Bilibili Inc. (BILI)

Cornell Hedge Fund | Global Macro Fund FA 2020 Fund Manager: Willa Chen Analysts: Alyssa Lee, Brandon Amtzis, Echo Li, Rishab Yeddula Table of Contents

Investment Thesis 3

Industry Overview 5

Company Overview 7

Catalysts 11

Risks & Mitigants 15

Valuation 17

Final Recommendation 22

Appendix 25

2 Investment Thesis

3 Investment Thesis

Company Overview Catalysts • Bilibili Inc., also called B-Site, is a Shanghai-based video sharing 1 Versatile User Acquisition Strategies and online streaming platform which offers advertisement, gaming, and e-commerce services to over 130 million users • Founded in 2010 and listed on NASDAQ in 2018 2 Advertisement Monetization via Diversified Channels • Core features include user-generated content and real-time bullet captioning system Danmu popular with young consumers 3 $1.5bn Hong Kong Secondary IPO in 2021

Statistics & Fundamentals Valuation

Current ADR Price ADRs Outstanding Market Cap $44.20 347.4M RMB 101.8B

Levered Beta P/S Revenue (TTM) 1.63 6.97x RMB 8.8B

Investment Thesis: BUY

We recommend a BUY for BILI at $44.20 with a target share price of $58.00, implying a 31.2% upside over a 12-month investment horizon.

Significant user acquisition and monetization potential, in addition to a planned secondary listing in Hong Kong, are key drivers to accelerate Bilibili’s rapid growth and strengthen the firm’s position as the most diversified and youth-conscious online streaming platform in the Chinese market.

Sources: Capital IQ, Equity research reports (Credit Suisse, Huatai, Jefferies, JP Morgan, Morgan Stanley, UBS) 4 Industry Overview

5 Industry Overview Online Entertainment & Streaming Industry in China Industry Overview Industry Revenue • Entertainment and online streaming services including TV, movies, and 2019 Revenue by Segment user-generated content targeted at younger audiences • Monetization of online user platforms by expanding categories to advertising, mobile gaming, e-commerce • Chinese market dominated by Youku (Alibaba), iQiYi (Baidu), and QQ Video (Tencent) which each occupy a specific niche in the industry Industry Trends & Economic Drivers Key Industry Players

Cross-Category • Gaming, e-sports, film, original, short-term, and user-generated content Monthly Average Users (MAU) per Platform (millions) Content • >50% total annual growth driven by VR and OTT Videos Diversification • 62% of China’s 904M internet users engage in livestreaming

Expansion of • Multiple revenue streams via advertising, e-commerce, and partnerships Revenue • Consumer spending on online entertainment, driven by Gen Z users Channels and lower-tier households, projected to hit $116B by 2023 (+114.8%)

• Customer retention via emotes, content creation, and media selection Aggressive User • Internet penetration in China projected to reach 975M users by 2022 Acquisition (+3.1%)

• 5G adoption to revolutionize how users produce and consume content 5G Adoption & • Gen Z’s contribution to total market revenue projected to reach 66% Gen Z Growth by 2023 (+24%)

The online entertainment and streaming industry in China is experiencing tremendous growth across all service and content categories due to high consumer demand, leading to multiple monetization opportunities and aggressive competition for user traffic.

Sources: Bilibili 2019 10-K, Equity research reports (Credit Suisse, Huatai, Jefferies, JP Morgan, Morgan Stanley, UBS) 6 Company Overview

7 Company Overview Company Profile Company Overview Historical Stock Performance

• Bilibili was founded in 2010 in Shanghai as an iconic youth-centered Market Cap: RMB 101.8B FY19 Revenue: RMB 6.78B FY19 EBITDA: RMB (0.44)B brand of online entertainment for younger consumers • Chinese video-streaming and video-sharing site themed around Current ADR Price: $44.20; EPS: $(0.49/share) animation, comics, and games (ACG) which has evolved into a full spectrum of online entertainment categories and content formats Management

Founder & President: Yi Xu Chief Financial Officer: Xin Fan

CEO & Chairman: Rui Chen Vice Chairman & COO: Ni Li

Institutional Investors FY2019 Revenue Breakdown

1 Platform usage rises dramatically after Chinese government launches Covid-19 lockdown. Fidelity Management 4.2% Alibaba Group Holding 3.8% 2 Sony pays $400M in cash for equity stake in Bilibili. Hillhouse Capital Advisors 3.5% Yiheng Capital LLC 2.5% 3 Holding Foreign Companies Accountable Act expected to be signed. Wells Capital Management 2.4% 4 Bilibili announces $66M investment in Huanxi Media, gaining exclusive film and TV rights.

Bilibili originated as an ACG-focused content community for young consumers and has pursued rapid growth over the past decade through diversified content expansion and strategic partnerships with both media providers and investors like Alibaba and Tencent.

Sources: Bilibili 2019 10-K, Capital IQ, Yahoo Finance 8 Company Overview Key Differentiators & Growth Strategy Competitive Advantages Growth Performance

Content Positioning Membership System Key Highlights Unique content positioning focused Members must pass 100-question 107% CAGR Daily time spent/user jumped from on ACG; currently top-ranked and entrance exam, creating a 1 81-87 min in the past quarter due to most popular in genre knowledgeable, loyal user community more time amidst Covid-19 Official members increased to 89M Platform Features Target Audience 2 and avg. MAU share in China’s mobile industry 16% higher in Q3 Pioneered “bullet chatting” Danmu Dominant user base amongst Gen Z 2017 2018 2019 2020E 2021E Significant increase in views and feature, a live commenting experience with strong demand in culture 3 interactions with avg. monthly video with 122% yoy interaction growth products driving site engagement Net Profit Operating Profit Gross Profit views/MAU change from 59-210 Timeline of Key Events

October 2018 December 2018 April 2020 August 2020 August 2020

$318 million Tencent Collaboration in E- $400 million Investment 3-year Partnership $66 million Investment Video Equity Investment Commerce with TaoBao from Sony Music with Riot Games in Huanxi Media

Equity investment to broadcast Drive e-commerce platform Expand operations in animation Exclusive live broadcasting of Pursue opportunities in film more anime and esports content with focus on lifestyle services and mobile games verticals League of Legends global events and TV dramas series

Bilibili has numerous competitive advantages, including its unique content positioning, membership system, and platform features, as well as positive performance over the past decade. The firm will continue its growth momentum through strategic partnerships, content and service expansion, and increased monetization.

Sources: Bilibili 2019 10-K, Capital IQ, Yahoo Finance 9 Company Overview Business Segments Mobile Games (53% of FY2019 Revenue) Value-Added Services (24% of FY2019 Revenue) Mobile games revenue reached RMB 1.2B in 2Q20 (+35.7% yoy), mainly VAS revenue (live-streaming and membership businesses) reached RMB driven by the successful launch of mobile game Princess Connect. 825.3M in 2Q20 (+153.1% yoy). The number of premium members rose 100% yoy in June 2020. 1151 1248 794 825 873 920 933 871 791 744 713 571 453 292 326 119 169 202

18Q2 18Q3 18Q4 19Q1 19Q2 19Q3 19Q4 20Q1 20Q2 18Q2 18Q3 18Q4 19Q1 19Q2 19Q3 19Q4 20Q1 20Q2

Advertising (12% of FY2019 Revenue) E-Commerce & Others (11% of FY2019 Revenue) Advertising revenue reached RMB 348.6M in 2Q20 (+107.8% yoy) amid E-commerce & others revenue reached RMB 195.8M in 2Q20 (+57.8% yoy), macro tailwinds. Effective ad solutions and a vibrant community of younger with Covid-related logistics disruptions responsible for the slowdown. users have helped Bilibili become the go-to online platform for marketing. 349 E-Commerce Model Partnerships 290 247 Content creators can set up their own Collaboration with Taobao and Xiaomi to 214 business on Bilibili. create integrated digital marketing tools 160 168 137 • along with Logitech G and Sony Music. 96 112 Partnership with popular KOLs or KOCs to promote products • Launched its own mini program for e-commerce 18Q2 18Q3 18Q4 19Q1 19Q2 19Q3 19Q4 20Q1 20Q2

Bilibili has seen tremendous growth across all business segments in the past few quarters, with advertising and value-added services businesses leading due to effective ad solutions, a growing Gen Z user base, and a rise in premium memberships in the pandemic environment.

Sources: Bilibili 2019 10-K, Capital IQ, Yahoo Finance 10 Catalysts

11 Catalysts Catalyst 1: User Acquisition Strategy Key User Growth Factors User Demographics

Gaming Platform Generation Z • Gen Z users account for 80% of Bilibili’s current MAU, vastly higher than • Bilibili released Genshin Impact, an open-world RPG game on Sept. competitors like Mango TV and iQiYi. 28th, which surpassed Fortnite on launch day. • Corporate strategy has been to partner with major developers to ACG (Anime, Comics, and Games ) onboard streamers onto the Bilibili content platform. • Bilibili has one of the highest ACG user bases in China, driving sales through their gaming platform. Sept. 2020 May 2021 May 2021 Early 2021 Future Release Pipeline Genshin Impact Princess Connect Animistic Sword Art Online MAU (Monthly Active Users) Targets (miHoYo)

• Once Bilibili reaches 400M MAU, they will attain super-app status (like Content Ecosystem YouTube), cementing a clear advantage over other video sharing applications like iQiYi, Tencent, and Youku. • Heavy investments into user-created content have differentiated Bilibili from competitors like Tencent and iQiYi, with 60M more MAU. • Bilibili is investing heavily into their content provider advertising platform Huahuo, which connects content providers to brand advertisers.

800 40% • Bilibili is working on rebranding to shift away from ACG users, 600 Average 600 500 changing its slogan to “Videos you are interested in, all at Bilibili.” 400 20% Actionable mobile MAU 400 • By letting users join for free, and not focusing on monetizing existing 0% Steps of major video 200 100 95 users, Bilibili can grow extremely quickly, albeit at a debatably apps in China 0 -20% sustainable rate. iQiyi Tencent Youkou Mango TV Bilibili

Sources: Bilibili 2019 10-K, Equity research reports (Credit Suisse, Huatai, Jefferies, JP Morgan, Morgan Stanley, UBS) 12 Catalysts Catalyst 2: Advertisement Monetization Bilibili's current revenue stream implies ample revenue potential for advertising monetization. There is a significant mismatch in Bilibili's traffic pool and its revenue stream.

Traffic System Monetization Segment Source of Traffic Scale of Traffic Main Revenue Source Percentage of Revenue Most video channels (game, lifestyle, knowledge, PUGV 92% of Bilibili’s. Video Views (VV) Advertising & E-Commerce 23% cartoon, entertainment, etc.) 8% of VV OGV Movies, dramas, variety shows, documentaries Membership 13% Subscriber 6% of MAU Live Streaming Live streaming Paying User 1.4% of MAU Live-Stream Tip Revenue 12%

Online Game Game center, PUGV segment game channel Paying User 1.0% of MAU In-Game Purchases 53%

Increasing significance of advertising in revenue mix Advertising revenue has strong growth with great potential

400 1 Increasing Overall Impressions RMB millions 349 350 Focus on integrating advertising into its content ecosystem paired with rapidly growing VV would be a 290 300 major driver of advertising revenue growth 247 250 2 Diversifying Ad Formats 214 200 160 168 Offer advertising services in different placement formats, including mobile app opening advertisements 150 137 112 and performance-based feed advertisements 96 100 3 Increasing Brand Ads Potential 50

Leverage the accumulation of large Gen Z user base, which has a relatively high spending power and 0 willingness to pay to increase eCPM and Ad Load 18Q2 18Q3 18Q4 19Q1 19Q2 19Q3 19Q4 20Q1 20Q2

Sources: Bilibili 2019 10-K, Equity research reports (Credit Suisse, Huatai, Jefferies, JP Morgan, Morgan Stanley, UBS) 13 Catalysts Catalyst 3: Secondary Hong Kong IPO

1 Raising Capital Attracts Foreign Investors

• Bilibili plans to raise up to $1.5B (current market capitalization is $16.9B) • 2021 is earliest Bilibili can go public due to regulatory requirements • 2 years of good regulatory compliance on another exchange required • Investors seeking diversification and value will see a video streaming secondary listing as an opportunity to enter a rapidly growing industry

2 Geopolitical Tensions Threaten NASDAQ Delisting

• Rising US China tensions have threatened delisting of Chinese firms from American stock exchanges unless auditing requirements are met • Many companies have declined to do so, citing Chinese law • Alibaba, JD.com, NetEase have all pursued secondary listings in Hong Kong • 8 Chinese companies listed on American exchanges have raised a combined $25B since November 2019

3 Financial Performance Stimulated by IPO • When news broke of Hong Kong offering, shares jumped 14% the next day • Share price has risen 300% since BILI’s debut on NASDAQ in 2018 • BILI went public at $11.50/ADS, now trading at $44.20 • Cross listing between New York and Hong Kong increases liquidity across 2 continents • Provides greater access to capital • Currently unknown if offering will be dilutive or non-dilutive

Sources: Bilibili 2019 10-K, Equity research reports (Credit Suisse, Huatai, Jefferies, JP Morgan, Morgan Stanley, UBS) 14 Risks & Mitigants

15 Risks & Mitigants Risks 1 Bilibili’s wide product offering may cause them to lose market share to specialized players like Huya and iQiYi.

Risk Mitigant • Companies like iQiYi (which focuses on video streaming) and Huya • Massive growth through free usage pushed Bilibili over the 400 MAU, (livestreaming) could steal market share from Bilibili. which disincentivizes users from using other platforms. • Bilibili’s key differentiator is its freemium business model. • User retention metrics show Bilibili is faring well competitively.

2 A substantial majority of revenues come from mobile games, a highly competitive space.

Risk Mitigant • 53% of revenue derived from mobile games in 2019, and from a • Focus on advertising and e-commerce revenue streams and correct limited number of games. the mismatch between traffic and monetization. • May not be able to maintain or renew third-party game developer • Maintain strong relationships with third-party game developers and agreements on acceptable terms. issue exclusive and non-exclusive partnerships.

3 Bilibili may be unable to attract sufficient user traffic to remain competitive due to failure to anticipate user preferences.

Risk Mitigant • The rapidly changing technologies and changing user expectations • Invest in technological integration with networking and of the industry. telecommunications industry and modify infrastructure and service. • To provide superior user experience, Bilibili must be able to retain, • Divert improved advertising revenue to incentivize content creators to grow, and engage its user base. produce culturally relevant trends and maintain good relationships

Sources: Bilibili 2019 10-K, Equity research reports (Credit Suisse, Huatai, Jefferies, JP Morgan, Morgan Stanley, UBS) 16 Valuation

17 Valuation Valuation Summary Comparable Company Analysis Current Price: $44.20 Target Price: $58.00 • Valuation Range: 75th Percentile • Implied ADR Price • 7.78x EV/Revenue: $50.94 52-Week Trading Range 15.18 54.00 • 7.91x Price/Sales: $50.51

Discounted Cash Flow Analysis Analyst Consensus 48.00 78.57 • Valuation Case: Base Case • Projection Period: 2020E – 2030E • Weighted Average Cost of Capital: 10.40% EV/Revenue 29.05 54.42 • Implied ADR Price • 3.70% Perpetuity Rate: $50.73 • 6.80x Exit EV/Revenue: $80.91 Price/Sales 31.09 61.53 Valuation Weights

DCF Perpetuity 43.84 64.68 • Comparable Company Analysis: 50% • DCF Analysis: 50%

DCF Exit Multiple 69.17 102.58 Blended target ADR price is $58.00 with a 31.23% $5 $15 $25 $35 $45 $55 $65 $75 $85 $95 $105 implied upside over 12 months Implied ADR Price (US$)

Sources: Bilibili 2019 10-K, Congressional Budget Office Economic Outlook 18 Valuation Comparable Company Analysis

Sources: Bilibili 2019 10-K, Capital IQ 19 Valuation Discounted Cash Flow (DCF) Analysis – Free Cash Flow Buildup

Sources: Bilibili 2019 10-K, Congressional Budget Office Economic Outlook 20 Valuation Discounted Cash Flow (DCF) Analysis – Valuation

Perpetuity Growth Method Exit Multiple Method

Implied Valuation Sensitivity Analysis

Sources: Bilibili 2019 10-K, Capital IQ 21 Final Recommendation

22 Final Recommendation Final Recommendation: BUY

We recommend a BUY for BILI at $44.20 with a target price of $58.00, implying a 31.23% upside over 12 months.

What is the market missing? Catalysts & Upside

• Bilibili’s ambitious growth strategies have elevated the platform far beyond the ACG market with multiple untapped monetization channels 1 Versatile User Acquisition Strategies and a highly monetizable user base. Become a one-stop entertainment platform and increase MAU base • Bilibili’s diversified business model and core strengths in social engagement and user-generated content make it more resilient and in Gen Z and lower-tier city market segments with diversified capable of consumer retention than its competitors. content beyond ACG and improved user participation services • As online entertainment surges in China and globally, Bilibili is uniquely poised for market growth and increased earnings potential. 2 Advertisement Monetization via Diversified Channels Football Field Valuation Capitalize on unique versatility of platform ecosystem and growing user traffic to grow ARPU through increased advertising volume and sponsorships

3 $1.5bn Hong Kong Secondary IPO in 2021

Go public via a secondary listing as an ideal capital-raising strategy to increase funds directed towards platform development and gain higher exposure to potential consumers

Sources: Bilibili 2019 10-K, Equity research reports (Credit Suisse, Huatai, Jefferies, JP Morgan, Morgan Stanley, UBS) 23 Q&A

24 Appendix

25 Appendix Table of Contents

Appendix 1: Operating Model 27

Appendix 2: Cost of Capital 32

Appendix 3: Comparable Company Analysis 33

Appendix 4: Valuation Summary 34

26 Appendix Appendix 1: Operating Model – Income Statement

27 Appendix Appendix 1: Operating Model – Balance Sheet

28 Appendix Appendix 1: Operating Model – Statement of Cash Flows

29 Appendix Appendix 1: Operating Model – Assumptions & Forecast

30 Appendix Appendix 1: Operating Model – Assumptions & Forecast

31 Appendix Appendix 2: Cost of Capital

32 Appendix Appendix 3: Comparable Company Analysis

33 Appendix Appendix 4: Valuation Summary

Valuation Summary for Bilibili Inc.

Current Price: $44.20 Target Price: $58.00

52-Week Trading Range 15.18 54.00

Analyst Consensus 48.00 78.57

EV/Revenue 29.05 54.42

Price/Sales 31.09 61.53

DCF Perpetuity 43.84 64.68

DCF Exit Multiple 69.17 102.58

$5 $15 $25 $35 $45 $55 $65 $75 $85 $95 $105 Implied ADR Price (US$)