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Early monetization stage with great potential

■ Bilibili reported that 3Q21 revenue was up 61% yoy, in line with our expectation. Its non-GAAP net loss was Rmb1,613m, below our expectation because of a lower GPM.
■ In 4Q21F, management guided revenue of Rmb5.7–5.8bn, a 48–51% yoy increase. Management is confident in achieving the 400m MAU goal at the end of FY23F.
■ Reiterate Add with a new DCF-based TP of HK$839.

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Strong top line but the margin will take time to improve

3Q21 segment yoy sales growth was 95%, 110%, and 78%, respectively, for the value added services (live broadcasting and paid memberships), advertising and e-commerce segments. Mobile game revenue returned to positive growth of 9% yoy, from yoy flattish in 1H21. Its GPM dropped by 4.0% pts yoy to 19.6% because of a revenue mix change, as the mobile game revenue contribution decreased and its GPM was higher. The mobile game segment GPM of 60% was higher than 50%, 10%+ and 20%- for the advertising, value-added services and e-commerce segments. Its non-GAAP net loss was Rmb1,613m, higher than the loss of Rmb948m in 3Q20, below our expectation, because of a lower GPM. We expect its GPM to improve yoy from FY22F, as mobile game revenue growth picks up and the paying ratio improves. We believe that Bilibili is still in the early stage of monetization and that its paying ratio and margins will improve in the long term. In 4Q21F, management guided revenue of Rmb5.7–5.8bn, up 48–51% yoy.

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Multi-format content to provide B2C monetization potential

Besides the top five PUGV categories of lifestyle, games, entertainment, ACG and knowledge, Bilibili saw fast growth in other emerging verticals, such as fitness, food and travel, and it will promote relationship, career, fashion and beauty, and home decoration content in the coming quarters to meet user preferences and attract new users. OGV productions caught up with hot anime, variety shows and documentaries released in 3Q21. With fast-growing MAU of 267.2m (up 35.5% yoy), Bilibili’s 12-month retention rate remained above 80%. Bilibili’s “story-mode” short-video content has created more entertainment options for users and helped Bilibili capture users’ fragmented time from other short-video platforms. In the quarter, Bilibili also saw the increasing popularity of its smart TV app, which provides high quality video content. The user overlap between its mobile app and smart TV app is only about 20%, and many smart TV app users are from lower-tier cities, which is distinct from its top-tier mobile app user base, indicating large potential for user base growth and cross-platform opportunities. Bilibili will start to explore the monetization model for its smart TV app next year and expects it to become a new
revenue driver.

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Platform value proven for advertisers

In 3Q21, Bilibili’s top five advertising verticals were mobile games, skincare and cosmetics, e-commerce, digital products, and food and beverage, and it also saw emerging verticals such as automotive, handbags and apparel, grow rapidly. Bilibili was ranked the second most- valuable brand name in China in terms of growth rate by BrandZ, and during the “11.11” online shopping festival, it ranked fifth in ad budget market share and first in overall conversion ROI by major e-commerce platforms. The click-through rate of Bilibili’s feed ads improved by 30% in the quarter, and the retention rate of its ad customers was over 75%. The ad videos had over 50% continuous playback on average. Bilibili is strengthening its ad middle-desk, i.e. Sparkle. Leveraging its Sparkle ad platform, which has attracted over 150k content creators (up 25% yoy), Bilibili can provide low-cost first-taste ad services for SME brands. Bilibili’s video-based ads were two times more efficient than the traditional picture- and text-based ads, and it expects the eCPM (effective cost per mile) to grow by 100%.

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