Bilibili: Is the entertainment outsider worth a buy?

NASDAQ: BILI
HKSE: 9626

(Reading time: 13 minutes)

The entertainment industry received a bad hit worldwide during the COVID-19 pandemic.

However, the online part of it saw an expansion of the user figures as people were forced into their homes for months.

Several players contend that market space in China, with Tencent Music Entertainment Group and NetEase being the largest market share scorers.

Bilibili has a stunning market cap that has always been connected with its importance for the manga niche, even though the company controls only 1.9% of the whole market of entertainment in China.

How can this relatively small company (in terms of market share) compete with the aforementioned giants?

Let’s see its position and its overall valuation, compared with the competitors!

1. The Company

History

In June 2009, the first website of the company was launched by Xu Yi, followed by the official renaming in January 2010 to “Bilibili”. The name is connected with the manga culture.

The founder wanted to provide a better service than the existing video-sharing websites available at the time: Niconico and AcFun.

Between 2011 and 2014, Bilibili restructured its company scheme several times to find a way to overcome the restrictions imposed by PRC laws and regulations on foreign ownership of companies that engage in internet and other related businesses.

In August 2012, Bilibili started displaying its affiliation with the state-owned company Shanghai Media Group and the use of various content provider licenses.

Starting from November 2014, the guidance of the founder Xu Yi was replaced by Chen Rui, a billionaire tech tycoon, currently CEO and Chairman of the Board.

On March 28, 2018, BiliBili was listed on the Nasdaq Global Select Market under the symbol “BILI”. The net proceeds from the IPO were approximately $ 443.3 million.

In October 2018, the company entered into a definitive agreement with Tencent, for a capital injection of net proceeds of approximately $ 317.2 million. Later in the same month, BiliBili entered into a strategic collaboration with Tencent to ensure the sharing and the operating of existing and additional games on the platform.

In December of the same year, the Chinese e-commerce platform Taobao entered into business collaboration agreement with BiliBili to commercialize the company’s intellectual property assets. Under the agreement, Taobao will develop a dynamic ecosystem that will connect content creators, merchandise and users of both the platforms in this deal.

In April 2019 and June 2020, BiliBili seeks fresh capital to be invested. In 2019, they proposed to the market 2026 notes with a 1.375% interest rate per year, payable semiannual. In 2020, instead, the company proposed 2027 notes with an interest rate of 1.25% per year.

In April 2020, Sony Corporation invested in the company and entered into strategic collaboration arrangements. Sony will acquire a 4.98% minority stake with the deal for $ 400 million. During September 2020, BiliBili entered into a strategic partnership with Riot Games and secured a three-year exclusive license for live broadcasting the League of Legends E-Sports global events in China.

In February 2021, Bilibili announced the acquisition of Shanghai Yarun Culture Communications Co., Ltd, the parent company of the animation studio Haoliners Animation League and all its subsidiaries.

In March 2021, the company underwent a second listing at the Hong Kong Stock Exchange: net proceeds from this operation at $ 2.6 billion.

Structure of the company

The core customers of this company are the Gen Z+ individuals. 

The user base is proliferating: in the fourth quarter of 2020, there were 202 million Monthly Average Users, from 130.3 MAU for the same period in 2019.

Bilibili has a special community membership. The access to this restricted group is granted after having passed a 100 multiple choice exam. The number of the members of this special community reached the 102.6 million mark in 2020, growing by 51.1% year over year.

The whole ecosystem that BiliBili built during the years can count on different formats of content and entertainment fruition.

The portfolio of content spans from video services to mobile games and value-added services.

In particular, the company states that “a comprehensive suite of video services is offered, with PUGV being the cornerstone of the content ecosystem, and live broadcasting and OGV being the major attractions to the platform”.

PUGV

The PUGV are a crucial part of BiliBili’s content ecosystem: they contribute to 91% of the total video views on the platform.

To international investors, these services are equiparable to the ones offered by YouTube. Thanks to the advancement of technology and the low investments to be sustained to get a basic high-quality setup to shot videos, content creators are providing the users with a fulfilling experience, creating word-of-mouth.

Live Broadcasting

This service is a natural extension of the already provided video services and allows users to interact with the content creators in real time.

Live broadcasting is particularly popular for the gaming enthusiasts, who follow their favourite e-sports athletes.

OGV

BiliBili produces content directly and through joint ventures for its OGV offering. Also, the company engages in licensing agreements to enrich its catalogue. From 2018 and 2020, BiliBili produced and co-produced 100 titles, covering Chinese and overseas anime, documentaries, variety shows, TV shows and movies.

The company’s strength when it comes to OGV is related to its anime library.

Mobile games

A large share of BiliBili’s users is composed by online games enthusiasts. Gaming is the second most popular category of the PUGV and the most popular category of live broadcasting.

As of 31 December 2020, the company operated 43 exclusively distributed mobile games, and hundreds of jointly operated mobile games.

Maoer and BiliBili Comic

In 2018, the company acquired a majority equity interest in Maoer Inc., an audio platform offering audio drama, such as music and audiobooks.

Moreover, during the same year, a deal to acquire NetEase Comics was finalized: this allowed the company to create BiliBili Comics, a mobile app offering anime and comic content.

The management expects BiliBili Comics and Maoer to score significant growth in the future. 

Commercialisation Model

The company generates revenues primarily from mobile games, VAS, advertising and e-commerce.

In 2020, 40% of BiliBili’s sales were attributable to the sales of in-game virtual items that enhance the game-playing experience of users.

Furthermore, the company receives revenues from various kinds of VAS: Bilibili can count on a premium membership program (43% of VAS sales), live broadcasting (34% of VAS sales) and other value-added services (Bilibili Comic and Maoer audio program).

Other sources of income are advertising inside the platforms and e-commerce of ACG-related merchandise. In fact, many users interested in a certain anime will be recommended to buy related products manufactured directly for BiliBili. Offline e-commerce sales are mainly related to the sale of event tickets and peripheral products.

Management Overview

Mr Rui Chen is the Chairman of the Board of Directors and Chief Executive Officer

Mr Chen has served as Chairman of the Board of Directors and CEO of the Company since November 2014. He is a serial entrepreneur with more than 15 years of experience in the tech sector in China. Mr Rui led the strategic development of the company since its founding.

Before joining the company, Mr Chen co-founded Cheetah Mobile Inc. (NYSE: CMCM), a mobile internet company. In 2009, Mr Chen founded Beike Internet Security Co., Ltd. and served as its CEO from 2009 to 2010. Prior to that, Mr Chen served as general manager of Internet Security R&D at Kingsoft Corporation Limited (SEHK:03888), a leading software and internet service company, from 2001 to 2008.

Mr Chen received his bachelor’s degree from Chengdu University of Information Technology in 2001.

Mr Yi Xu is the Founder, Director and President

Mr Yi Xu founded the company’s website in 2009 and has served as director and president since December 2013. Mr Xu has guided the company’s technological development and played an instrumental role in developing various ground-breaking interactive features.

Ms Ni Li is Vice Chairwoman of the Board of Directors, and serves as Chief Operating Officer

Ms Ni Li has served as the company’s COO since November 2014 and vice chairwoman of the company’s board of directors since January 2015. Ms Li oversees the company’s overall business operation, building content ecosystem, commercialisation, strategic investment, and brand marketing.

Prior to joining the company, Ms Li was in charge of HR operations at Cheetah Mobile (NYSE: CMCM) from 2013 to 2014. Previously, Ms Li founded Goalcareer, a management consulting firm serving Fortune 500 companies and startups focusing on the semiconductor, telecommunication and internet sectors, and worked as its CEO from 2008 to 2012. Ms Li received a bachelor’s degree in Law from Lingnan Normal University in 2008.

Mr Xin Fan represents BiliBili as Chief Financial Officer

Mr Xin Fan has served as CFO since September 2017. Prior to that, Mr Fan served as VP of Finance since April 2016. Before joining the company, Mr Fan was a finance director at NetEase (Nasdaq: NTES, HKEX: 9999) from 2011 to 2016. Prior to 2011, Mr Fan held various positions at KPMG Huazhen for eight years and served there as a senior manager from 2008 to 2011. Mr Fan received a Bachelor’s degree in international accounting from Shanghai University of Finance and Economics in 2001.

2. Qualitative Analysis

Business Highlights

The industry of production and distribution of entertainment content is a double faced one. On one side, it can be profitable, but on the other hand rather volatile.

While BiliBili is a respectable player, it has to confront a strenuous competition in both of its core businesses: mobile games and video services.

Let’s analyse the competitors of the firm to understand better the difficulties encountered in the Chinese scene.

Competitors and Threats

From the mobile games side, the company faces an incredible competition from the giant Tencent Games and NetEase. Those two companies, in 2019, were controlling 60% of the total mobile gaming market in China.

On the other side, in the video streaming services, BiliBili has to face the competition of Douyin (the world-wide known TikTok) and Kuaishou.

While BiliBili was able to conquer some market share figures by concentrating in niches, the feeling is that the giants that control the market will impede an easy scalability of the business. In fact, a highly liquid company like Tencent can afford to sacrifice the margins for some time to kill the competition, while BiliBili can’t undergo such sufferings.

To sum up, the impression is that the company will be able to keep the current market share among the following years, but will face strenuous competition from more powerful players.

The current margins that BiliBili can boast, then, are anything but respectable. The company’s financial health can’t allow to compete on prices, but only on niche content that speaks to a specific segment of the market.

While BiliBili’s current market share will not disappear, there seem not to be many foreseen expansion possibilities.

3. Quantitative Analysis

Financial Performance

Here is an overview of BiliBili’s full-year 2016,17,18,19,20 income statement. The figures are in million of Chinese Yuan. Please note that the exchange rate from CNY to USD is currently at 0.16 USD for each CNY.

While revenues have been constantly growing over the years, the company doesn’t seem to be able to achieve a positive operating income.

One of the most critical lines of business for BiliBili is for sure game distribution and development. However, this part of the company is also requiring more cash to be developed than it produces in autonomy. Videogames, especially the mobile ones, have a high churn rate and the company, for this reason, needs to keep developing them or licensing new ones continuously.

After considering the costs of development of a new game, there are other costs to be added that, for BiliBili, are not negligible: marketing expenses take up 20% of the value of revenues and, together with other expense accounts, make the company strongly unprofitable and a black hole of cash.

The lack of profitability and the constant negative cash position can also be seen by observing that, despite undergoing several rounds of financing and public offerings, the company has not enhanced its cash position in a way that can give the investors hopes of an improved solidity.

Equity figures are thin, if compared to the amount of debt: a value of more than 2 of the debt-to-equity ratio for a platform company seems rather risky.

BiliBili’s financials are weak and don’t give much space to foresee a bright future for the company, despite its influence on the Chinese Market. What will then be the valuation of its shares? Let’s see it!

Valuation

The objective of a valuation is always the one of understanding the intrinsic worth of a certain company. With BiliBii it’s not that straightforward to individuate a correct price range.

Why is that? Well, let’s start with the fact that it’s not possible to perform the Discounted Cash Flow Analysis as the present and forward free cash flows are negative.

Nevertheless, ChineseAlpha’s team performed an analysis using comparables from peer companies, to try and estimate the intrinsic value.

The shortlisted peers used for the analysis were: Perfect World Co., Ltd, HUYA Inc., Douyu International Holdings Limited, JOYY Inc., Weibo Corporation and iQIYI, Inc.

The results of the comparable analysis can be seen on the below graph, which shows the ranges for each on of the multiples.

In particular, the share price that the market assigns to BiliBili is overvalued.

EV/Revenue

Bilibili has an EV/Revenue multiple of 14.9x which is vastly greater than the multiple range of 2.4x – 4.1x among its peers. This is because Bilibili has the largest enterprise value among its peers: 3 times greater than the second largest. All of this while generating revenues that are within the ballpark of the same group of comparable companies.

In other words, their revenue generation is severely laggard given the capital available to the business. Companies with lower market capitalization are generating the same amounts of profit. 

Take for example, Perfect World, a business engaged in the :production, distribution, and marketing of games, film, and television content like Bilibili has 1/3 the capital. Still, it is actively generating twice the amount of revenues.

P/Sales

For Bilibili, Price-to-sales and EV/Revenue are roughly the same numbers; they both indicate that the company is overvalued. The explanation follows the same reasoning for above.

Enterprise value is Market Capitalisation plus Debt. In other words, the value of the entire business is the sum of both equity and debt funding into the business. 

4. Risks

Global political relations

China doesn’t have precisely the best relations with all the countries worldwide. In particular, the relationship with the US has been complicated by the Trump mandate. The new President of the United States, Joe Biden, is perceived as more peaceful towards the Celestial Kingdom.

However, Biden recently said to be “prepared to act and impose costs” over the Chinese government’s intervention on Hong Kong’s pro-democracy movement and Taiwan’s heightened intimidation.

The European Union is in the middle, mediating between the need for democracy worldwide and trade freedom.

It could be the European Union to help resolve the destructive conflicts between the US and China.

The error here could lay on the US imposing China tariffs and blocking the export of the oriental power, primarily directed to the States. That could lead the US in a prolonged and intense correction phase, together with the EU, both terribly hit from the perpetrating of COVID-19.

The continuous uncertainty around the political themes gives the global supply chains of many companies great trouble understanding what will happen next.

On the other hand, Bilibili has its strong focus on the internal market, so the risks related to these political tensions, impacting its business are relatively low.

5. Conclusion & Investment Strategies

Is Bilibili worth a buy?

So is BiliBili a buy?

Absolutely not. BiliBili is a fragile company that, despite its dimension and influence in the internal market of Mainland China, has not been delivering results from a financial point of view.

Future growth forecasts do not justify the overall market’s optimism that is pushing the stock to appreciate.

For these reasons, BiliBili is right now a SELL, as the implied share price coming from our analysis would advise values around the $ 20/share and the stock is trading in the $ 97/share area.

A strong downtrend is not foreseen, so investment strategies will not be listed.

From a technical point of view, the price action of the charts implies a short term appreciation towards the $ 103-105/share area, which coincides with the zone in which a couple of moving averages insist.

To sum up, the stock is definitely a SELL, with a possibility for a short term speculation. The latter, however, is susceptible to strong volatility swings due also to regulatory concerns.

Thanks for reading this analysis, and continue following us on ChineseAlpha.com!


Disclaimer: Our content is intended to be used solely for informational and educational purposes, and not as investment advice. Always do your research and consider your personal circumstances before making investment decisions. ChineseAlpha is not liable for any losses that may arise from relying on information provided.


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