Bilibili: The moment of revaluation for Chinese concept stocks, not collapsing is a win?

Overall, Bilibili's performance in the fourth quarter basically met expectations, with high growth in games and advertising leading to its first positive GAAP profit.

Before the earnings report, due to the relatively weaker early revenue of the new season of "Three Kingdoms" in early January compared to the last season, the market increased concerns about Bilibili's game revenue this year, and some institutions slightly lowered their growth expectations for this year.

Therefore, under a neutral to cautious market expectation, if the management can provide more confidence in this year's growth guidance, then in this year of improving sentiment towards Chinese assets, Bilibili, as a barometer of sentiment, is also expected to continue benefiting from this round of revaluation.

Specifically:

1. First GAAP Profit: Previously, when discussing Bilibili's profitability, it was always in a Non-GAAP context excluding stock-based compensation (SBC) expenses. However, in the fourth quarter, the operating profit under GAAP reached 126 million, with a profit margin of 1.6%, just turning positive. Therefore, adding back about 4 percentage points of SBC expenses, the adjusted net profit is 450 million, with a profit margin of 5.8%, further improving profitability compared to the third quarter.

Profitability relies on high growth in games and advertising, both of which are essential as they are high-margin businesses. Additionally, operating expenses have been relatively restrained, with continuous optimization of the expense ratio.

Regarding the expectation of profit improvement, management is quite confident, stating in the conference call that the company's medium to long-term profit outlook is a gross margin of 40%-45% and an operating profit margin of 15%-20%.

2. Traffic Continues to Grow Slowly, Ceiling in Sight: The monthly active user growth rate continued to slow in the fourth quarter, slightly below expectations. The DAU/MAU stickiness remains at 30%, with an average daily user duration of 99 minutes in the fourth quarter.

However, according to QM data, unlike Bilibili's growth peaking, Xiaohongshu's user base is still soaring, giving it a greater advantage over Bilibili.

3. One Game "Three Kingdoms" for a Year: The fourth quarter game revenue achieved a high growth of 79%, still relying on "Three Kingdoms." Based on deferred revenue and third-party data estimates, out of less than 1.5 billion in revenue in the fourth quarter, "Three Kingdoms" generated 800 million, accounting for more than half, but showed weakness compared to Q3. The newly launched "Jujutsu Kaisen" in November performed mediocrely, with an estimated monthly revenue of only 100-200 million.

The base dividend of "Three Kingdoms" can still be enjoyed once in Q1, but will be completely diminished afterward. The biggest concern for the market regarding Bilibili this year is the lack of new games that can perform well. Last quarter, management mentioned that this year's game work mainly involves the international release of "Three Kingdoms" and the release of another type of game, but relying solely on these two may still put some pressure on this year's game growth4. What will drive high growth in advertising next year: In the fourth quarter, advertising revenue grew by 23.8% year-on-year, a high growth rate that was expected, mainly benefiting from e-commerce advertising, game advertising, and AI-related application advertising during the shopping peak season.

In addition, the upgrade of the advertising system mentioned by Dolphin Research last quarter should not be overlooked, especially during the e-commerce peak season, where content creators are highly motivated to purchase traffic from the platform to increase video exposure.

5. Live streaming has dragged down value-added subscriptions: The revenue from live streaming and premium membership subscriptions grew by 7.9% year-on-year in the fourth quarter, continuing to slow down under a high base. However, the number of premium members has recovered this quarter, so the main drag should be from live streaming.

In fact, Bilibili started live streaming in the second quarter of 2023, and it began to show results in the second half of the year. It is currently in a high base period after the early dividend phase, so there is expected to be some base pressure in the next quarter.

6. Significant improvement in cash flow: Both gaming and advertising are good at generating cash flow. In the fourth quarter, Bilibili's cash, deposits, and short-term investments increased to RMB 16.5 billion, with net cash of RMB 15 billion after deducting short-term debts of RMB 1.57 billion, an increase of RMB 4 billion compared to the third quarter.

7. Performance indicators overview

Dolphin Research's viewpoint

Bilibili has always been good at managing expectations, so what really affects the stock price is often the short-term guidance and outlook from conference calls or small institutional meetings. However, after releasing a basically inline Q4 financial report this time, the market chose to rise first as a courtesy.

Dolphin Research believes this may be related to the downward adjustment of expectations by some institutions at the beginning of the year, leading to a cautious overall view on Bilibili—everyone knows that the revenue from "Three Strategies" has passed its peak, and there are fundamental pain points with no new games expected in 2025. Therefore, the Q4 performance being basically inline, with some exceeding expectations (on the profit side), along with the significant increase in DAU brought by the Spring Festival Gala in Q1, the expected cost optimization from AI internally, and the high potential growth space implied by the medium to long-term profit margin targets, have all contributed to a marginal improvement in cautious sentiment.

In addition, Dolphin Research's understanding of Bilibili is also inseparable from the label of "atmosphere stocks" for Chinese concept stocks. When market investment sentiment improves marginally, Bilibili often leads the charge. Of course, conversely, Bilibili's performance can also lag behind.

However, beyond these emotional fluctuations, returning to fundamentals, the actual concerns about gaming have not been fundamentally alleviated. The company's strategy is still to fully support "Three Strategies" to become a major IP, first launching it on the platform and then taking it abroad. Under this strategy, it cannot be ruled out that it will replicate the domestic explosive success again, but to be honest, the element of betting on probabilities is not low.

Therefore, Dolphin Research attributes the market's positive reaction to Bilibili's Q4 financial report mainly to the valuation repair brought about by the improvement in sentiment towards Chinese concept stocks under the AI frenzy, rather than a significant enhancement in fundamental expectations. Especially for the funds investing in Bilibili, as long as the performance is not disastrous, the actual performance itself seems to be less important in the short term.**

The following is a detailed analysis

I. Traffic gradually peaks, but stickiness increases

In the fourth quarter, user growth further slowed down, while user stickiness basically maintained a stable increase, with DAU/MAU still at 30%. Although it is the off-season, user duration reached 99 minutes, continuing to increase year-on-year. However, compared to peers, Xiaohongshu's advantage over Bilibili is still widening (source: QM data).

Specific user data:

In the fourth quarter, Bilibili's overall monthly active users (App, PC, TV, etc.) reached 340 million, a year-on-year increase of 1.2%, with a seasonal decline of 800,000 users.

The stickiness of existing users remains stable and is improving. In the fourth quarter, DAU reached 103 million, with DAU/MAU reaching 30.3%. The average daily user duration was 99 minutes, an increase of 4 minutes year-on-year. In addition, the average interaction volume (likes/comments/collections) and the average daily video views increased by 10% and 14%, respectively.

According to data from Sensor Tower, Xiaohongshu continues to expand its user activity advantage over Bilibili, not only with DAU continuing to grow significantly, but also the growth rate of total user duration ranking first across all platforms. Earlier this year, possibly due to the TikTok refugee effect, user duration further accelerated.

However, the company also revealed that during the Spring Festival Gala interactive bullet screen collaboration with CCTV in February this year, DAU saw a significant increase. It is expected to have some breakout effect, and attention can be paid to whether this part of the user base can truly be retained.

II. Advertising: How will this year's high growth come about?

In the fourth quarter, Bilibili's advertising revenue reached 2.39 billion yuan, a year-on-year increase of 23.8%, in line with expectations. Since the fourth quarter is the shopping peak season, the high growth mainly benefited from e-commerce advertising, as well as games, 3C digital products, etc.

In addition, the advertising upgrade made in the middle of the year—full management for small and medium-sized businesses + user acquisition tools for content creators—also played a significant role during the Double 11 and Double 12 periods in the fourth quarter.

Dolphin Research believes that it is not impossible for Bilibili to maintain high growth in 2025. This mainly stems from the fact that, at least in the public domain information flow, Bilibili's advertising loading rate is still around 7%, while peers like Douyin are close to 15%, and Kuaishou is also at 10%.

Of course, there are also many content marketing videos from content creators, which are not included in the aforementioned 7% advertising loading rate definition. However, Douyin and Kuaishou also have content marketing issues, and their 15%/10% advertising loading rates do not include content marketingTherefore, to maintain high growth in advertising, Bilibili still has a certain degree of initiative in terms of advertising loading rates.

3. Games: Sanmou, Sanmou, or Sanmou

In the fourth quarter, game revenue achieved a high growth of 79%, with "Sanmou" still being the main growth driver.

Although in the fourth quarter, Bilibili launched a new game "Jujutsu Kaisen" globally (excluding Japan), the overall response was average, with monthly revenue expected to be between 100 million to 200 million RMB, compared to "Sanmou," which is estimated to have a revenue scale of 800 million in Q4.

Deferred revenue in the fourth quarter dropped by 7% quarter-on-quarter, indicating that the current revenue is also weakening. Therefore, if there continues to be no new key game reserves, the pressure for game growth this year will undoubtedly be significant.

However, it seems that the management has decided to continue to "heavily invest" in "Sanmou." In 2025, not only will multiple versions and seasons be released, but it will also be launched overseas. Currently, the PC version has been launched, and with the traffic recommendation positions and distribution rights within the Bilibili platform, it is expected to form a "Game-Player-Streamer" triangular ecosystem,

— Streamers play "Sanmou" to recommend traffic, more people see the live stream and start playing "Sanmou," increasing/maintaining the number of "Sanmou" players, and streamers have the motivation to continue live streaming "Sanmou."

Since the start of the new S5 season in January, the initial revenue of the season has weakened compared to the previous season. Although it must be acknowledged that the downward trend of "Sanmou" is still much more stable than most games, for Bilibili, which does not have many reserves this year, the decline in "Sanmou" needs to be compensated with incremental growth.

Clearly, the company still chooses to bet on "Sanmou." This year's growth theme is to launch "Sanmou" on multiple platforms, in multiple regions, and operate multiple seasons. Here, Dolphin Research suggests maintaining relative caution and not having overly high expectations.

4. Value-added Services: Long Videos Recovering, Live Streaming Still at a High Base Period

The VAS (Value-Added Services) revenue, mainly from live streaming and premium membership subscriptions, grew by 7.9% year-on-year in the fourth quarter, and the quarter-on-quarter growth continued to slow down, but the pace of slowdown has also slowed.

In the fourth quarter, the number of premium members increased to 22.7 million, with both quarter-on-quarter and year-on-year increases. Therefore, long video subscription revenue should be good, which also implies that the growth of live streaming is still relatively weak

Dolphin Research believes that the pressure on live streaming mainly comes from the impact of the base of live streaming rewards, and at the same time, the live streaming industry itself is already in a period of decline. Although Bilibili has a strong private domain and a wide variety of content creators, it is not easy to forcibly break away from the trend.

Moreover, some content creators are not good at long-duration live streaming, so Bilibili's live streaming may also attract users in specific scenarios. For example, beauty shows (where male users account for a high proportion on Bilibili), and game live streaming (with many users from the ACG community and traffic recommendations for their games).

As for the long video business, Dolphin Research has long stated that Bilibili is different from traditional platforms like iQIYI, Youku, and Tencent Video:

(1) Bilibili mainly introduces high-quality historical film and television content that has been proven to be excellent, along with a small amount of self-produced variety content that aligns with trending topics on the platform (which is easier to attract attention), somewhat similar to Youku's classic drama strategy.

(2) Additionally, Bilibili's unique bullet screen culture (which enriches the content) and the paid subscription rate (6.7% in Q4) are expected to continue to improve.

(3) On the other hand, under this model, the accounting for long videos is easier to manage (the copyright fees for classic historical dramas are often not high).

V. Setting Long-term Profit Improvement Goals

In Q4, there was a tangible positive profit under GAAP, but it also relied on the indispensable contributions from advertising and gaming (which boosted gross margin) and continued slow efficiency improvements (controlling the growth of operating expenses). Therefore, if gaming faces pressure in 2025, profitability will also need to continue to fluctuate seasonally.

However, management seems to have directly proposed medium- to long-term profit margin targets in response to market concerns—a gross margin of 40%-45% and a Non-GAAP operating profit margin of 15%-20% (the difference between GAAP operating profit and Non-GAAP is 3 to 4 percentage points of SBC). This target sets a framework, indicating that there is indeed considerable room for improvement compared to the current situation.

We worry about profit margins due to the pressure on gaming growth, but management's profit margin targets seem to indicate that, in the medium to long term, there is no need to worry about the growth of high-margin advertising and gaming businesses. It should be noted that part of management's profit margin target should also include contributions from AI optimizing internal cost expenses.

In terms of costs, revenue sharing costs account for a large portion. In the fourth quarter, revenue sharing costs continued to grow to 3.17 billion, and Dolphin Research expects this may mainly be due to the increase in revenue from games and advertisements, which has led to more game revenue sharing and Up 主 Huohuo advertisement sharing (Bilibili only shares 5%, with the remaining 95% going to Up 主).

Regarding operating expenses, aside from marketing expenses which fluctuate seasonally due to new game launches and game activity operations, management and R&D expenses are relatively strictly controlled—growing at a rate lower than revenue and slowing down quarter by quarter.

This trend is also present in the fourth quarter. Although marketing expenses may continue to see slight growth quarter-on-quarter due to promotional activities related to the new game "Jujutsu Kaisen" launched in November and the PC version of "Sanmou," the year-on-year growth rates of the other two expenses have decreased compared to the third quarter.

From the perspective of the traffic monetization/cost relationship that Dolphin Research has been observing, overall in the fourth quarter, the value that can be extracted per user has increased (ex games), indicating that the overall monetization efficiency of the platform is improving.