SUMMARY

1. The Bilibili (BILI) current valuation is higher than that of several comparable companies in the industry, and the key factor going forward is whether revenue growth translates into real profit growth
2. The company’s stock price has rebounded strongly in recent days, which may be affected by the company’s performance in the second quarter
3. The specific content of the company's second quarterly report ,the change of the company's current operating conditions and business structure

Estimation and technical analysis

First of all, Our team would like to briefly talk with you about the company's current valuation and market analysis. Secondly, we will report to you more about the company's second quarter financial report and operating status in more content later.

Judging from the company’s profits, it has been a net loss in recent years, so it is meaningless if we use conventional indicator PE and PB valuation methods , it is more suitable for analysis by PS valuation because the company is not in an heavy-asset industry, so according to the data provided by FUTU Holdings, among the five companies in the same industry which have the same level Market Cap , Bilibili’s current PS is 12.63, and the industry average PS is 7.56, ranked 30th in the industry (the higher the ranking, the more underestimated it is). Obviously from this point of view, Bilibili is currently on the high side, Therefore, the price decline since February of this year is an explanation of the adjustment of valuation

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However, judging from the company’s own valuation, compared with the average PS in the past 5 years which was in the rage of 7.6-20.6, it is now in a lower position range which means that the lower the adjustment ,the lower the risk, So since last week’s second quarterly report was announced, prices have rebounded despite a loss of profits,this may also be the reason why the market is still more confident in the company’s performance.

At the same time, from the perspective of technical analysis, it is currently at the support level of weekly adjustments. The future rebound depends on whether the current upward trend can be effective and continued, and it also depends on whether the company can turn losses into profits and create sustained profit growth and higher valuation.

The second quarter financial report and the operating status

On the afternoon of August 19, Beijing time, Bilibili (NASQAQ: BILI) released its Q2 2021 financial report. The report which exceeded analysts' expectations, has highlighted that the company’s total revenue for the second quarter of 2021 was $696m, far more than the previous expectation of $660m, up 72% year-on-year from Q2 2020; monthly active users grew by 38% year-on-year to 237 million, with monthly mobile active users increased by 44% year-on-year to 220 million; daily active users reached 62.7 million, up 24% year-on-year; and average monthly subscribers gained by 62% to 20.9 million.

However, along with the growing total earnings, Bilibili's losses is also continue to expand. In the second quarter, Bilibili's net loss was $173m, increasing 96.5% year-on-year; adjusted net loss based on non-GAAP was $132m, up 80.3% year-on-year.

The counterpart iQIYI in its latest earnings report for the Q2 2021 showed that its net loss was $212m, $40m more than Bilibili's $172m, while iQIYI's total revenue of $1.17bn was significantly higher than that of Bilibili's $690M. The ever lasting losses continues to raise concerns about Bilibili's profitability.

Overall, most of the data in Bilibili's report indicate a trend of solid growth, both in terms of user growth and revenue structure, which are basically moving in line with the company’s expects.

Currently, Bilibili’s revenue mixture consists of four major businesses, they are mobile games, value-added services, advertising, as well as e-commerce and others. With the exception of the games sector, revenues from all other sections have realized different levels of year-on-year growth in the second quarter

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The report shows a clear feature this time: though the waning of the game business, which the sector used to be the “backbone” of revenue, has put pressure on Bilibili, the optimization of the overall structure has seen tangible results.

When listed on NASDAQ in 2018, many people had defined Bilibili as a “game company” because the prospectus showed that the company relied too much on game revenue. The games was the pillar of its revenue for a long time in the past, which the income once took a share of 83.4% of the total revenue in 2017. After it went public, the “video community” has made efforts to optimize its revenue structure, which proved effective as the proportion of game revenue to total revenue continuing to decrease. By the fourth quarter of 2020, VAS revenue overtook game revenue for the first time and become the top source of revenue for bilibili until now.

Based on the stable growth of its businesses, the continuous optimization of revenue structure is Bilibili's forever goal. However, the trend of slower growth in the game business in the second quarter casts a shadow on this pursuit.

Mobile games revenue of Bilibili for the quarter was $190m, down slightly from $193m when compared to Q2 2020, and up just 5% sequentially from the last quarter. Instead, the NO.1 revenue source, VAS, reached $252m in the second quarter, a 98% jump year-on-year.

In a call meeting, ChenRui, board chairman and CEO of Bilibili, attributed the braking in game revenue to the lack of new games on the supply side, “Whether served as game agent or co-operator, the increase in revenue requires access to new games, but in the past half year, the whole market has got too few games with license agreement, resulting in our game supply being lower than expected. Meanwhile, for the same reason, many of our games debut schedules have been delayed which also decelerated the revenue growth. Despite the influence of market environment factors, the slowdown in game growth still raises questions about the effectiveness of all the efforts that Bilibili had done for the period.

In that quarter, Bilibili's' big moves in the gaming included a strategic investment of $123m in XinDong Network (a game company) and being the agent of the official public test of the pixel-style RPG game “Guardian Tales”. The blockbuster in the first half of the year has been placed on heavy bets, which Bilibili, with unprecedented promotion, not only promoted it everywhere in its own communities, but also advertised it on multiple platforms such as Weibo, Baidu, WeChat, Douyin, Douyu and HuYa.

Bilibili’s sales and marketing expenses in the second quarter $216m, an increase of 107% year-on-year. The financial report also clearly marked that part of the cost came from “the company’s mobile game promotion expenses", which was never seen in the previous report. The strong investment in games does not gain wanted result showed in the earnings income. Therefore, Bilibili has begun to think about how to steer its game business for the following days.

"Self-developed games will be our key focus at the current stage, and I predict that in a few years we should have more than half of the game revenue will come from the self-made . If being a game agent and co-operator were the past growth engine of Bilibili's game business, then the self-developed games would be the second driver in the future.” ChenRui said so in the call meeting. Since last year, the company has been contriving to build a team for game development, which now has more than 1,000 members.

People are concerned about Bilibili's game business is because it can reap stable revenue, to a further extent, is also because they wonder whether Bilibili learns a lesson from the strategies and results of its business.

Nevertheless, although the game is in a bottleneck, another noteworthy data appears in the report that can answer people’s doubts about its commercialization: in the second quarter, Bilibili's advertising revenue achieved a noticeable growth, which surpassed the billion-dollar mark for the first time in a single quarter, reaching 1.5 billion yuan ($162m), up more than 200% year-on-year.

Previously, owing to the need to maintain the community atmosphere, Bilibili has always adopted very cautious attitude towards advertising. And therefore, how to cooperate with advertisers and when to widely embrace advertising are frequent topics of concern. At the beginning of the year, Bilibili had made three plans for its advertising business: first, to continue to enhance its own ability as a commercial through the improvement of product capabilities, algorithm capabilities to help improve advertising monetization; second, to make advertising available on more consumer scenarios, such as live, comics, etc., to bridge tighter connection between brands and the young; third, to strengthen the standardized integrated marketing capabilities to deep cultivate vertical field customers.

From result-oriented view, Bilibili's advertising strategy has started to work. The three measures were also the key things that Bilibili did to boost advertising revenue in the second quarter, as mentioned by Li Ni, Vice Board Chairman and COO of the company, in the call meeting. She also pointed out that the commercialization team structure was upgraded, which the original commercial flow management system, advertising system and Huahuo system (the official cooperation platform between UPers and brand owners) were turned into the commercial middleground, while the marketing team of UPer (the Youtuber-like content creator) was also merged into one major marketing center.

The advertising logic of Bilibili is “content is advertising, advertising is content”, and the improvement of content richness and viewership is crucial to the growth of advertising revenue.

With Bilibili opens wider arms to advertising, the next question people will likely discuss will be how far the company can reach.

At least by now, the ceiling is still far high from being touched. Earlier this month, Bilibili had issued the annual data since the launch of Huahuo system. It was mentioned therein that as of June this year, the brands registered in the platform grew by 2050% year-on-year, the middle-popular UPers received orders at a rate of over 100% year-on-year, and the brands’ readvertised rate reached 75%; over the past year, more than 3,000 funded videos made themselves listed on the hot trend, equivalent to an average of over 10 videos on the list every day.

From this financial report, it can be seen that with the user structure and user growth rate, as well as the continued prosperity of the content ecology, it is no longer appropriate to treat Bilibili as a “game company”.