BILIBILLI LTD（9626.HK）：通過流式運營增強盈利能力;升級至收購

We expect BILI to report 2Q24 results in mid Aug. We model 17% YoY 2Q24 total revenue contributed by 12% YoY game, 31% YoY ad and 15% YoY VAS. GPM expansion and loss shrinkage sustain despite increased S&M on new game promotions. We expect dazzling new SLG game will contribute considerable 2H24 game incremental with higher GPM. Along with sustainable online ad growth momentum facilitated by multiple internal drivers, committed VAS executions and explorations, as well as streamlined operations across core segments, we see Co. will gain share within energetic domestic game and online ad in 2H24 with enhanced monetisation capabilities and efficiencies on vibrant community. Upgrade to BUY with new TP of US$20.0/ HK$156.0.

Key Factors for Rating

Game: New SLG 'On fire'; Streamlined operations. We expect Co.'s game business will resume energetic in 2H24 (est. 2H24 mobile game revenue up 114% YoY on low base) mainly contributed by outperformed exclusively licensed SLG new game SanGuo. According to Qimai, it stably ranks Top 7 in iOS grossing game list by 10 July since launch on 13 June, way above our previous expectation assumed i) intensified competition in 2H24 domestic game market; and ii) solidified leaders within niche SLG game genre characterised with high ARPUs and low DAUs. We further lift our estimates and currently model its first month grossing to reach over RMB900mn and over RMB2.2bn grossing contribution in 2024. Simplified tedious game mode, light monetisation, synergies with in-app vibrant community filled with various verticals and successful promotions are key elements, in our view. We are quite optimistic for their N-T user retention and grossing sustainability given their upcoming S2 season schedule, content update and UGC ecosystems. We see L-T operations of this game would be a tipping point for Co. as this will be a i) reflection of game operation capabilities apart from core ACG games; and ii) sustainable revenue and profit generator. We expect Co. to announce more exclusively licensed pipelines across game genres in the future. Apart from SanGuo, another exclusively licensed ARPG game 'Heaven Burns Red' (織焰天穹) developed by Wright Flyer Studio is set to be officially released on 17 July in domestic market. Its official registration users exceeded 1m by 1 July. However, we currently do not model material revenue incremental for this game.

For jointly operated game, we expect launch of MiHoYo game ZZZ (絕區零) further enrich game PUGV content while we do not expect meaningful revenue contribution. For in-house game strategy, Co. just announced to suspend operations for their in-house title 'Thrud' (斯露德) on 9 Oct, 2024 (launched on 17 Aug, 2023). We see this is a reflection to demonstrate Co.'s ROI-oriented game strategy to allocate resources diligently and dynamically. Similarly, we do not expect their in-house game to contribution meaningful game revenue in the future (low single-digit game revenue contribution).

Online advertising: Multi-catalysts to drive sustainable growth. We expect sustainable and robust ad growth momentum in coming years (est. 24% 2023-2026E CAGR to RMB12bn in 2026E) on both increased ad inventory, ROI and eCPM contributed by i) new ad products; ii) enhanced monetisations on various consumption scenarios (search, moments, live and short video eC); iii) streamlined operations (dynamic ad load); iv) optimised algorithm on AI empowerment; and v) strengthened infrastructures. eCommerce platforms, game, 3C and FMCG will continue to be leading verticals to support growth.

VAS: Committed executions. We deem their VAS strategy will be committed, i.e., integrating streaming with their core PUGV ecosystem and innovating various VAS monetisation models (premium membership, paid class, commission, etc.) to enhance their commercialistion capabilities. We model 13% 2023-2026E CAGR to reach over RMB14bn in 2026E for VAS revenue.

Forecasts change: 3Q24 breakeven holds; FY24 breakeven subject to SLG grossing and S&M. We raise our 2024/25/26E total revenue estimations by 7%/5%/4% respectively by mainly uplifting our mobile game revenue forecasts (raised by 45%/33%/28% in 2024/25/26E) contributed by new SLG game. Accordingly, we lift our 2024/25/26E GPM forecasts by 120bps/ 123bps/ 82bps to reflect revenue mix change (est. 55-60% GPM for exclusively licensed SLG game). While our bottom line estimations are less impacted due to our increased S&M assumptions. We maintain our 3Q24 adj. Op breakeven assumption and currently estimate -1%/ 5%/ 8% adj. OPM in 2024/25/26E.

2Q24 preview: Solid ad; continued loss shrinkage despite increased S&M on new game promotions. We model total revenue to grow at accelerated 17% YoY to RMB6.2bn, 2% above consensus. Mobile game revenue resumed back to +12% YoY on low base without material contribution from outperformed new SLG game. Online ad remain solid at 31% YoY to RMB2.0bn. VAS revenue deliver 15% YoY to RMB2.7bn mainly supported by strong streaming. We expect users remain healthy with DAUs growing at 7% YoY to 103mn. GPM continue expand QoQ to 29.3%, in line with consensus. Despite increased RMB1.2bn S&M estimation mainly on new game promotions, Op loss continue narrow QoQ with forecasted adj. operating loss margin shrinking from -18% in 2Q23 and -9% in 1Q24 to -8% in 2Q24. Adj. net loss margin of -6.3%, bigger than consensus -5.4%.

Key Risks for Rating

Downside: (i) slower-than-expected macro recovery; ii) ineffective monetisation;

(iii) content creator and user engagement; (iv) content supply and quality; and (v) regulations on games, streaming, advertising, data collection, taxation, etc.

Valuation

Upgrade to BUY and raise our TP to US$20.0/ HK$156.0 on 2.1x blended 2024 PSR from 4 key business segments (game, online ad, streaming and VAS) on our updated 2024E segment revenue estimations and corresponding selected domestic peers' valuation . This implies 36x/ 22x 2025/26E adj. PER based on our estimations. We currently maintain our PS valuation approach as we need to dynamically assess game grossing sustainability, GPM for key segments and S&M expenses, which are 3 determinants for their breakeven pace and future profitability forecasts.