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iQiyi Vs. Netflix

|About: LATAM Airlines Group S.A. (LTM), Includes: IQ, NFLX, TME
Summary

The "Chinese Netflix" iQiyi is significantly undervalued compared to Netflix based on multiples.

Equity upside from both ASP and number of paid users.

Market has attached a higher valuation to Tencent Music, the "Chinese Spotify"

EV/EBITDA (NTM) multiple of Netflix is 53x, vs. iQiyi 9.7x

EV/EBITDA (LTM) multiple of Netflix is 97.5x, vs. iQiyi 13.5x

Assumptions - constant margins

The revenue drivers of both companies are average spending per subscribers ("ASPU") and number of paid subscribers, which growth shall dictate future profitability growth, and ultimately the earnings multiples.

Number of paid subscribers - As of Sep 30, 2018, Netflix has 204M paid subscribers, among which 134M were US accounts - basically one-third of US population. If miraculously by Sep 30, 2019, everyone in US had a Netflix account and another 250M people in other parts of the world became paid users, tripling the number of paid subscribers to c.600M, under the assumption of no significant increase in monthly subscription fee per user, the NTM EV/EBITDA would be come 97.5/600*204 = 33.1x, significantly larger than the iQiyi multiple of 13.5x. Noted that number of iQiyi paid users is 79M by Sep 30, 2018, only 5% of total population in China with a much larger market to untap.

In terms of ASPU, given the spending power discrepancy between USA and China, long-terms ASPU in terms of subscription fee of iQiyi will remain to be lower than Netflix. But unlike Netflix of which revenue is almost 100% attributable to subscription fee, iQiyi booked 34% of its revenue as advertising revenue in Q3. Any increase in advertising charges to companies will have no negative impact to the number of paid subscribers, hence a larger room for increase in ASPU for iQiyi as well. Also noted that Tencent Music (listed in Hong Kong), the Chinese version of Spotify, which faces the same "issue" of limited spending power per user, has EV/EBITDA multiple of 36.9x, significantly larger than iQiyi.