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Investor Does Fundamental Analysis on Bilibili (BILI) - Stock Analysis For Beginners

03 Sep 2021

Transcript

00:00 About Bilibili

While Tencent and Alibaba are busy competing to be the top dogs, this company instead managed to get the 2 internet giants to invest in their company business. Wah, respect!

Hey guys, I’m Alex. Welcome to Behind The Stock where I dissect company information and annual report to discover and identify investment opportunities for you. We upload new episodes every Friday! Make sure to subscribe and turn on the notification bell!

Today, let’s talk about Bilibili, one of China's biggest video-sharing sites!

00:45 Bilibili Business Overview

Some would call them the YouTube of China! Also known as B站 in China, they’re essentially a Chinese video sharing website where creators can share their original content online.

Bilibili was originally meant to cater to ACG – which is anime, comics, and games. As the company evolved over the past 10 years plus, they have expanded to a broader audience and types of content available on their site.

Now you can find videos of various themes and subcultures on B站 including music, dance, movies, drama, fashion and more.

What's interesting for Bilibili is their feature which is the scrolling bullet title at the top of the video, which they call danmu (弹幕).

Based on their latest Q2 report, Bilibili has 237 million monthly active users, 63 million daily active users and 21 million average monthly paying users. On average, their users are spending 81 minutes per day on the platform!

Currently, 86% of Bilibili users are below 35 years old and 450 plus million are Gen Z.

So, Bilibili has become the leading video community for younger generations in China with Gen Z+ being their core of user base. I think I'm considered grandpa to them.

And when it comes to Internet giants in China, Tencent and Alibaba comes to mind. Bilibili is in an interesting position because instead of solely competing with them, Bilibili is also backed by BOTH Tencent and Alibaba each with 13% and 6% stake in the company respectively. Other than that, they're also backed by Sony Group and Fosun International.

Bilibili made their debut on Nasdaq back in March 2018. Following that in March 2021, Bilibili managed to raise 3 billion US Dollar and completed their secondary listing in the Hong Kong stock exchange. Bilibili’s mission is to enrich the everyday life of young generations in China. These are their 3 C’s. Content, Community, and Commercialization

They put heavy emphasis on quality content. Bilibili encourages users to not only discover and view, but also share and create quality content.

They’re able to cater to a wide range of niche and communities. The video content also comes in forms of story mode, PUG videos which stands for professional user generated video, live broadcasting, and occupationally generated videos or OGV.

The platform also allows for ever-growing supply of creative PUG videos, which contributes to 93% of total video views! With talented content creators, they’re able to create high quality content which grows their loyal fan base and encourages more users to create their own content and the cycle continues.

As for how Bilibili makes money, these are the different revenue sources. Mobile games. Value-added services like premium membership program, live broadcasting services and others. Advertising. E-commerce and others.

03:41 Bilibili Growth

Moving on, let’s talk about Bilibili’s growth!

According to their latest Q2 presentation, their growth strategy has 4 parts. One, pursue healthy and high-quality user growth. Two, putting the community first. Three, reinforce their ever-growing content ecosystem. And four, strengthen their user-centric commercialization capabilities.

That sounds good but I also like to look at something more quantifiable like their growth rates. In their recent earnings, they reported 72% of net revenue increase, 38% and 44% increase respectively for average monthly active user and mobile monthly active user. Daily active users increased 24% and average monthly paying users increased 62%

So, I would attribute one of their growth factors to user growth & engagement.

Overall, video content is now a fundamental part of information, entertainment, and communication. As technology improves, the demand for videos will continue to increase.

For Bilibili, the number of average monthly paying users has generally been increasing. This is because of the premium membership program which offers high-quality content. There’s also the expansion of mobile games operations and diversification of other value-added services offerings.

Users who subscribe to Bilibili premium membership program are likely to consume other products of their favourite content on the platform. For example, if they like an anime, they’re also likely to pay for the games developed based on that anime offered, comic books, figurines and more.

So these high quality OGV can create valuable IP assets in long term and create multiple derivatives which can grow their premium members. Bilibili is also working to broaden their audience beyond their core Gen Z users through content category expansion.

Their strategy involves encouraging genres that appeals to a broader audience like cars, relationships, and fitness. By doing this, not only would it help the platform expand the user demographics, they also won’t alienate their loyal Gen Z user base. Not only that, it could also increase user engagement among their core users who now will get a wider variety of content that covers more topics of interests.

Which leads me to the next point which is strategic collaboration and alliances.

Bilibili has already launched their exclusive licensed games. We can also look forward to self-developed games and jointly-operated games. Not only that, Bilibili announced a strategic equity investment in China Telecom to pursue collaboration opportunities in areas including user growth, brand promotion, IDC and cloud services.

They also announced a business collaboration agreement with Sony. The partnership with SONY will allow Bilibili to distribute exclusive games for popular SONY anime franchises. This has a high likelihood of gaining traction, while competitors are internally developing games.

So for Alex Meter, I rate their growth as exciting.

06:41 Bilibili Moat

In terms of Bilibili’s competitive advantage, I would say it’s their network effect.

This is due to different factors like the strength and reputation of Bilibili brand. Their ability to provide creative and quality PUG videos. Their vibrant and inclusive community culture and more.

They provide great support for their content creators which helps to produce high quality content and in turn attract more people to the platform.

With their AI-powered algorithm, they’re able to push the right content to the right people which creates high quality traffic. This then helps creators quickly build fan base and gain influence. They also provide tools and opportunities to for creators to unlock their commercial value. To get continuous creation, creators are also motivated and supported by the engaging and interactive community, the positive feedback & encouraging culture, as well as inspiration by peers.

For example, their unique bullet chat functions and other interactive tools boosts engagement amongst users. The Bilibili platform has about 1.7 billion average daily video views and 7.3 billion monthly interactions.

This results in a highly sticky community with users having a strong sense of belonging as evident in their growing official members of currently 121 million and high retention rate of about 80%. And for your information, not easy to be official member okay! They have to take and pass a community entrance exam consisting of 100 questions covering community etiquette and various topics!

So for Alex Meter, I rate their competitive advantage as strong.

08:20 Bilibili Risks

Moving on to the risks, one of them is Regulatory Risk.

Bilibili does faces certain uncertainties with the recent anti-monopoly crackdown. There’s also regulation and censorship of information to consider. Plus, the PRC government has taken steps to limit online game playing time for all minors to control the content and operation of online games. So that could affect Bilibili’s games segment.

Besides that, there’s also Technology Risk.

Since Bilibili operates in a fast-evolving industry. If they fail to anticipate user preferences and can’t provide products and services to attract and retain users, or fail to keep up with technology, they may not be able to attract sufficient user traffic to remain competitive.

Bilibili also derive a substantial portion of revenues from mobile games. So, if they fail to launch new games or release upgrades, it could harm the busines. They also must be vigilant against illegal game servers and acts of cheating by users of mobile games.

Lastly, there’s Competition.

They compete with companies that operate in the video-based industry in China designed to engage users. Besides that, their other verticals like live streaming, mobiles games and others also come with their own competitors.

Some of the big names they compete with are Tencent, Alibaba, ByteDance, Douyu, Huya, iQiyi, and more.

Bilibili must continuously compete to attract, engage and retain users. Not only that but also to attract and retain talented content creators to improve and expand their content library. This way, they can have unique offerings as well as to attract and retain advertisers.

So for Alex Meter, I rate their risks as medium to high risk.

10:03 Bilibili Financial

Next on, let's look into the financial of the business. In terms of revenue, it is increasing and gross profit margin is increasing as well. However, currently it is still a loss-making company because they have been investing a lot in sales, marketing, and branding expansion. In terms of debt, their D/E currently is at 0.35x which is acceptable. Cash flow wise is decent, generating positive and growing cashflow and free cash flow.

So for Alex Meter, I rate their financial as good.

10:31 Like & Dislikes about Bilibili

Now, here’s what I like and dislike about Bilibili.

I like that they have a diversified revenue stream! Mobile games contributes 27%, Value-added services (or VAS) 36%, ads (23%) and ecommerce (13%). So, they're not heavily reliant on one source of revenue generator to protect the company. For example, while mobile revenue growth is stagnant, the 3 other business segment are growing fast! VAS 98%, Ads 201% and ecommerce 195%

Besides that, I also like that all 4 business segments form a very strong ecosystem. For instance, having more content creators would enrich the ecosystem of content and thereby increase user engagement which could boost value added services revenues through premium membership fees. Also, more users equals bigger audience which means more user data. This enables Bilibili to improve ad performance to attract more advertisers which then boosts Advertising revenue. Plus, more accurate ad targeting can facilitate E-commerce revenue as well. Not only that, the platform can benefit from cross-selling opportunities – for instance a game player can purchase related merchandise from Bilibili’s e-commerce store, or related comics.

As for what I dislike, it would be on the regulations.

China regulators announced a new set of tighter regulations for China’s games industry. This states users under age 18 will only be able to play games from 8pm – 9pm local time on Fridays, weekends and holidays. While this new rule is aimed to curb excessive indulgence in games to protect the physical and mental health of minors, this will impact the growth of the business.

So, after watching my analysis, would you add Bilibili into your watchlist? Would you opt for the US listing or HK listing? Comment down below!

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Till then, I’m Alex and goodbye!