After the Hong Kong stock market closed on November 17, Beijing time, BiliBili (Bili. O / 09626. HK) released the financial report for the third quarter of 2021. 1) In the third quarter, station B achieved a net revenue of RMB 5.2 billion, a year-on-year increase of 61%, better than the market consensus expectation of RMB 5.17 billion (Bloomberg), slightly exceeding the upper limit of the previous guidance of RMB 5.2 billion. The main growth drivers are still advertising and value-added services. Looking forward to the fourth quarter, the management gave revenue guidance of RMB 5.7 billion ~ 5.8 billion, with an implied growth rate of about 50%, which was basically consistent with market expectations without too many surprises. 2) In the third quarter, the adjusted net loss was 1.622 billion yuan (excluding the impact of investment loss and equity incentive), which was slightly inferior to the market expectation of 1.543 billion yuan. The corresponding loss rate of 31% was further expanded compared with the second quarter. The consensus expectation of the market is 30%, and the main expectation is poor in the gross profit margin. Games with high gross profit in the third quarter continued to pull the hip (the growth rate is lower than the previous guidance), which further reduced the contribution to the total revenue, while value-added services with high sharing cost and fireworks advertising weakened the overall gross profit to a certain extent. (specific reasons are analyzed below) In addition, in terms of other key business indicators, the performance in the second quarter is different from the market expectation. Quick overview: Long bridge dolphin King's overall view The main highlights of the third quarterly report are user indicators and value-added services. Advertising realization is expected to expand rapidly. However, the game has become a segment business with disappointing performance in recent two quarters. As the main source of revenue and cash of station B in the past, the disadvantage brought by station B's self-research ability is more obvious under the adverse wind and intensified competition in the industry. Looking at station B at the moment, the company's guidelines and expectations for platform performance and long-term strategy become more and more critical. In most of the market valuation logic, the high valuation of station B is mainly supported by the high growth of advertising revenue under the continuous expansion of user scale. However, if the game business lags behind in the short term and exceeds market expectations, the pressure on advertising will also increase. Considering that the current advertising environment itself is also facing the headwind of growth, dolphin Jun is relatively neutral to the short-term growth of station B. in the long run, he still recognizes the scarcity of station B and has a unique advantage in peer competition. At present, the valuation of station B is ahead of its peers, corresponding to the consensus expectation of 8 times PS in 2022 (revenue growth rate of 45%). Although it is located in the valuation center before the epidemic, compared with the same industry, it is obvious that the market has given station B a relatively high premium. Quick view of market concerns (1) The user growth index is the core element supporting the valuation of station B. as the third quarter of the summer peak season, is the user index affected under the supervision of Qinglang movement? Has the company adjusted the long-term guidelines? Although it was located in the regulatory center in the third quarter, the user growth of station B was still stable, exceeding the previous guidelines, with a net increase of 30.1 million, reaching 267 million at the end of the quarter, a year-on-year increase of 36%. The user stickiness also improved in this quarter. The highlight is that the user duration has reached a new high. We guess it is mainly driven by live broadcasting, self-made variety shows and summer vacation. For long-term user guidance, whether to change is not disclosed in the financial report. You can pay attention to our follow-up telephone meeting minutes. (2) What is the flow of the three games self-developed / single generation mobile games released in the past two quarters? What is the impact on pipeline in the coming year under the disturbance of game supervision? In the third quarter, the game increased by 9% year-on-year, lower than 15% of the guidelines and market expectations. Despite the release of three new games, the initial flow of kangong launched in the second quarter is good, some of which are deferred to the third quarter for revenue recognition, and some of the combined transport revenue of Yuanshen and Harry Potter should be recognized in the third quarter. On the whole, the game revenue is still very general. (3) In the third quarter, station B added up main recommended advertising space, which widened the scope of advertisers. Will the advertising revenue continue to be excellent? In the third quarter, advertising revenue continued a high growth trend, with a year-on-year increase of 110% to 1.17 billion yuan. Although it was lower than 120% of the market expectation, it achieved high growth under strong supervision, indicating that the boom is still good. (4) From the financial reports disclosed by peers, the live broadcast of the show is still miserable, and the competition for long video is becoming more and more fierce. As station B, which is still in the early stage of development, have these two value-added payment services been significantly affected? The live broadcast value-added service is also one of the highlights of the financial report, with a year-on-year growth rate of 95%. There was no significant decline compared with the previous quarter. It is speculated that the effect of the up main live broadcast incentive activity promoted in the second quarter is good. In addition, in the third quarter, station B produced several self-made variety shows with hot topics, which is expected to improve the growth of large member paying users. The overall number of paying users increased by 3 million in the third quarter, and the payment rate further increased to 8.9%. However, like other live and long video platforms, single user payment continued to decline year-on-year. (5) Although the current market requirements are not high, is there any sign of marginal improvement in the profitability of station B? The operating loss rate in the third quarter continued to expand compared with the previous quarter, mainly due to the decrease of gross profit margin. From 22% in the previous quarter, it fell to 19% in the current quarter. Although the company has made expected guidance and adjustment on the decline of gross profit in the exchange of the second quarterly report (the annual gross profit margin level is 20%, compared with 23.7% last year), the market is still concerned about the subsequent changes of gross profit and the room for improvement in the future. In recent quarters, the main expenditure affecting profits lies in the main share of up at the cost side. However, in the critical period of breaking the circle and the intensification of traffic competition, as the core asset, the incentive given by station B is still difficult to reduce. The short-term improvement may lie in the cost side. Compared with the counterparts in Kwai Tong and other B operators, although the operation costs are relatively restrained, they still have room for optimization. The overall three quarter ring ratio remains basically stable. In the long run, on the one hand, if the proportion of self-developed games in station B increases, or the competition pattern is stable and the income scale is expanded, the up main share incentive can be moderately relaxed, which is also an expected direction for profit improvement. Detailed interpretation of the financial report data 1. Overall performance: little beat expected that there was no surprise in the guidelines for the fourth quarter (1) Revenue side: fall within the guidelines In the third quarter, station B achieved a net revenue of RMB 5.2 billion, a year-on-year increase of 61.4%, slightly exceeding the market expectation (5.17 billion) and close to the upper limit of management guidance. Source: BiliBili financial report, Longbridge dolphin investment research Continuing the performance of the previous quarter, the main businesses driving revenue growth in the third quarter are still advertising and value-added services. Although the overall environment is not good, the good thing is that the two businesses of station B are still in the early stage of development, and they envy their peers only in terms of growth rate. Although the growth rate of game revenue caught up with the industry level, there were three new games in station B in the third quarter. Although the self-developed games in station B have been general, the market was still relatively positive. In addition, the company also gave the growth guidance of the game in the last quarter. The year-on-year growth rate in the third quarter can be 15%, but the actual situation is disappointing. Source: BiliBili financial report, Longbridge dolphin investment research (2) Profit side: the change of income structure leads to the fluctuation of gross profit margin The main expected difference at the profit end this time is the gross profit margin. In the third quarter, the company's gross profit margin fell 2.4ppt month on month, mainly due to changes in revenue structure. The proportion of game revenue with high gross profit has fallen sharply. Businesses with low gross profit margin, such as advertising, live broadcasting and other value-added services, are still developing at a high speed, contributing more and more to the total revenue. The share of the live broadcast service of station B to the up master is quite high, with a share ratio of more than 80%, much higher than 60-70% of the industry. In addition, most of the advertising revenue of HuaHuo platform is mainly distributed to up owners. Therefore, the overall advertising gross profit margin of station B will be about 60%, which will be significantly lower than that of other platforms by 70-80%. Source: BiliBili financial report, Longbridge dolphin investment research The operating loss of the main business is almost the same as the market expectation, and the three operating expenses remain basically stable. Although there was no significant improvement month on month, considering that the third quarter is the peak summer season, station B has three new games online during this period, and there will be no less investment. Therefore, it is understandable that the sales rate remains high. If compared with the fast developing Kwai tat, the marketing of B stations has been relatively restrained. From the cost of acquiring customers, the B station which obviously wins the game by content and community tonal is more efficient. Source: BiliBili financial report, Longbridge dolphin investment research In terms of R & D investment, it is mainly reflected in the staff cost of game R & D at station B. At the new game conference of station B in the third quarter, a total of 16 mobile games were unveiled, of which 7 were self-developed, mainly MMO, ACG and other types. There are more R & D tasks. Combined with the situation of peers, Longqiao dolphin Jun expects that the R & D expenses of station B will continue to remain high in the future. 2. Traffic scale: users "fly together" with the main growth of up In the third quarter, the monthly activity of the whole platform of station B increased by 30.1 million compared with the previous quarter, reaching 267 million. Although the third quarter was the peak season, this achievement was also quite good under heavy regulatory pressure, with an increase of 36% under the high base of last year. Previously, the company gave annual guidelines in the communication, and the users increased by 30% to 260 million. Obviously, the performance in the third quarter has reached the standard. Source: BiliBili financial report, Longbridge dolphin investment research In the comments on the financial report of last quarter, dolphin Jun once expressed concern about whether station B could achieve the goal of 400 million users in 2023. He believed that the growth rate should exceed 30% at least this year, otherwise it would be a little difficult to achieve the goal of 400 million according to the normal growth and reduction rate. Users grew brightly in the third quarter. If this growth trend can be maintained in the fourth quarter, the growth pressure for the next two years will be reduced accordingly. Turning to the user stickiness index (dau / MAU), there was a certain improvement in this quarter, from 26.4% to 27%. In addition, the increase in user stickiness is also reflected in the extension of the average daily user hours. In the third quarter, the average daily user hours reached a new high of 88 minutes / day. Source: BiliBili financial report, Longbridge dolphin investment research Dolphin King speculates that there may be three reasons: 1) Summer peak season effect. 2) With the operation activity of increasing the share of up main live broadcast for the first time from March to July, the penetration rate of live broadcast users of station B has increased to a certain extent, which not only lengthens the user time, but also promotes more value-added payments. In response, the growth of value-added revenue significantly exceeded market expectations. In addition, under the poor performance of the game, the overall paid users increased significantly, that is, most of the paid contributions of users mainly came from live broadcasting and large members. 3) Station B also launched some self-made variety shows with good popularity and response in the third quarter, such as 90 matchmaking agency, do you listen to my music, etc., which should also contribute to the improvement of user duration. Source: BiliBili financial report, Longbridge dolphin investment research Source: BiliBili financial report, Longbridge dolphin investment research Out of the company, from the comparison of peers, the user duration of station B still has advantages in the whole industry. User duration is generally an indicator that advertisers focus on when choosing delivery channels. Therefore, the extension of user duration will also provide more commercial realization paths for station B. Source: questmobile, Longbridge dolphin investment research The main end of up is not only expanded in scale, but also transformed internally by users, reflecting a healthy ecology of "external drainage + internal transformation" and endogenous growth power. Source: BiliBili financial report, Longbridge dolphin investment research Source: BiliBili financial report, Longbridge dolphin investment research 3. Advertising business: affected by the environment