Bilibili Q3 2023 Financial Report Review: Advertising and Value-added Services have Performed Well, but Gaming has Fallen Short of Expectations

On November 29th, Bilibili released its Q3 financial report. On November 30th, CMB International released a commentary on Bilibili's Q3 financial report, stating that total revenue was flat year-on-year, with strong performance in Q3 for advertising and value-added services businesses, but gaming business fell short of expectations.

Stock Rating: BUY

Closing price (at the time of the preview release): $11.86 (November 29, 2023)

Current closing price: $11.51 (December 01, 2023)

CMB International target price: $24

Bilibili's Q3 performance was in line with expectations, with total revenue flat YoY at RMB 5.81 billion, in line with CMB International/market expectations of RMB 5.77/5.80 billion, and significantly reduced adjusted net loss. Ad business saw steady growth, while e-commerce ad and value-added service revenue grew rapidly YoY. Due to the underperformance of its mobile gaming business, the company guided its 2023 FY total revenue to the lower end of RMB 22.5-23.5 billion. The improving user quality and commercial ecosystem led to record high daily active users, increased DAU/MAU ratio, and a significant YoY increase in content creators, laying the foundation for revenue growth and breakeven. CMB International expects the company to achieve breakeven by the end of 2024 and recommends a BUY rating.

In Q3, ad revenue increased by 21% YoY to RMB 164 million (28% of total revenue), with performance ad revenue growing by over 40% YoY. E-commerce ad revenue grew by over 90% YoY. During the Double 11 period, total transaction volume for video and live-streaming products increased by over 250% YoY. Value-added service revenue grew by 17% YoY to RMB 2.6 billion (45% of total revenue), mainly due to the growth of live-streaming revenue. Mobile gaming revenue underperformed, decreasing by 33% YoY. The company has made progress in optimizing its in-house game development team.

In Q3, daily active users reached 103 million, up 14% YoY, with a DAU/MAU ratio of 30.1%. The company has developed a more prosperous commercial ecosystem and seen a YoY increase of over 160% in content creators who earn revenue from video and live-streaming products. These factors are expected to lay the foundation for Bilibili's revenue growth and breakeven.

In Q3, the gross profit margin increased by 6.8 percentage points YoY to reach 25.0%. The adjusted net loss rate improved, and operating cash flow turned positive in the quarter.

CMB International predicts that in Q4, the adjusted net loss rate will further improve, and operating cash flow will remain positive. In Q4, Bilibili will continue to optimize its in-house game development team, which CMB believes will improve its R&D efficiency. Additionally, the improving user quality and commercial ecosystem in Q4 will pave the way for Bilibili's revenue growth and breakeven. CMB International has set a target price of $24 for Bilibili, with ad business at $100.1 (42.1% of total valuation), value-added services at $91.0 (38.0%), mobile gaming at $45.0 (18.8%), and intellectual property derivatives and other projects at $0.3 (1.2%). The target price reflects Bilibili's unique value proposition and strong growth prospects in the video advertising market, as well as its growing user base and improving monetization efficiency. Due to Bilibili's lack of a successful in-house game development record, the target PE multiple for its mobile gaming business is lower than the industry average.