Bilibili Trades on Strong Name in Debt-for-Shares Swap

The popular video site sold $409 million in new shares ahead of its fourth-quarter results release, and will use part of the proceeds to buy back debt coming due in 2026

Key Takeaways:

• Bilibili raised $409 million through a new ADS placement, with plans to use some of the funds to repurchase convertible senior notes due in 2026
• The company’s stock has tripled since October as its net loss narrowed significantly in last year’s third quarter and could narrow further in the fourth

By Ken Lo

Short video platform Bilibili Inc. (BILI.US; 9626.HK) has joined the recent “pump and dump” train of U.S.-listed Chinese companies raising funds through new share issues, tapping a wave of warming investor sentiment that has boosted its shares in recent months. The company’s status as an investor favorite among its peers was also a likely factor behind its decision last week to unveil a plan raising up to $409 million by issuing new American depositary shares (ADSs).

Bilibili confirmed last Thursday that Goldman Sachs, the underwriter, had successfully sold 15.344 million ADSs to at least six investors for $26.65 per ADS, in one of the biggest placements so far in the recent wave. But the placement, whose final price represented a 7% discount to the company’s last close before the plan was announced, also undercut Bilbili’s shares. The stock slipped 4.7% and 2% the day of the offer’s completion in Hong Kong and New York, respectively, to close just above the placement price.

As Hong Kong’s stock market thaws following a bleak first 10 months of 2022, Bilibili has been one of the best rebounders. Its Hong Kong shares have tripled from an all-time low of HK$66.10 last October to more than HK$220 early this month, and its New York shares are up by a similar amount from $8.23 to $27 over that period. The enthusiasm also reflects investor bullishness on the company’s fourth quarter results, which will likely be published next month.

Proceeds from the new placement will partly be used to buy back convertible senior notes that will come due at the end of 2026, and to replenish the company’s working capital, Bilibili said.

Early note redemption

Bilibili’s management seems quite confident in its future cash flow, based on its decision to use so much of the new funds to aggressively repurchase notes that won’t be due for three more years. As of the September last year, the company had spent $198 million to repurchase $275 million-worth of notes due in December 2026, and spent $49.3 million to buy back $54 million worth of notes due in October 2027, according to its third-quarter results.

Bilibili also approved a program last March that allows it to repurchase up to $500 million worth of its ADSs over the next two years. But as of last September, it had only used $53.60 million to buy back shares so far.

At the end of last September, the company’s cash and short-term investments totaled 23.9 billion yuan ($3.6 billion), which looked relatively low compared to its non-current long-term liabilities of 12.3 billion yuan. Accordingly, the use of newly raised cash for early redemption of forward notes is widely considered a display of optimism by the company about its business outlook.

Bilibili’s successful paydown of future debt through the issue of new shares will give it more flexibility when issuing future debt. But old problems still remain, most notably the company’s failure to ever turn a profit, partly due to its lack of spending discipline. As a result, despite its trendier and more progressive image among Chinese youth, its gross margins still trail far behind its main competitor, Kuaishou Technology (1024.HK).

Trimming the fat

Kuaishou is head-and-shoulders above Bilibili in profitability, posting gross margins of more than 40% and even as much as 45% in the last two quarters. By comparison, Bilibili’s gross margin has stood below 20% in the past five quarters, and was a paltry 18.2% in last year’s third quarter.

Bilibili’s woes owe largely to its spendthrift ways. Its operating expenses, including marketing, administrative and R&D costs, reached 8.63 billion yuan in the first three quarters of last year, up 17% year-on-year, and accounting for a shocking 54.8% of its total revenue. Many believe it will need to show better self-discipline in its spending to reach its goal of eventual profitability.

The company is finally taking action in that regard. Last month rumors swirled that it would lay off 30% of the staff from its live broadcasting and comics departments. Product testers were said to bear the brunt of the cuts, while R&D, operations and human resource staffers were also among those targeted. The company denied any major cost-cutting motives, saying any headcount reductions were simply normal business adjustments.

Bilibili has successfully positioned itself as a social media platform for China’s “Z+ generation,” usually considered those born between 1985 and 2009. The platform’s active user base has seen remarkable growth, but still significantly lags Kuaishou. It had 332 million monthly active users at the end of last September, or just over half of Kuaishou’s 604 million. Bilibili’s average monthly paid user base was also just 48% of Kuaishou’s.

Despite their similarities, the two rivals actually have quite different revenue structures. Kuaishou focuses on direct online marketing as its primary revenue source, with livestreaming a secondary source. Bilibili has a more diverse structure, with revenue coming from mobile games, value-added services, advertising and e-commerce. Bilibili’s performance also improved strongly in last year’s third quarter, with revenue up 18% from the second quarter to 5.79 billion yuan. Its gross profit shot up far faster, by 42.8%, to 1.05 billion yuan over that period. As a result, its net loss narrowed by 14.6% quarter-on-quarter to 1.72 billion yuan, and was down 36% year-on-year.

After its big stock gains since last October, Bilibili’s latest price-to-sales (P/S) ratio stands at 3.5 times, slightly higher than Kuaishou’s 3.3 times and far ahead of iQiyi’s (IQ.US) 1.3 times. The high premium owes to rosy expectations for Bilibili’s fourth quarter results as it marches closer to becoming profitable. But management will still need to show better spending discipline, and also articulate a day in the not-too-distant future when the company will become profitable, to retain investor support over the longer term.

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