Incidents:

On August 22, the company announced its 2024Q2 quarterly report, achieving operating income of 6.1 billion yuan (YoY +16%, QoQ +8%) and adjusted net profit of -0.27 billion yuan. Losses narrowed sharply year-on-year.

Our point of view:

1. Operating conditions: User traffic on the 2024Q2 platform continued to grow healthily. MAU increased 4% year over year to 0.336 billion, DAU increased 6% year over year to 0.102 billion, DAU ratio increased, and user stickiness index improved.

2. Main financial indicators: Bilibili 2024Q2 achieved revenue of 6.1 billion yuan (YoY +16%, QoQ +8%), including mobile game business 1.007 billion yuan (YoY +13%, QoQ +2%), value-added services 2.566 billion yuan (YoY +11%, QoQ +1%), advertising business 2.037 billion yuan (YoY +30%, QoQ +22%), IP derivatives and other businesses 0.516 billion yuan (YoY -4%, QoQ +7%). Gross margin increased to 29.9% year on year (yoy+6.8pct, qoq+1.6pct), various expense ratios continued to improve year over year, sales expense ratio 17% (yoy-0.4pct, qoq+0.5pct), R&D expense ratio 15.0% (yoy-5.1pct, qoq-2.4pct), administrative expenses rate 8% (yoy-2.2pct, qoq-1.4pct). After adjustment, net profit to mother narrowed sharply year-on-year and further improved month-on-month.

3. Mobile game business: 2024Q2's revenue increased 13% year over year to 1.007 billion yuan. The reason for the increase was mainly due to the excellent performance of the company's launch of the new exclusively licensed game “Three Kingdoms: Seek the World”. The company's leading games “Fate/Grand Order (Fate/Grand Order)” and “Blue Line” have performed well recently. The first strategy game “Three Kingdoms: Designing the World”, which was launched in June, landed third in the iOS game bestseller list on the day of the public beta, and remained in the top ten for a month. Given the long-term operating characteristics of the SLG category, “Three Kingdoms: Designing the World” is expected to continue to make significant incremental contributions to the game in the second half of the year.

4. Value-added business: 2024Q2 revenue increased 11% year-on-year to 2.566 billion yuan. Station B continues to strengthen the collaboration between live streaming and video ecosystems, and continues to enrich live streaming content with diverse interest groups in the community.

In terms of membership business, the total number of members maintained steady growth in the second quarter, exceeding 22.3 million, of which over 80% were annual subscriptions or automatically renewed members.

5. Advertising business: 2024Q2 revenue increased 30% year-on-year to 2.037 billion yuan, mainly due to the company's improved supply of advertising products and improved advertising efficiency. Station B has further enhanced its commercialization capabilities through product infrastructure upgrades and more targeted industry solutions. In the first half of the year, the number of advertisers on Station B increased by 50% year-on-year, and more advertisers from emerging industries joined Station B, with AI vendors covering more than 90%. At the same time, Station B has maintained a high growth rate in e-commerce and game advertising industries, and has also achieved double-digit year-on-year growth in emerging industries such as online services, AI, and education. Station B continues to adhere to the “big open loop” strategy. Delivery transactions increased by more than 140% year-on-year during the 618 period, and the number of advertisers was 4 times that of the same period last year.

Profit forecasts and investment ratings estimate the company's FY2024-2026 revenue to be 26.8/31.6/36.3 billion yuan, NON-GAAP net profit of -0.003/1.96/2.96 billion yuan, and corresponding PS of 1.5x/1.3x/1.1x, respectively. The company's platform has deep ecological barriers, and user participation and retention rates have been steadily improving. We have given it a 2024 target MAU valuation of RMB 160 corresponding to a market value of 55.2 billion yuan, a target PS 2X corresponding to a target market value of 53.5 billion yuan, a SOTP valuation of 56.8 billion yuan, corresponding to a compromise target market value of RMB 55.1 billion, and a target price of HK$131/HK$143 in 2024, maintaining a “buy” rating.

Risks suggest risks of macroeconomic growth falling short of expectations, risks of game version acquisition, game development and launch falling short of expectations, increased risk of competition, risk of losing users, risk of internet valuation adjustments, and policy regulation risks.