Following Baidu’s recent secondary listing, China’s leading video platform Bilibili is also tapping the Hong Kong equity market with a US$3.2 billion offering, pricing its shares at HK$808 apiece.
Billed as China’s YouTube, Bilibili mainly targets the country’s generation Z+, those born from 1985 to 2009. While many businesses seek to tap opportunities from China’s new generation, Bilibili’s model is believed to be more successful in capturing users’ need.
Several key features of Bilibili underpins its popularity among Gen-Z: ad-free (there is no advertisement appearing before, during and after videos), bullet-screen comments (users often find those comments more interesting than the video), and re-creation (a large portion of videos are re-creation of existing work).
With an estimated population exceeding 452.5 million in 2020, Gen Z+ have become the driving force and trendsetter for consumption in China. With over 86% of monthly active users (MAU) aged 35 and below in 2020, Bilibili has the biggest number of Gen Z+ users among the top 10 video-centric mobile apps in China in 2020, according to iResearch Report. It recorded an average of 202 million MAU last year, up 55% from 2019.
The prospectus attributed the high MAU growth to a continued growing supply of content in various forms and themes, as well as the vibrant community and immersive experience accessible on mobile apps. In addition, to expand user base and diversify content, Bilibili has continued to invite international influencers such as workout icon Pamela Reif from Germany to upload their videos on the app.
As Bilibili adopts a commonly used “cash burning” marketing strategy to gain new users, its sales and marketing expenses as a percentage of the total net revenues continued to increase, from 17.7% in 2019 to 29.1% in 2020. While net revenue jumped by 77.0% to US$1,838.9 million, its net loss more than doubled during the year.
Despite pressure from rising losses, Bilibili still managed to implement its monetization strategy cautiously. Unlike YouTube which relies mainly on advertisement income, Bilibili derives 40% of its revenue from mobile games, with ads accounting for only 15.6% of its revenue in 2020. As chairman Rui Chen has set a target of 400 million MAU, it is unlikely that Bilibili will significantly change its current advertisement strategy and sacrifice user experience.
A healthy cash flow position also facilitates Bilibili’s further expansion. At the end of 2020, the company recorded US$716 million in cash and cash equivalent, 5.7% down from 2019. It plans to deploy 50% of the net proceeds from the offering to content, 20% to research and development, 20% to sales and marketing, and 10% for general corporate purposes and working capital needs.
As of March 23, Bilibili’s price/sales-to-growth (PSG) ratio was 0.26 based on 2020 sales and growth, and 0.22 based on 2021 figures estimated by brokers. Kuaishou and Iqiyi have higher PSG ratios, suggesting the company is undervalued when compared to peers.
As the leading player in the video sector, Bilibili has attracted a number of high-profile investors. Outside of Bilibili’s management team, Tencent is the second largest shareholder with 12.4% while Alibaba’s Taobao is the fourth largest shareholder with 6.7%.
Morgan Stanley, Goldman Sachs, J.P. Morgan, and UBS acted as joint sponsors, joint global coordinators, joint bookrunners, and joint lead managers. CICC, Merrill Lynch, Credit Suisse, CLSA, Haitong International, CMB International, CCB International, and Guotai Junan acted as joint bookrunners and joint lead managers. Futu Securities and Wellington Financial are joint lead managers.