese companies listed on U.S. exchanges to delist starting as early as 2023. The news should support recent outperformance by Chinese equities following moves to relax coronavirus testing and quarantine policies in China. Although volatility may persist as COVID-19 cases increase in China, we think the combined news presents a floor in terms of risk premium to China equities. While Chinese stocks have rebounded off lows, wide- and narrow moat-rated ADRs such as NetEase, Alibaba, Yum China, and JD.com are still seeing attractive upsides to our fair value estimates.

Bilibili posted better-than-expected earnings for third-quarter 2022, and announced additional cost-reduction measures. With cost-cutting ahead of our expectations, we've lowered our cost assumptions and brought forward our forecast of Bilibili's break-even timetable by one year, from 2025 to end-2024. However, even with plans to reduce spending in the next several quarters, we don't believe it warrants a change to our 16% long-term margin assumption. Management also said that it would increase monetization efficiency, but stopped short of providing anything new. We maintain our fair value estimate of $38.20 (HKD 300). Despite a 20% rally in the share price, we still think Bilibili is undervalued. We believe the current market valuation (price/sales multiple of 1.8 times for 2023) indicates that the market underestimates: 1) the long-term ad revenue contribution from the video-sharing platform and 2) more operating leverage as revenue grows.

No-moat Bilibili reported disappointing second-quarter earnings, with an adjusted net loss of CNY 2 billion, below both our and consensus expectations. The primary driver of the shortfall was higher general and administrative, and research and development expenses (up 58% year over year on a combined basis). Shares fell about 15% after the earnings release, which we attribute to weak guidance. Management expects advertising revenue growth to remain depressed for a few more quarters, assuming COVID-19 lockdowns continue across China.

On June 22, China’s National Radio and Television Administration and Ministry of Culture and Tourism released new regulations governing livestreaming, with guidelines that amount to a code of conduct for online livestreamers covering matters such as the qualifications required to livestream certain professional topics, for example medical and livestreamers’ tax liabilities. We believe there will be more specific responsibilities for internet audiovisual platforms, which could increase compliance costs. However, the regulations do not contain specific penalties if platforms are found to be negligent by the government, and we think performers face much greater risk. Article 15 and 16 of the regulations indicate the government will strengthen supervision and inspection as well as enforcement of rules for internet audiovisual platforms, agencies, and livestreaming hosts. If content and livestreamers violate these rules, platforms will need to deal with violations properly and quickly. Article 17 stipulates that internet performance, platforms, and agencies need to strictly adhere to statutory duties and obligations, enhance training and education, daily management, and guidance of standards for livestreamers. For example, internet hosts who commit serious or repetitive misconduct should be stopped and not allowed to conduct internet performance on another platform or use another account. We think that further regulations will be created if misconduct continues. At this stage, we expect the regulations will have an immaterial impact on the Chinese internet companies under our coverage. We maintain our fair value estimate, earnings estimates, moat and uncertainty ratings for Tencent Music, NetEase Cloud Music, Bilibili, Alibaba Health, JD Health, Alibaba, JD.com, and Pinduoduo.

We initiate coverage of Chinese video-sharing platform Bilibili with a favorable long-term view. We assign the firm a fair value estimate of USD 38.20 (HKD 300.00) with no-moat and stable moat trend ratings. Bilibili’s business model is subject to more regulatory uncertainty than other Chinese internet companies under our coverage, translating to our very high uncertainty rating. That said, we still see opportunity in Bilibili following the past year’s pullback, with shares trading 30% below our fair value estimate.

Bilibili generates revenue through five major sources: 1) advertising; 2) mobile games; 3) live streaming; 4) subscriptions; and 5) e-commerce. We believe that the advertising business (as part of its YouTube-like video sharing website) is the most important asset for the company’s long-term success.