IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

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Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

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<a href="https://www.smartkarma.com/entities/26793" target="_blank" data-smartkarma-citation="entities:26793:1">Bilibili Inc (BILI US)</a> is a Chinese online video platform themed around anime, manga, and game fandom. Last week, it announced its IPO price range of $10.50-12.50 per ADS. At the mid-point of the IPO price range, Bilibili will raise net proceeds of $443.3 million, resulting in a fully diluted market cap of $3.3 billion. Bilibili aims to use 34% of net proceeds for R&amp;D, 11% for S&amp;M and the remainder 55% for working capital, content and M&amp;A.In <a href="https://www.smartkarma.com/insights/bilibili-ipo-preview-myths-about-generation-z" target="_blank" data-smartkarma-citation="insights:18326">Bilibili IPO Preview: Myths About Generation Z</a> we were bearish on Bilibili's fundamentals due to an unattractive risk/reward profile underscored by poor earnings quality. From a valuation perspective, we believe that the proposed IPO price range is unattractive and recommend not to participate in the IPO because:<ol><li>Bilibili has a disproportionately large revenue risk from a single mobile game, Fate/Grand Order, which accounted for 60% of total revenue in 2017. At the start of 2018, Fate/Grand Order remained a regular feature in the list of the top ten grossing mobile games in China, according to AppAnnie. However, Fate/Grand Order has hit a sharp slump in March. Since 6 March, Fate/Grand Order has consistently ranked below the top 20 grossing mobile games in China. </li><li>As mobile games account for 83% of Bilibili's revenue in 2017, we have used a blended peer group of global internet game companies for our relative valuation. Based on our estimates and at IPO mid-point, Bilibili trades at a material premium with the blended median of its peer group on a 2018 EV/EBITDA and P/E basis.</li><li>Due to poor earnings quality, we believe Bilibili should trade at most inline with its peer group on an EV/EBITDA and P/E basis. If Bilibili traded inline with its peers, it would imply an IPO price range of $8-9 per ADS, which is materially below the proposed IPO price range.</li></ol>

Bilibili Inc (BILI US) is a Chinese online video platform themed around anime, manga, and game fandom. Last week, it announced its IPO price range of $10.50-12.50 per ADS. At the mid-point of the IPO price range, Bilibili will raise net proceeds of $443.3 million, resulting in a fully diluted market cap of $3.3 billion. Bilibili aims to use 34% of net proceeds for R&amp;D, 11% for S&amp;M and the remainder 55% for working capital, content and M&amp;A.In Bilibili IPO Preview: Myths About Generation Z we were bearish on Bilibili's fundamentals due to an unattractive risk/reward profile underscored by poor earnings quality. From a valuation perspective, we believe that the proposed IPO price range is unattractive and recommend not to participate in the IPO because:Bilibili has a disproportionately large revenue risk from a single mobile game, Fate/Grand Order, which accounted for 60% of total revenue in 2017. At the start of 2018, Fate/Grand Order remained a regular feature in the list of the top ten grossing mobile games in China, according to AppAnnie. However, Fate/Grand Order has hit a sharp slump in March. Since 6 March, Fate/Grand Order has consistently ranked below the top 20 grossing mobile games in China. As mobile games account for 83% of Bilibili's revenue in 2017, we have used a blended peer group of global internet game companies for our relative valuation. Based on our estimates and at IPO mid-point, Bilibili trades at a material premium with the blended median of its peer group on a 2018 EV/EBITDA and P/E basis.Due to poor earnings quality, we believe Bilibili should trade at most inline with its peer group on an EV/EBITDA and P/E basis. If Bilibili traded inline with its peers, it would imply an IPO price range of $8-9 per ADS, which is materially below the proposed IPO price range.

Bilibili IPO Valuation: A Grand Risk Seems in Order

<a href="https://www.smartkarma.com/entities/26793" target="_blank" data-smartkarma-citation="entities:26793:1">Bilibili Inc (BILI US)</a> filed for an NYSE IPO to raise $400 million on 2 March. It is a Chinese online video platform themed around anime, manga, and game fandom backed by <a href="https://www.smartkarma.com/entities/26" target="_blank" data-smartkarma-citation="entities:26:1">Tencent Holdings Ltd (700 HK)</a>, a 5.2% shareholder.Bilibili seems to be the ideal way for investors to gain exposure to Generation Z’s (82% of bilibili’s users) increasing spend on the online entertainment industry in China. A common view is that Generation Z is more accustomed to paying for content and premium services as they grow up, compared to previous generations. However, as a play on Generation Z spends, bilibili does not have an attractive risk/reward profile. We are bearish on bilibili on a fundamental basis due to the following factors:<ol><li>Bilibili has a disproportionately large revenue risk from a single mobile game, Fate/Grand Order, an exclusively distributed game based on the Fate anime series. Fate/Grand Order accounted for 60% of total revenue in 2017 vs 13% in 2016. While the Fate/Grand Order success story is commendable, bilibili’s earnings quality is poor due to the heavy reliance on Fate/Grand Order. It is unclear if bilibili has an upcoming mobile game which can replicate Fate/Grand Order’s success.</li><li>Due to the launch of Fate/Grand Order at the end of 3Q16, mobile games' monthly paying users (MPUs) exponentially grew on average 260% in the each of first three quarters of 2017. However, due to tougher comparable, mobile games’ MPUs growth slowed to a relatively pedestrian 25% in 4Q17. It is likely mobile games' MPUs growth will continue to decelerate in the absence of a compelling alternative to Fate/Grand Order.</li><li>The SEC F-1 filing provides a deluge of facts to suggest that bilibili has many engaged users. However, monetising non-mobile games users seems to be an entirely different matter. While Bilibili’s non-mobile games paying ratio increased from 0.3% in 2016 to 0.7% in 2017, it is marginal compared to live streaming peer <a href="https://www.smartkarma.com/entities/285" target="_blank" data-smartkarma-citation="entities:285:1">YY Inc ADR (YY US)</a>'s paying ratio of 8.5% in 4Q17. Also, bilibili’s advertising revenue per monthly active user (MAU) is low at RMB3 in 2017 vs an average RMB16 for major Chinese internet companies.</li></ol>We will provide a view of valuation once the IPO price range is announced.

Bilibili Inc (BILI US) filed for an NYSE IPO to raise $400 million on 2 March. It is a Chinese online video platform themed around anime, manga, and game fandom backed by Tencent Holdings Ltd (700 HK), a 5.2% shareholder.Bilibili seems to be the ideal way for investors to gain exposure to Generation Z’s (82% of bilibili’s users) increasing spend on the online entertainment industry in China. A common view is that Generation Z is more accustomed to paying for content and premium services as they grow up, compared to previous generations. However, as a play on Generation Z spends, bilibili does not have an attractive risk/reward profile. We are bearish on bilibili on a fundamental basis due to the following factors:Bilibili has a disproportionately large revenue risk from a single mobile game, Fate/Grand Order, an exclusively distributed game based on the Fate anime series. Fate/Grand Order accounted for 60% of total revenue in 2017 vs 13% in 2016. While the Fate/Grand Order success story is commendable, bilibili’s earnings quality is poor due to the heavy reliance on Fate/Grand Order. It is unclear if bilibili has an upcoming mobile game which can replicate Fate/Grand Order’s success.Due to the launch of Fate/Grand Order at the end of 3Q16, mobile games' monthly paying users (MPUs) exponentially grew on average 260% in the each of first three quarters of 2017. However, due to tougher comparable, mobile games’ MPUs growth slowed to a relatively pedestrian 25% in 4Q17. It is likely mobile games' MPUs growth will continue to decelerate in the absence of a compelling alternative to Fate/Grand Order.The SEC F-1 filing provides a deluge of facts to suggest that bilibili has many engaged users. However, monetising non-mobile games users seems to be an entirely different matter. While Bilibili’s non-mobile games paying ratio increased from 0.3% in 2016 to 0.7% in 2017, it is marginal compared to live streaming peer YY Inc ADR (YY US)'s paying ratio of 8.5% in 4Q17. Also, bilibili’s advertising revenue per monthly active user (MAU) is low at RMB3 in 2017 vs an average RMB16 for major Chinese internet companies.We will provide a view of valuation once the IPO price range is announced.

Bilibili IPO Preview: Myths About Generation Z

China

Bilibili Inc. provides online entertainment services. The Company offers a platform that covers a wide array of genres and media formats, including videos, live broadcasting, mobile games, animation, and comics. Bilibili serves customers in China.

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Bilibili (BILI US)

Bilibili IPO Valuation: A Grand Risk Seems in Order

Bilibili Inc (BILI US) is a Chinese online video platform themed around anime, manga, and game fandom. Last week, it announced its IPO price range...

Arun George

Bilibili IPO Preview: Myths About Generation Z

Bilibili Inc (BILI US) filed for an NYSE IPO to raise $400 million on 2 March. It is a Chinese online video platform themed around anime, manga,...

Arun George

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)