Description

Bilibili is a Shanghai-based online platform that provides a wide range of entertainment services. These include online games, videos, live broadcasting and e-commerce. A typical user may join Bilibili’s platform initially for its animation, comics and games (ACG) content but may move on to content of other genres, including lifestyle, games and dramas.

Business breakdown

Bilibili monetises its user traffic through game publishing (39.5% of 3Q2020 revenue), value-added services (30.4%), online ads (17.3%) and e-commerce (12.8%). Its game-publishing segment publishes and distributes exclusive mobile games as well as the games of third-party developers. Its value-added service segment operates and maintains live broadcasting channels and sells virtual items to users. Its ACG users are mainly Gen Z Chinese consumers born between 1990 and 2009.

Its web traffic comes from China (86.8%), Taiwan (2.8%), the U.S. (2.7%) and Japan (2.6%) (Figure 1). Almost all of its revenue stems from China.

Investment rationale

1. Shift to non-gaming to sustain growth. Bilibili traditionally relies on its gaming business for revenue, at 80% of its total in 2018. In the past 10 quarters, it has been shifting to non-gaming segments which offer higher growth and margins. Non-gaming revenue grew by a stunning 3-year CAGR of 148%, dwarfing gaming’s 28.6%, to account for 60% of 3Q20 revenue. Non-gaming businesses include advertising and value-added services. As their operating costs are lower, growth in these businesses has lifted gross margins, from 13.8% in 1Q19 to 23.6% in 3Q20. (Figure 3).

We expect non-gaming growth to continue. COVID-19 had bumped up monthly active users by 54% YoY in 3Q20. More user data allows for better ad-targeting and potentially higher advertising pricing. The number of content creators with more than 10,000 fans had also increased 75% YoY, providing a strong backdrop for growth in its value-added segment.

2. Platform’s network effects. Bilibili has established itself as the go-to platform for ACG content. At the same time, it is broadening its content to entice more users onto its platform. More content creators may then join Bilibili as they are attracted to its vast user base, creating a positive feedback loop between users and content growth. Monthly active users (MAUs) had increased by 9.79% over the past 10 quarters, to 197mn in 3Q20 (Figure 4). A comparison with some of its competitors suggests higher website-traffic engagement (Figure 5). This should facilitate further monetisation, as average monthly paying users continued to climb from 3.2% in 1Q18 to 7.6% in 3Q20 (Figure 4).
3. Alibaba’s and Tencent’s strategic collaboration. Tencent has a 13.3% stake in Bilibili. We believe collaboration between the two will inject more well-known intellectual property to Bilibili’s mobile-game platform. This would further cement Bilibili as the go-to platform for ACG content. Alibaba also has a 7.2% stake, which should allow Bilibili to leverage Alibaba’s e-commerce capabilities for content creators to sell their products on Taobao. Bilibili can then take a revenue share of their sales. E-commerce accounted for only 1.5% of its 1Q18 revenue but 12.8% by 3Q20. We expect the partnerships to sustain the strong growth in its e-commerce segment, which grew 82.8% YoY in 3Q20.

Risks

1. Likely to remain loss-making in foreseeable future. Bilibili is aggressively spending on sales and marketing, content and R&D to develop its business. As such, operating expenses increased faster than revenue in the past 10 quarters. They accounted for 57.2% of 3Q20 revenue, up from 33.1% in 1Q18 (Figure 6). Continuous investments in sales and marketing and R&D are expected to widen its losses in the near term.
2. Entertainment industry highly competitive. Bilibili needs to avoid being a jack of all trades and master of none as well as maintain its leadership position in the ACG industry. It may face challenges in its content penetration of the video-game streaming space from market leaders, Douyu and Huya. A potential merger between the two would create China’s biggest video-game streaming platform with a combined market share of more than 80% in China.

 Technical Outlook:

We have a TECHNICAL BUY rating on Bilibili. Do refer to our recent technical report on Bilibili at https://www.stocksbnb.com/tech-pulse/technical-pulse-bilibili-inc/, dated 16 February 2021.

 Figure 1: Bulk of web traffic is from China (85.2%). The rest is from the U.S. (3.3%), Taiwan (3.2%) and Japan (2.7%)

Figure 2: Bilibili monetises its user traffic through game publishing (39.5%), value-added services (30.4%), online ads (17.3%) and e-commerce (12.8%)

Figure 3: Growth of non-gaming segment has accelerated from 1Q19, lifting gross margins

Figure 4: MAUs increased 9.79% in the past 10 quarters, to 197mn in 3Q20. Average monthly paying users (MPUs) also increased, from 3.2% of average MAUs in 1Q18 to 7.6% in 3Q20

Figure 5: Bilibili has higher website traffic engagement than some of its rivals

Figure 6: Operating expenses increased faster than revenue in the past 10 quarters. Investments in sales and marketing and R&D are expected to continue, which may widen losses in the near term