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If you can see beyond the headwinds and political risks for technology and Internet companies in China, then an investment in Bilibili (NASDAQ: BILI) can be an attractive long-term purchase. Since its all-time high in February 2021, BILI shares have sold more than 85.3%. I value Bilibili based on a residual earnings framework and calculate a base case target price of $ 33.07 / 40% share undervaluation.
In my opinion, there are several aspects that I like:
- leading video platform with a highly compromised Generation Z + user demographics
- a strong potential for continuous growth
- potential for differentiated monetization in advertising, live streaming, and member subscription.
Bilibili is a leading video streaming platform in China. The company started as the main content center for ACG (“Animation, Comics, and Games”), but in recent years the company has increasingly become an entertainment provider to include content about lifestyle, games, entertainment, and anime. , technology, knowledge and education. Bilibili describes its own value proposition as follows:
We provide users “All the videos you like” as our value proposition. In our community, users and content creators discover and interact with diverse content that spans different interests, from lifestyle, games, entertainment, anime, and technology to knowledge. We also enable broad-based video consumption scenarios focused on professional user-generated videos, or PUGVs, complemented by live broadcasts, professional-generated videos, or OGVs, and more. We have become the welcoming home of diverse interests for the younger generations in China and the frontier to promote Chinese culture all over the world.
Bilibili is the video platform for the new generation in China (Generation Z), with 78% of the user base under 35 years. In the fourth quarter of 2021, Bilibili recorded a monthly active user base (MAU) of 272 million, of which 72 million access the platform on a daily basis. In addition, the average daily time spent per user is 1 hour and 22 minutes. Bilibili generates diversified revenue from mobile gaming (1), value-added services (2), advertising (3), and e-commerce (4). Bilibili has often been described as China’s response to YouTube.
The Bull Cenough for Bilibili
Incomparable growth rates
Bilibili enjoyed huge growth in interest in the platform. In fact, the monthly base of active users (MAU) went from 128 million in the third quarter of 2019 to 272 million in the fourth quarter of 2021, representing a CAGR of 35%. Revenue grew at an even faster rate: from RMB 1.859 million in Q3 2021 to RMB 5.781 in Q4 2021, implying a CAGR of 61%. Also, consider the diversified revenue mix, which underscores the platform’s monetization potential.
Moreover, Bilibili’s growth does not appear to be slowing down. Looking at Google Trends ’Google search data, we can see that interest in Bilibili accelerated in the fourth quarter of 2021 and clearly outpaced popular competitors such as IQIYI and Kuaishou. Bilibili CEO Chen Rui said earlier this year that the company plans to double its monthly active users (MAU) over the next three years, reaching 400 million by the end of 2021.
A very committed community
As a video community for new generations in China, Bilibili is in the best position to capture the most attractive online audience: Generation Z. According to iResearch, Generation Z is seen as the golden cohort in China’s video-based industry. as they are the engine and marker of trends of all kinds of consumption. Generation Z accounts for more than 48% of China’s total online population and contributes 55% of China’s online entertainment revenue.
Bilibili designed his platform around passion and commitment. In fact, Bilibili’s user base is made up of a large number of interest-based subcommunities with shared interests. According to the company, 90.9% of all video views on Bilibili are attributed to Professional User Generated Content (PUGC), which relies on Generation Z’s desire to express itself, the popularization of video as a medium, and the high level of public participation in the platform. Interactive features include vignette chat, comments, tracking, favorites, sharing, posting moments, and virtual giveaways. As a result, Bilibili has considerably lower content and user acquisition costs than other streaming platforms in China, because high-cost licensed content is less important.
According to the latest Bilibili presentation for investors, Bili has approximately 2.7 million creators of average monthly active content (+ 62% year-on-year) and the number of monthly video submissions amounts to millions (+ 80% year-on-year).
Supported by strong partnerships
Bilibili is backed by three very strong companies: Tencent, Alibaba and Sony. At the end of 2021, Tencent had a 13.3% stake in Bilibili, Alibaba (via Taobao) had a 7.2% stake and Sony had a 4.98% stake.
Tencent is Bili’s second largest shareholder, second only to CEO Rui Chen. Given that Bilibili and Tencent are two major players in China’s ACG industry, their partnership in animation and gaming has great potential. Tencent Comic has contributed more than 1,500 videos in the Chinese animation category to the Bili platform, and analysts expect more synergies in gaming cooperation, given Tencent’s leadership position in gaming.
The partnership with Taobao is designed to develop a content-driven e-commerce ecosystem and the marketing of Bili’s IP assets. Or in other words, Bili’s cooperation with Taobao is beneficial in supporting its PUGC creators, where qualified content creators could earn commissions by recommending Taobao products to their audience.
I value Bilibili with the residual earnings (RE) framework.
I decided to use the RE valuation on the DCF framework, as the RE is considered more reliable for loss-making assets with considerable cash outflows for investment. With respect to assumptions: as my view of business fundamentals may be biased, I decide to base my EPS estimates on the consensus of analysts, based on more than 20 analysts. In addition, I use the CAPM model to calculate the cost of equity and, as a second step, deduct the WACC according to business leverage. With respect to the terminal growth rate, I believe that growth equal to the estimated nominal growth of long-term GDP is appropriate, if not underestimated for high-growth assets such as Bilibili. My calculation returns a $ 33.07 price per share and a 40% implied underestimation. Thus, the RE framework sees considerable long-term value in Bilibili.
However, keep in mind that there is considerable uncertainty in predicting a company in the future. Thus, it is recommended that investors consider different scenarios. What happens if the assumptions change? In the appendix you will find a sensitivity analysis based on different growth combinations of TV and WACC. (For reference: red scenarios imply overestimation, green scenarios underestimation). Feel free to select the scenario you deem most appropriate.
Personally, I like Bilibili. I think the company has great growth potential. I see the growth rate of television above nominal GDP growth. Estimating the price of Bili’s shares based on a 4% TV growth rate and a lower WACC of 8%, assuming there will come a new time when Chinese shares are viewed more favorably, I see that the valuation of Bilibili is about $ 35 per share – $ 45 per share.
The video streaming industry in China is highly competitive (Douyin, Kuaishou, iQiyi, etc.) and, in theory, the streaming industry has the characteristics of an industry governed by the winner takes it all principle. Although Bilibili has the highest user participation among the platforms and the highest growth rates, I am not confident in my ability to pick a winner at this time.
As we all know, China pushed for a stricter regulatory environment for technology and internet companies in 2021. Bilibili was no exception: the bad news began when state media publicly criticized Bili for allowing vulgar content on the site. Then Bili underwent restrictions and regulations around the gaming industry. Needless to say, the market is still frightened by these developments and investors should expect considerable volatility in the price of Bili shares until the uncertainties are resolved, if any.
Another risk is the continuous pressure resulting from a possible withdrawal from the ADR. While investors have appreciated some positive headlines as regulators in China and the United States appear to be moving toward a deal, the risk of a possible exclusion adds to the general uncertainty surrounding an investment in Bili. For reference, Bilibili shares are also listed on the Hong Kong Stock Exchange under the symbol HKG: 9626.
Bilibili is an interesting competitor in China’s online video streaming industry with a unique position to attract Generation Z streamers. Bili’s ambitious growth strategies have elevated the platform far beyond the original ACG market and the company has opened several channels. monetization and attracted a very committed user base. While the company is still in overloaded growth mode, I expect Bilibili to focus more on user monetization around 2023, when the platform should reach the CEO milestone of 400 million MAU. Given my favorable outlook on the business, I see Bilibili as a long-term buying opportunity for prices <$ 25 / share.