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If you can see past the political headwinds and risks for tech and Internet companies in China, then an investment in Bilibili (NASDAQ:BILI) might be an attractive long-term buy. From its all-time high in February 2021, the BILI stock has sold off more than 85.3%. I value Bilibili based on a Residual Earnings framework and calculate a base-case price-target of $33.07 / share undervaluation of 40%.
In my opinion, there are multiple aspects to like:
Bilibili is a leading video streaming platform in China. The company started as the prime hub for ACG (“Animation, Comics, and Games”) content, but since a few years the business has transformed more and more into a pan-entertainment provider to include content around lifestyle, games, entertainment, anime, technology, knowledge and education. Bilibili describes its own value-proposition as follows:
We provide users with ‘All the Videos You Like’ as our value proposition. In our community, users and content creators discover and interact with diverse content encompassing different interests, from lifestyle, games, entertainment, anime and tech & knowledge to many. We also enable broad video-based content consumption scenarios centered around professional user-generated videos, or PUGV, supplemented with live broadcasting, occupationally-generated videos, or OGV, and more. We have become the welcoming home of diverse interests for young generations in China and the frontier to promote Chinese culture across the world.
Bilibili is the go-to video platform for the young generation in China (Generation Z), with 78% of the user base being younger than 35 years. As of Q4 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 games (1), value-added services (2), advertising (3), and e-commerce (4). Bilibili has often been described as China’s answer to YouTube.
Bilibili Investor Presentation, Q4 2021
Bilibili has enjoyed a tremendous growth in interest for the platform. In fact, the Monthly Active User-base (MAU) grew from 128 million in Q3 2019 to 272 million in Q4 2021, representing a CAGR of 35%. Revenues grew at an even higher rate: from RMB 1.859 million in Q3 2021 to RMB 5.781 in Q4 2021, implying a CAGR of 61%. Also, note the diversified revenue mix, which underscores the monetization potential of the platform.
Bilibili Investor Presentation, Q4 2021
Moreover, Bilibili’s growth is doesn’t seem to be slowing down. Looking at Google search data from Google Trends, we can see that the interest in Bilibili accelerated in Q4 2021 and clearly surpassed popular competitors such as IQIYI and Kuaishou. Bilibili CEO Chen Rui said earlier this year that the company aims to double its monthly active users (MAUs) over the next three years, reaching 400 million by the end of 2021.
As a go-to video community for young generations in China, Bilibili is best positioned to capture the most attractive online audience — Generation Z. According to iResearch, Generation Z is viewed as the golden cohort in China’s video-based industry as they are the driving force and trend-setter of all kinds of consumption. Generation Z accounts for more than 48% of the total online population in China and contributes 55% of China’s online entertainment revenue.
Bilibili designed it’s platform around passion and engagement. In fact, the Bilibili user-base is comprised of a great number of interest-based sub-communities with shared interests. According to the company, 90.9% of the total video views on Bilibili are attributed to Professional User-Generated Content (PUGC), which is supported by Gen Z’s desire to express themselves, the popularization of video as a communication medium and the high level of audience engagement on the platform. Interactive features include bullet chat, commentaries, following, favourites, sharing, moment posts and virtual gifting. As a result, Bilibili has considerably lower content costs and user acquisition costs than other streaming platforms in China, because high-cost licensed content is less important.
According to Bilibili’s most recent investor presentation, Bili has approximately 2.7 million average monthly active content creators (+62% YoY), and the monthly number of video submissions amounts to million (+80% YoY).
Bilibili Investor Presentation, Q4 2021
Bilibili is backed by three very strong companies: Tencent, Alibaba and Sony. As of late 2021, Tencent had a 13.3% stake in Bilibili, Alibaba (through Taobao) had a 7.2% stake, and Sony had a 4.98% stake.
Tencent is Bili’s second-largest shareholder only second after CEO Rui Chen. Since Bilibili and Tencent are two major players in China’s ACG industry, their partnership in animation and games implies strong potential. Tencent Comic has contributed over 1,500 videos under the Chinese animation category to the Bili platform and going forward analysts expect more synergies on game cooperation, given Tencent’s leading position in games.
The partnership with Taobao is designed to develop a content-driven e-commerce ecosystem and the commercialization of Bili’s IP assets. Or in other words: Bili’s cooperation with Taobao is beneficial for supporting its PUGC creators, where qualified content creators could earn commission by recommending Taobao products to their audience.
I value Bilibili with the Residual Earnings framework (R-E).
I have decided to use the R-E valuation over the DCF framework, as the R-E is considered more reliable for loss-making growth assets with considerable cash-outflows for investment. With regards to the assumptions: As my insights into the business fundamentals might be biased, I decide to base my EPS estimates on the analyst consensus–based on more than 20 analysts. In addition, I use the CAPM model to calculate the cost of equity and as a second step derive the WACC according to the business leverage. With regards to the terminal growth rate I think I think growth equal to the estimated nominal long-term GDP growth is adequate, if not understated for such a high-growth assets as Bilibili. My calculation returns a price per share of $33.07 and an implied undervalued of 40%. Thus, the R-E framework sees considerable long-term value in Bilibili.
Source: Analyst Consensus, Author’s Calculations
However, please note that there is considerable uncertainty in forecasting a company five years into the future. Thus, investors are advised to consider different scenarios. What happens if assumptions change? Enclosed you will find a sensitivity analysis based on different combinations of TV growth and WACC. (For reference: red scenarios imply overvaluation, green scenarios undervaluation). 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 TV growth rate above nominal GDP growth. Estimating Bili’s share price based on a 4% TV growth rate, and a lower WACC of 8%—assuming there will come a time again when China equities are viewed more favourably—I see Bilibili’s valuation at approximately $35 / share – $45 / share.
The video streaming industry in China is highly competitive (Douyin, Kuaishou, iQiyi, etc.) and, in theory, the streaming industry exhibits the features of an industry that is governed by the winner-takes-it-all principle. Although Bilibili records the highest user-engagement amongst the platforms, and the highest growth rates, I am not confident in my ability to pick a winner at this point.
As we all know, China has pushed a stricter regulatory environment for tech / internet companies in 2021. Bilibili was no exception: The bad news began when state media publicly criticizing Bili for allowing vulgar content on the site. Then Bili suffered from restrictions and regulations around the gaming industry. Needless to say, the market is still spooked by these developments and investors should expect considerable volatility in Bili’s stock price until uncertainties are resolved—if ever.
Another risk is continued pressure coming from a potential ADR delisting. While investors have appreciated some positive headlines as China and US regulators seem to move towards an agreement, the risk of a potential delisting adds to the overall uncertainty surrounding an investment in Bili. For reference, Bilibili shares are also listed on the Hong Kong Stock Exchange under the ticker symbol HKG: 9626.
Bilibili is an interesting competitor in China’s online video streaming industry with a unique position to attract the Gen Z streamers. Bili’s ambitious growth strategies have elevated the platform far beyond the original ACG market and the company has opened multiple monetization channels and attracted a highly engaged user base. While the company is still in super-charged growth mode, I expect Bilibili to focus more on user monetization around 2023, when the platform should have achieved the CEO’s 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.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of BILI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not financial advise