Expect Short-Term Headwind: Bilibili

Summary

• Simply Investor has written a great long piece on Bilibili. Although we agree with the thesis, investors should be wary of short-term headwind.
• Rumor on Chinese regulators might suspend game approvals is concerning. As a result, we expect gaming revenue to slow down in the coming quarter.
• Expect MAU growth to slow down due to impact of deletion from app store.
• Other platforms that do not need game revenue pose threats.

Simply Investor has presented a robust long thesis on Bilibili (NASDAQ:BILI), addressing both user growth (MAU up 36% YoY) and monetization (revenue up 105% YoY) in 1Q 18. We believe Bilibili is one of those companies that is well positioned as a community-oriented video content/gaming platform targeting Generation Z. Even though Bilibili is trading at a discount (<$2 Rev/MAU) to Tencent (TCEHY) ($10+ Rev/MAU) and Facebook (FB) ($5+ Rev/MAU) (Rev/MAU & Price/Sales), our view is that this valuation is justifiable.

We believe that the short-term underperformance was attributable to i) potential Q2 and 2H18 gaming revenue comes below expectation, ii) lower near-term MAU growth, and iii) short-term and long-term competition from other platforms that are not dependent upon game revenue. While we believe the first two reasons could be short-lived, the third factor poses a long-term threat as the government tightens mobile gaming approval or consumers change taste over time.

Potential of gaming revenue might come below expectation

Bilibili has three exclusive licensed games (Untouchable Palm/BanG Dream!/A3!) scheduled to launch in 2H18. However, visibility in the launch time of these new games remains low. We are hoping that Bilibili will provide some guidance on the next earnings call.

Below are some excerpts about a rumor news release regarding game suspension:

“The Ministry of Culture and Tourism has halted the registration of domestically developed gaming products following an institutional restructuring plan of the State Council, China's cabinet, domestic news site ce.cn reported on Thursday.”

“If the channel stayed closed forever, it would have a huge impact on the industry, which is very unlikely," Guo Chengjie, an industry analyst at Beijing-based industry consultancy iResearch, told the Global Times. However, in the past two years, regulations covering the content of online games have been further tightened, Guo noted.”

Even though the validity of the news has not been confirmed by Tencent and NetEase (NTES), and we don’t believe that the government will “shut down” game approvals in the future, however, actions leaning towards tightening game approval is viewed negatively, especially for companies like Bilibili that have strong street revenue growth expectation and a limited significant revenue driver (2019E Revenue RMB6.0B+).

More importantly, most mobile games have relatively short adoption-to-stabilization cycles. Mobile games will most likely gain explosive popularity within months even days after launch, and will then consistently attract incremental traffic until DAU plateaued. Shortly after DAU plateaued, 10%-20% of DAU will gradually become inactive and as a result, DAU will stabilize over time. See below DAU migration evidence from Honour of Kings from Tencent and Pokemon Go from Nintendo (OTCPK:NTDOY)

Honour of Kings Baidu User Index

Source (Baidu Index)

Pokemon Go DAU

Source (Business Insider)

FGO DAU

Our view is that both FGO and Azur Lane are in the steady growth phase and will probably hit the plateau phase or the stabilization phase within the next couple of quarters. As a result, Bilibili needs to be able to launch new games in the pipeline to sustain robust revenue growth. Otherwise, we expect Bilibili to guide to a lower revenue forecast in the next several quarters.

MAU growth potential challenge

We expect near-term challenges in MAU growth as the Bilibili app was removed from major Android app stores due to certain content regulatory issues. As a result, various mobile apps including Bilibili, Miaopai, Onion Video (a short video app) were removed from major Android app stores, such as Yingyongbao (Tencent), Xiaomi, Huawei for 30 days, mainly as a result of Cyberspace Administration of China’s recent content regulation of mobile short video platforms. Users can still download the Bilibili app via its mobile website on the Android platform.

On July 27, Bilibili made an official announcement to start a round of content review in accordance with the requirement. Although we don't expect content deletion to be material, we expect slower MAU in the near term as 1) the mobile app is the most used user acquisition channel, accounting for 80%+ of Bilibili MAU, and 2) summer vacation is the key user acquisition time period for Bilibili, as its main audience is Generation Z users. Due to this challenge, we expect weakness in MAU growth.

Competition from other apps

Douyin, a short video app achieved 500m global MAU in mid-July. According to QuestMobile, total time spent of apps from Bytedance (developer of Toutiao/Douyin/Huoshan etc.) have accounted for 10.1% of total internet time spent in China in June 2018, up from 3.9% a year ago. While we don’t believe potential users will switch to other apps because Bilibili is not accessible from the app store, we do believe competition from leading mobile apps will eventually impact the monetization outlook of those apps as they gain user attention. This can be even more so as the existing user universe drifts away from their once-loved ACGN culture and content.

Conclusion

Although Bilibili is well positioned to capture the lucrative Generation Z market, we expect short-term headwind in MAU growth, monetization, and competition from other apps to hinder short-term share performances. In our view, Bilibili will become a more convincing investment once more revenue transparency has transpired.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.