We took the opportunity to build a moderate-sized new position in Bilibili (BILI). BILI is undergoing a transformation from a niche ACG (anime, comics & game, or 二次元 in Chinese) media market leader, to a multifaceted business with leading positions in mid-form PUGC (professional users generated content) market, yet heavily under-monetizing the value it generates.
By a rough comparison, BILI runs a YouTube of China without in-feed ads. Tao: BILI started as ACG video site and game operator targeted Generation Z, and gradually grew to a multifaceted media business with expanded user base. It now has 4 main business:
1) mid-form PUGC (basically a YouTube);
2) ACG mobile game (publishing & operating games);
3) Live Streaming (content creators hosting live streaming);
4) E-commerce (directly selling ACG merchandises).
One unique culture about BILI’s video platform is that it decided to not run in-feed ads for most content, which created superior user experience compared to prevalent multi-minutes mandatory in-feed ads for free users among all other mid-to-long form video platforms in China. To some extent, all three subsequent businesses are experiments of non-ads-based monetization came to fruition.
By revenue, game is its main business (generating 50+%), but I see the mid-form PUGC video platform its core assets. Stripping out game revenue and assuming all game users are also users of at least one of BILI’s other services (which is a safe assumption), I estimate BILI currently generates about RMB 26 ($3.7) revenue per user, which is under-monetized both absolutely compared its intrinsic value, and relatively compared local & global counterparties. Meteorology: BILI built alliances with both Alibaba &Tencent, who own 6.8% & 12.7% strategic stake respectively.
This is rare as the two giants are competing head-to-head in many fronts and usually require their portfolio companies to explicitly pick side. Such alliances allow BILI to flourish in both 4 games & e-commerce segments. Although BILI competes with any business that requires users’ screen time, which include long-form video (iQiyi, Youku, Tencent Video) and short-from ones (TicTok, Kuaishou), the direct head-to-head competition comes from ByteDance-backed Xigua video.
From user profile, BILI has younger & more active users, as Xigua has older audiences. Regulatory risk is another major consideration, as any “YouTube” imitator in China may encounter censorship issue someday. Topography: I believe BILI has built a moat around its mid-form PUGC platform. It now has 130 million engaging monthly active users, and wide range type of content. The network effect of attracting highquality content creators is evident, as it organically expands user base to older millennials (in their 30s) who has no ACG-related hobby. Also based on BILI’s top 100 hosts of 2019, the top 2 segments are now Life & Game, consisting of over 50% of all hosts, an indication of strong influence over expanded topics. BILI is also exploring other approaches of monetization, e.g. Online education (like Coursera) & incubating agency.
Commander: CEO Chen Rui is a serial entrepreneur, also an old lieutenant of Lei Jun, a highly regarded tech entrepreneur and current CEO of Xiaomi. I evaluated that Chen has genuine passion of ACG culture (Anecdotes has it that he was one of the earliest users of BILI and bought in as an angel investor when BILI still hosted servers in founder Xu Yi’s apartment). He seems to be credible in designing & executing strategies, yet not as deeply-thinking, based on his public writings & interviews, as some other Chinese founder/CEOs that I highly regard (e.g. Lei Jun of Xiaomi, Colin Huang of Pinduoduo & Li Xueling of YY, to name a few). Interestingly, the generation X founder Xu Yi still holds president role of the company, and actively involves in BILI’s community (like Jack Dorsey’s active Twitting). Xu Yi, although very young, seems to have strong opinions and sense of value. For example, the no-in-feed-ads was his early public commitment and is still currently honored even he’s in a back seat. This type of dual-leadership (one operational, one communal) is not common and is not easy to evaluate. I rather to see one leader processes both traits, but it seems to work well for BILI thus far.
System: BILI’s story could one day be a great case study of “how to build a profitable YouTube without ads”. It has made great strides to this goal thus far. Mobile game is a proven lucrative business and is strengthened by Sony’s new strategic investment. Both live streaming & e-commerce are also promising as the monetization models are well built & tested in China, for example, tipping streamer (for which platform can take a quick cut) widely becomes a convention, and mobile payment & logistics infrastructure are mature for e-commerce.
Therefore, BILI can focus on fostering high quality PUGC which attracts traffic for further downstream monetization. To achieve this, BILI had built a welldesigned incentive system for creators yet without diluting the “culture” from its origin. Valuation: BILI looks reasonably value optically at 4.5x sales. However, I think the simple revenue multiple overlooked the mixture of a lucrative game business & rest under-monetized best-of-breed PUGC video business. I estimated BILI’s game business could worth about $3b on a 15x forward earning, which, at our cost basis, implies $2.8b for the rest operating businesses, or $22 market cap for each MAU. This is very cheap considering such a business should be able to easily monetize at $10/user (using either opportunity-cost-based survey or Chinese video/streaming/social media peers) from current 5 mere $3.7/user when they see appropriate.
A reference point is that YouTube currently monetizes at $8/user globally, which is also under-done in my opinion. So, we paid 2.2X “fair” revenue for a YouTube of China, where I think a fair multiple should be between 5 to 10 times (depending how much growth you believe is still left). It doesn’t mean BILI price won’t go down than what we paid, but I estimate it could worth twice to 5 times more in 3-5 years with decent probability.