Bilibili’s Cost Initiatives Bear Fruit

Bilibili BILI posted a narrower fourth-quarter loss than the Refinitiv consensus estimate. Adjusted net loss came in at CNY 1.31 billion, 8% better than consensus of CNY 1.42 billion. Weak revenue guidance for 2023 (midpoint calling for 14% revenue growth) is due to management’s plan to pull back on low-margin businesses, such as esports, content sublicensing, and e-commerce. Combined with other cost-cutting initiatives, management expects adjusted net loss to halve in 2023, positioning the firm to break even sooner than our previous forecast. However, despite plans to reduce costs over the next several quarters, we do not believe this warrants major changes to our long-term assumptions. Therefore, we retain our $38.20 (HKD 300) fair value estimate. Despite a 10% rally in share price after the earnings release, we still find the shares to be undervalued as of March 3, 2023, We believe the current market valuation (price to 2023 sales multiple of 2.5 times) indicates that the market underestimates 1) the long-term ad revenue contribution from the video-sharing platform; and 2) more operating leverage as the top line grows.

In the fourth quarter of 2022, user time spent increased 51% year over year, underscoring the health of Bilibili’s community and the continued momentum of its video platform. Revenue grew 6% year over year to CNY 6.1 billion. Advertising revenue (27% of the total) declined 5% as the challenging macroeconomic environment in the fourth quarter weighed on advertiser budgets. After China’s scrapping of its zero-COVID policy, Bilibili is starting to see strong rebound in ad demand. For first-quarter 2023, management now expects advertising revenue to grow 25% year over year. For 2023, management expects ad revenue to grow by more than 20%, assuming no increase to ad load (the frequency of ads showing on videos). We think the segment will grow 30% this year, driven by China’s rapid economic recovery and a slight increase in ad load.