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Morning Notes iQIYI Inc. August 15, 2019 Content Control Constrains IQ’s Paying Member Growth iQIYI Inc. in 2Q19; The Situation May Get Better In 4Q19 IQ: N/A IQ will report 2Q19 results on August 19th after the markets closed followed by a Price: $16.93 9pm EST conference call. 2019 is a tough year for the online media sector due to Target Price: N/A the government’s stricter control over media content as it is a political sensitive year. IQ and other online video vendors are limited to what they can broadcast on 52 Week Range: $14.35 - $32.46 their platforms. As a result, the paying user growth was slower. Subscribing Market Cap: $12.3B members in 2Q19 is likely to be 100.4M, vs. 96.8M in 1Q19 and 67.1M in 2Q18. In Avg. Daily Vol. (100 day): 7,915,971 addition, brand advertising may be weak from the slowdown in the economy, and 3-Yr. Est. Rev. CAGR: 29% performance ad is under pressure from ByteDance. Putting all together, we believe IQ’s 2Q19 revenue is likely to be in line with or slightly lower than consensus expectation at RMB7,021M. FY (Dec) 2018A 2019E 2020E iQiyi focused on airing top dramas in 2Q19 and less on quantity – iQiyi Q1 4,877A 6,990A 8,209E aired all top 10 drama content in 2Q19E. Among the top 10, two titles “破冰行 Q2 6,170A 6,972E 8,633E 动 (The Thunder)”and “新白娘子传奇 (The Legend of White Snake)” are IQ Q3 6,914A 7,757E 9,537E in-house produced content tiles (Figure 1). The total number of actively viewed Q4 7,027A 8,247E 10,248E content titles for IQ decreased 7.5% Y/Y in 2Q19, vs. increase of 3.1% Y/Y in Revenue 24,989A 29,966E 36,627E 1Q19 (Figure 2); while for the three video platforms (iQiyi, Youku and Tencent Video) combined - total number of actively viewed content titles decreased Q1 (13.80)A (2.52)A (2.20)E 1.1% Y/Y in 2Q19 (Figure 3). The total number of newly added titles for IQ Q2 (3.01)A (3.41)E (1.79)E decreased 10.5% Y/Y in 2Q19, vs. increase of 8.8% Y/Y in 1Q19 (Figure 4); which was below all three platforms combined - newly added active titles Q3 (4.34)A (4.11)E (1.91)E increased 5.1% Y/Y in 2Q19 and increased 3.2% Y/Y in June 2019 (Figure 5). Q4 (4.83)A (3.51)E (1.65)E The total number of in-house produced content titles for IQ increased 114.9% GAAP EPS (25.98)A (12.53)E (7.55)E Y/Y in 2Q19, vs. 220.8% Y/Y in 1Q19 (Figure 6); in-line with all three platforms P/S 3.8x 2.8x 2.3x combined - total actively viewed in-house content titles increased 119.2% Y/Y in 2Q19 and increased 96.6% Y/Y in June 2019 (Figure 7). All figures in RMB millions unless otherwise noted Figure 1: Top Ten Dramas, 1Q19 – 2Q19 $50 Top 10 Dramas $45 Quarter Rank Content Name Platform & in-house Producted $40 $35 1 知否知否应是绿肥红瘦(The Story of Ming Lan) iQiyi, Tencent Video, Youku $30 2 小女花不弃(I Will Never Let You Go) iQiyi, Tencent Video, Youku $25 $20 3 都挺好(All is Well) iQiyi, Tencent Video, Youku $15 4 独孤皇后(Queen Dugu) Youku, Mgtv $10 $5 5 招摇(The Legends) iQiyi Only $0 1Q19 6 皓镧传(Beauty Hao Lan) iQiyi Only 7 黄金瞳(The Golden Eyes) iQiyi - In-house Produced 8 逆流而上的你(Unbeatable You) iQiyi, Tencent Video, Youku 9 天衣无缝(Spy Hunter) iQiyi, Tencent Video, Youku, Mgtv 10 新倚天屠龙记(Relying on Heaven to Slaughter Dragons) Tencent Video 1 封神演义(Investiture of the Gods) iQiyi, Tencent Video, Youku, Mgtv Tian X. Hou; +86 10 8567 0989 2 白发(Princess Silver) iQiyi, Tencent Video, Youku [email protected] 3 破冰行动(The Thunder) iQiyi - In-house Produced 4 青春斗(Youth Struggle) iQiyi, Tencent Video, Youku, Mgtv Ethan Qin; +86 10 8567 0787 5 筑梦情缘(Architect`s Dream and Love) iQiyi, Tencent Video, Youku, Mgtv [email protected] 2Q19 6 如果可以这样爱(Merry Christmas) iQiyi, Tencent Video, Youku, Mgtv 7 我的真朋友(My True Friend) iQiyi, Tencent Video, Youku Jay Dong; +86 10 8567 0787 8 少年派(Growing Pain) iQiyi, Tencent Video, Youku, Mgtv [email protected] 9 新白娘子传奇(The Legend of White Snake) iQiyi - In-house Produced Gina Chen; (646) 389-8528 10 带着爸爸去留学(Over the Sea I Come to You) iQiyi, Tencent Video, Youku [email protected] Source: T.H. DATA (www.thdata.com) TH Data Capital (AKA T. H. Capital, LLC) 5E, Tower D, Central International Trade Center 6 Jianguomenwai Avenue, Beijing 100022, China Please see end this report for full disclosures August 15, 2019 Figure 2: iQiyi - Number of Actively Viewed Content Titles, Figure 3: Industry - Number of Actively Viewed Content Titles, 1/2018 – 6/2019 1/2018 – 6/2019 25,000 70,000 20,000 60,000 50,000 15,000 40,000 10,000 30,000 5,000 20,000 10,000 - - 201801 201802 201803 201804 201805 201806 201807 201808 201809 201810 201811 201812 201901 201902 201903 201904 201905 201906 201801 201802 201803 201804 201805 201806 201807 201808 201809 201810 201811 201812 201901 201902 201903 201904 201905 201906 TV Dramas Movies Cartoons Variety Shows iQiyi Tencent Youku Source: T.H. Data (www.thdata.com) Figure 4: iQiyi - Number of Newly Added Actively Viewed Figure 5: Industry - Number of Newly Added Actively Viewed Content Titles, 1/2018 – 6/2019 Content Titles, 1/2018 – 6/2019 6,000 16,000 14,000 5,000 12,000 4,000 10,000 3,000 8,000 6,000 2,000 4,000 1,000 2,000 - - 201801 201802 201803 201804 201805 201806 201807 201808 201809 201810 201811 201812 201901 201902 201903 201904 201905 201906 201801 201802 201803 201804 201805 201806 201807 201808 201809 201810 201811 201812 201901 201902 201903 201904 201905 201906 iQiyi Tencent Youku TV Dramas Movies Cartoons Variety Shows Source: T.H. Data (www.thdata.com) Figure 6: iQiyi - Number of Newly Added In-House Produced, Figure 7: Industry - Number of In-House Content, 1/2018 – 6/2019 Content, 1/2018 – 6/2019 1,600 3,000 1,400 2,500 1,200 2,000 1,000 1,500 800 600 1,000 400 500 200 - - 201801 201802 201803 201804 201805 201806 201807 201808 201809 201810 201811 201812 201901 201902 201903 201904 201905 201906 201801 201802 201803 201804 201805 201806 201807 201808 201809 201810 201811 201812 201901 201902 201903 201904 201905 201906 iQiyi Tencent Youku TV Dramas Movies Cartoons Variety Shows Source: T.H. Data (www.thdata.com) 2 of 6 DATA DRIVEN INVESTMENT RESEARCH & ADVISORY August 15, 2019 Figure 8: Earnings Model (in RMB Ms, except per share) FY17A FY18A 1Q19A 2Q19E 3Q19E 4Q19E FY19E 1Q20E 2Q20E 3Q20E 4Q20E FY20E FY21E Income Statement (000's of RMB) 12/31/17 12/31/18 3/31/19 6/30/19 9/30/19 12/31/19 12/31/19 3/31/20 6/30/20 9/30/20 12/31/20 12/31/20 12/31/21 Membership services 6,536,028 10,622,769 3,445,343 3,493,000 3,711,834 3,989,874 14,640,051 4,080,376 4,318,795 4,591,275 4,795,634 17,786,080 20,033,897 Online advertising services 8,158,924 9,328,061 2,119,433 2,094,006 2,204,547 2,335,855 8,753,841 2,373,765 2,617,507 2,689,548 2,919,819 10,600,639 12,917,074 Content distribution 1,191,816 2,162,643 442,620 485,423 834,576 600,344 2,362,963 575,406 689,301 1,160,061 828,474 3,253,242 4,411,355 Others 1,491,582 2,875,643 982,523 899,948 1,005,638 1,320,799 4,208,908 1,179,028 1,007,942 1,096,146 1,703,831 4,986,946 5,697,946 Total revenue 17,378,350 24,989,116 6,989,919 6,972,377 7,756,596 8,246,872 29,965,763 8,208,575 8,633,545 9,537,028 10,247,758 36,626,906 43,060,272 Cost of revenues 17,386,563 27,132,811 7,277,196 7,167,603 8,532,255 8,659,216 31,636,270 7,633,974 7,727,023 8,678,696 9,222,982 33,262,675 36,667,613 Gross Profit (8,213) (2,143,695) (287,277) (195,227) (775,660) (412,344) (1,670,507) 574,600 906,522 858,333 1,024,776 3,364,231 6,392,659 Selling, general & administrative 2,674,990 4,167,889 1,140,611 1,240,611 1,440,611 1,370,611 5,192,444 1,388,611 1,408,611 1,441,611 1,406,611 5,645,444 5,677,444 Research and development 1,269,806 1,994,652 598,072 611,072 639,072 649,072 2,497,288 658,072 673,072 685,072 698,072 2,714,288 2,831,288 Operating expenses 3,944,796 6,162,541 1,738,683 1,851,683 2,079,683 2,019,683 7,689,732 2,046,683 2,081,683 2,126,683 2,104,683 8,359,732 8,508,732 Operating income (3,953,009) (8,306,236) (2,025,960) (2,046,910) (2,855,343) (2,432,027) (9,360,239) (1,472,083) (1,175,161) (1,268,350) (1,079,907) (4,995,501) (2,116,073) Non-GAAP Operating income (3,719,585) (7,750,236) (1,769,960) (1,788,350) (2,594,197) (2,168,270) (8,320,776) (1,205,688) (906,102) (996,601) (805,441) (3,913,832) (990,484) Interest income 83,127 213,969 65,097 65,097 70,097 75,097 275,388 75,297 75,497 75,697 75,897 302,388 321,200 Interest expense (277,577) (94,711) (135,247) (145,247) (145,497) (145,487) (571,478) (145,502) (145,492) (145,482) (145,472) (581,948) (581,888) Foreign exchange (loss)/gain, net 400,737 (970,796) 328,035 (300,000) - - 28,035 - - - - - - Loss from equity method investments (263) (16,965) (34,535) (34,545) (34,555) (34,565) (138,200) (34,575) (34,585) (34,595) (34,605) (138,360) (138,520) Other (expense)/income, net 2,488 192,309 (12,224) (12,224) (12,224) (12,224) (48,896) (12,224) (12,224) (12,224) (12,224) (48,896) (48,896) Total other (expenses)/income, net 208,512 (676,194) 211,126 (426,919) (122,179) (117,179) (455,151) (117,004) (116,804) (116,604) (116,404) (466,816) (448,104) Pretax income (3,744,497) (8,982,430) (1,814,834) (2,473,829) (2,977,522) (2,549,206) (9,815,390) (1,589,087) (1,291,965) (1,384,954) (1,196,311) (5,462,317) (2,564,177) Income tax expense/(benefit) (7,565) 78,801 7,443 10,146 12,211 10,455 40,255 15,891 12,920 13,850 11,963 54,623 25,642 Net income (3,736,932) (9,061,231) (1,822,277) (2,483,974) (2,989,733) (2,559,660) (9,855,645) (1,604,978) (1,304,884) (1,398,804) (1,208,274) (5,516,940) (2,589,819) Noncontrolling interests - 48,545 (8,301) (8,321) (8,341) (8,361) (33,324) (8,371) (8,381) (8,391) (8,401) (33,544) (33,704) Net loss attributable to iQiyi (3,736,932) (9,109,776) (1,813,976) (2,475,653)
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