JohnCM
4年前
iQIYI, Inc. 2021Q1 Shareholder Letter
MAY 18, 2021 5:00AM EDT
BEIJING /PRNewswire/
Dear Shareholders,
In my first shareholder letter to you, I would like to share some thoughts and views on the online video industry, its competitive landscape, and our content strategy.
1. The industry and our competitive advantages
The online video industry in China has more than a decade long history. There are three common views on the classification of videos.
The first view is to classify videos based on length, by which videos are defined as either long or short videos, or long-form, medium- form, or short-form. The second view is to classify videos from the perspective of the content creators, and can be known as PPC (professional produced content), PUGC (professional user generated content) and UGC (user generated content). PPC videos are produced by professionals such as scriptwriters, directors, cameramen, actors, and actresses, and the content they produce includes films, dramas, animations, and variety shows. PUGC is usually produced by KOL and MCN, which are normally less professional when compared to PPC but their content can still be monetized through advertising or other ways. UGC is made by ordinary users and is generally not considered professional content.
The above-mentioned are the two most common ways to classify videos. However, there is also a third view; since content is made to be consumed by users, why not classify videos based on the users' purpose, mindset, and how they reflect as they watch the content? Therefore, we believe that video content can also be defined as delicious, entertainment, and interest-based video.
Delicious videos are like fast food. Users turn to this kind of video for simply relaxing and passing time rather than gaining any form of insights.
Typical entertainment videos are films, dramas, animations and variety shows. Quality entertainment videos can trigger instant and continuous in-depth thoughts, impress users, and even impact one's values and life. Among the different forms of entertainment content, film was born more than 120 years ago and is one of the world's most historic, artistic, and influential works. Dramas and variety shows also have a history of almost 100 years and a mass influence. While bringing fun and joy to people, entertainment videos also once changed people's habits, the society, and even the world.
Historically there has always been a demand for romantic, fictional and artistic works that were created based on reality, and entertainment content such as movies, dramas, variety shows and animations is the only video format that effectively meets this demand. We believe that entertainment video content has absorbed the essence of literature, painting, music, and other arts with a longer history, and will have an even larger addressable market moving forward. We have greater confidence in the Chinese market as the overall economy keeps developing steadily and continues to go through a consumption upgrade.
Interest-based videos are videos that were created to meet users' diverse interests and are generally based on real life events. The themes of these videos include but are not limited to food, DIY, product unpacking, travel, pets and so on. The creators of this type of content range from MCN and KOL, to amateurs and a small number of professionals. Interest-based content and its audience are more niche and long tail, and the content is usually less popular than movies, drama series, animations and variety shows.
Among the aforementioned video types, iQIYI mainly focuses on the latter two.
1) Our iQIYI app focuses on entertainment videos. On one hand, our platform facilitates an easier distribution of entertainment content while providing users with a better experience by leveraging technology innovations. Technology innovation coupled with creative ideas from artists, enables us to produce higher-quality films, dramas, animations, and variety shows. While we bring fun and joy to our users, we are also happy that we can influence users' lifestyles and provide them with easier access to more thought-provoking stories.
The entertainment video market has extremely high entry barriers, and it takes time to achieve the economies of scale necessary to operate efficiently. The overall understanding of the industry and its talents is also critical to being successful, as the entire content industry is still in a very nascent stage of industrialization and talents are scarce. Being the largest platform for video distribution in China, we have an in-depth understanding of users' demand for entertainment videos empowered by our technology and the vast amount of data accumulated over the years.
Together with the industry's capital-intensive nature, our knowledge on the industry's rules and practices, and our affiliation with directors, actors, scriptwriters, cameramen, sound engineers, art designers and other talents, iQIYI has established a solid leading position in the entertainment video industry in China. We are confident in our ability to continue driving the healthy growth of the industry and provide users with more high-quality entertainment content. In the future, we believe an increasing number of Chinese users will pursue entertainment content with higher spiritual value and more artistic quality after fully enjoying the pleasure brought from watching delicious videos. This is merely a process of a cultural consumption upgrade.
2) iQIYI's Suike app mainly focuses on interest-based videos which are also distributed on iQIYI's main platform. Interest-based content is very diversified and its target users are very long-tail. It has higher entry barriers but its users are also stickier. The total addressable market of interest-based videos is large, but it is difficult for a single player to gain a substantial share of the market. In our view, future Chinese media platforms focusing on interest-based content will be decentralized, as will user demand and content supply. This business model is still in a nascent stage in China but we have great potential in this emerging market with the rich resources we accumulated over the past decade.
Simply stated, iQIYI's core value is the production and distribution of entertainment content. Entertainment content is one of the core needs for human beings, and iQIYI is already a leader in this area and will continue to expand upon it moving forward. For interest-based videos, we will continue to invest in Suike and expect that it will contribute to our core entertainment business.
2. Our approach to current challenges
After 10-year development, it is widely known that our membership business has become the Company's largest revenue stream. Although we are currently facing some challenges that slowed the growth of our membership business or fluctuated the number of subscribing members, we still firmly believe that the membership business has huge potential. Two supporting pieces of data are: 1) As of the end of Q1 2021, the number of accumulative paid accounts has exceeded 490 million; and 2) In Q1 2021, the monthly average number of subscribing members who have membership benefits for any given day has reached nearly 160 million, which both show that there are a lot of users that are willing to pay for high-quality content. For the main reason of the slowdown in membership business growth, the industry generally believes that short-form videos and other diversified entertainment methods have squeezed user's time. We acknowledge the impact of this, but we have also observed that users' mindset about watching various kinds of content have gradually become clearer.
At the same time, based on our data and analysis, we believe that the reason of entertainment videos being squeezed by other methods is still the lack of high-quality content. Even now, there are a variety of different entertainment methods, but high-quality entertainment video content still plays an important role in driving user traffic and time spent. A recent example is our exclusive blockbuster "My Heroic Husband" launched in February of this year. Over the course of its run, the mega-hit drama was played on more than 180 million devices. At its conclusion, it attracted more than 64 million subscribing members, driving the peak number of subscribing members in the quarter to come close to the level at the end of Q1 last year.
Continuously producing high-quality content is the core of increasing the user base and member loyalty. We believe that the current lack of high-quality content is mainly caused by two factors: 1) The amount of licensed content that can be obtained from traditional channels is decreasing. The number of licensed drama series has decreased consistently with the shrinking market share of the traditional TV industry, and the impact from the global pandemic has dramatically reduced the number of theatrical movies, especially Hollywood productions screened in Chinese cinemas. Theatrical movies play a vital role in attracting and retaining subscribing members.
Our analysis shows that the number of movies with a box office of more than RMB100 million, which launched in SVOD mode from January to April in 2020 and 2021, decreased by around half, respectively, when compared with the same period in 2019. Among which, the number of overseas movies, primarily Hollywood movies, decreased by more than half, respectively. 2) The quantity and quality of self-produced content cannot currently satisfy user demand. We need to find the best talent and partners in the industry to build a strong content ecosystem, and then make breakthroughs of original content. It will take time to improve the content ecosystem.
With that, I would like to talk more about how we plan to resolve the issue we face: lack of high-quality content.
As content quality is at the core of our entire ecosystem, we aim to achieve a high hit ratio through the continuous improvement of content quality. To establish enough and highly productive in-house studios is an important prerequisite for the improvement of our content quality. When we did our IPO in 2018, we set a goal of establishing 50 in-house studios within two years which we have now achieved. Most of these internal studios are focusing on original dramas and variety shows, and a few are concentrating on movies and animations. In the next two years, an important aspect of our content strategy is to build more in-house film and animation studios. Through our in-house studios, we can amass outstanding talent in the content production industry and obtain more premium IPs and productions.
With our increasing number of in-house studios, we will also be able to continue to adhere to our strategy of diversifying content and deepening the vertical categories. Since the successful launch of our Mist Theater last year, short series format and content quality have been widely recognized by both our users and the market. I believe that through the accumulation of more experience and continuous efforts, we will provide a stable and sustainable high-quality content pipeline.
The content production industry also faces several problems, such as long and uncontrollable production schedules, low hit ratio, many simple and repetitive tasks, the lack of objective evaluation standards, and high financial risk, etc. In response to these challenges, we believe that the way to break the situation lies in the industrialization of video production.
The industrialization includes the restructuring of industry rules and intelligent production techniques. Among them, intelligent production is the key focus. This is because although China's video industry has already experienced an industrialization process for 20 to 30 years, it has yet to achieve substantial qualitative changes. One of the important reasons is the lack of technological support, and we believe that intelligent production techniques is the key to solve this problem. Thanks to the development and support of 5G, AI, blockchain, DRM, VR/AR, virtual shooting and other technologies, our intelligent production system is gradually improving.
The intelligent productions that we are planning and implementing include: 1) a production business intelligence system used for pre-broadcasting business index prediction and post-broadcasting commercial index analysis; 2) an intelligent integrated production system, leveraging artificial intelligence to integrate people, equipment, and materials in the content production process and to standardize the management of the entire process; 3) an intelligent production tool set, a multi-faceted production tool set using artificial intelligence, computer graphics and other technologies to improve work efficiency and user experience.
We are using these systems and tools to enhance the controllability of production schedules, content quality and financial risks, thereby further reducing costs and improving efficiencies. We believe that through modifying unreasonable rules in the industry via iQIYI's leadership and using intelligent production techniques to assist the optimization of industry rules and improve production efficiency, content production will become more stable, continuous and efficient with higher hit ratio in the future.
With over ten years of iQIYI's growth, in terms of our business operations, we are gradually establishing a win-win ecosystem and a diversified monetization model. In terms of content, we are recognized by our users and industry, and in terms of technology, we continue to innovate to improve our user experience and operating efficiencies. We are confident that our leadership will continue to heighten by leveraging our know-how acquired through years of highly intense competition. We also strongly believe that long-form video is irreplaceable as an entertainment format. In the meantime, through continuous technology innovations that empower content production, we will have the capability to increase our hit ratio, generate greater commercial value, and expand the imagination for the next generation of entertainment. As well, we look forward to bringing more good news to all shareholders.
Note from the Company: We won't present this letter on our earnings conference call later today, in order to leave more time to communicate with investors during the Q&A session.
Appendix: 2021Q1 Review and Outlook
We kicked off the year with a solid quarter. Our revenue increased both sequentially and year-over-year in the first quarter, which is above our previous guidance. Besides, in recent quarters when revenues have been relatively stable, our content costs have been effectively controlled and losses have continued to narrow. We continue to lead the market by launching a consistent stream of premium content. According to QuestMobile, our MAU, DAU and monthly time spent all ranked first in the industry in the first quarter of 2021.
Membership Business:
As of March 31, 2021, we had 105.3 million subscribers, with 3.6 million net additions during the quarter. Membership services revenue increased by 12% sequentially to RMB4.31 billion.
Subscriber growth was driven by several factors: 1) Our top content, in particular premium dramas, performed very well. For instance, our top drama, My Heroic Husband, was a blockbuster during the Spring Festival. Through this drama, we were able to achieve extremely high monetization efficiency with relatively fewer episodes. The average daily membership consumption exceeded the Story of Yanxi Palace, reaching a new record high. During the quarter, a number of theatrical movies were launched on our platform including Bath Buddy, Caught in Time and Shock Wave 2. Online movies such as Dreams of Getting Rich and Rising Shaolin: The Protector were also well-received. 2) Users spent more time on long-form video during major holidays such as Spring Festival, driving up the overall traffic on our platform. Both of our mobile MAUs and DAUs sequentially increased this quarter. 3) We introduced various innovative marketing initiatives during the holiday season, including an incentive task system. We also optimized our membership products and services, which significantly improved user engagement and loyalty.
In addition to overall membership growth, our sequential growth in membership services revenue was also due to two factors including: 1) An increased willingness to pay among users. This was driven by our premium content as well as the innovative business models we rolled out, such as our advanced viewing model for subscribers and PVOD mode. For example, our exclusive drama, My Heroic Husband, disrupted the stereotype of costume dramas with its comedy style attracting a large amount of members to pay extra fees for the advance viewing. Also, the movie Dreams of Getting Rich hit record highs in both viewership and pay-per-view revenue under the PVOD model. 2) ARPU growth driven by the headline pricing adjustment in November 2020.
Meanwhile, we strived to expand our total addressable market in two areas. 1) In late February, we launched a new VIP plan for iQIYI Lite, which targets users in lower-tier cities. We intend to convert these users into our subscribers with more customized content and privileges. 2) We also continued to expand our footprint overseas. During the first quarter, our overall overseas MAU increased by 77% sequentially. Our new downloads also remained amongst the TOP 5 in multiple Southeast Asian countries. In particular, we were ranked #1 in Thailand and Malaysia. The premium content we launched further improved our overseas brand awareness.
Though we still expect short-term volatility in our subscriber numbers, we remain confident in the mid- and long-term development of our membership business. This is based on our dedication to premium content, as well as ongoing improvements to our original content ecosystem and in-house production capabilities. We are happy to see that the content quality of domestic online video platforms is gradually converging with that of our global peers. It has become a norm that people are willing to pay for premium content. We have also noticed that one of our peers recently followed our move in membership pricing adjustments. That in our view bodes well for the long-term profitability of the online video industry.
Advertising Business:
During the quarter, the overall advertising market continued to recover. Our online advertising services revenue increased by 25% year over year. Even though the first quarter is traditionally a slow season for our advertising business, we were able to achieve decent sequential and year-over-year growth. Like the trend in the fourth quarter of 2020, growth was mainly attributable to strong content marketing revenue. Our content marketing revenue recorded decent growth driven by major variety shows and dramas. The content marketing revenue accounted for around 64% of our brand ad revenue in the first quarter, which was a peak for the last few quarters. This again validated advertisers' recognition of our premium content.
For brand ads, revenue stabilized driven by the rebound of both advertisers' budgets and the number of advertisers amid the macroeconomy recovery. Major dramas in the first quarter triggered word of mouth recommendations, attracting clients from different sectors to try out our theater products. If we break it down by industry, growth mainly came from food and beverage, and the cosmetics and toiletry industries. In terms of performance ads, the sequential revenue growth benefited from increased traffic during the holidays, as well as the contribution from key industries including network services, e-commerce, online video and gaming.
Content:
We continued to lead the industry in terms of total number of top titles and viewership across the categories, including drama, variety shows, animation, children and other content. According to third-party data, video views of our dramas and variety shows both accounted for nearly 40% of the overall market viewership in the first quarter; our animation, including children's animations, and movies had even higher numbers reaching over 40% and 50%, respectively, also ranking first among peers.
During the quarter, we continued to deliver a wide variety of best-in-class stories that our members loved to watch. We also made notable progress in IP development and stylistic innovations.
1) For dramas, our exclusive costume drama My Heroic Husband became an instant hit after its launch. Its innovations in theme and style provided a whole new way of creating good costume drama which will have an impact on our future productions. We also launched a number of popular original dramas with realistic themes such as, My Best Friend's Story, Dt. Appledog's Time and Vocation of Love.
2) For variety shows, we keep innovating on original content with different themes. Our new original variety shows, such as Theater for Living, Qipa Talk 7, Fourtry 2 and Ladies' Talk became hits during the quarter.
3) In original movies, we keep working on producing better stories. Our original movie Underworld Crashed has been screened in theaters, reached a box office of over RMB300 million, and has received high ratings from various platforms. Apart from that, we began shooting two new movies during the quarter. There are currently three others in post-production and will be released in theaters later this year. In addition, there are 18 iQIYI Original Films under development.
For the second quarter, key dramas in our pipeline include A Love for Dilemma, Court Lady, Crossroad Bistro, The Rebel, The Lion's Secret and others. Love for Dilemma and Court Lady were aired in April and well-received by our users. We kept promoting short drama theater brands with a brand featuring romantic content scheduled to launch on May 20th. We will also launch new content in Mist Theater later this year. In animation, new content to be aired includes No Choice but to Betray the Earth, The Tales of Wonder Keepers and the light animation Immortal Father As a Son-in-law 3 as well as others.
Despite some expected uncertainties in our content schedule in the coming months, we believe that the impact will be mitigated by our diversified content pipeline, especially self-produced dramas.
Technology:
We are empowering the entertainment industry with technology, while building an industrialized system for video production. The key highlights during the quarter included:
1. Smart production: The iQIYI "X City" extended reality (XR) live concert. The concert used world-leading extended reality visual production technology and set a new global benchmark in terms of the range of virtual scenes and the number of interactive users online.
2. Products: In January 2021, we officially released the iQIYI Lite app which targets users in the lower-tier regions of China. iQIYI Lite performed well in terms of user engagement. Both its current average time spent, and average video views have exceeded that of the main iQIYI app.
For more information, please contact: Investor Relations iQIYI, Inc. + 86 10 8264 6585 ir@qiyi.com
JohnCM
4年前
iQIYI Announces First Quarter 2021 Financial Results
MAY 18, 2021 5:00AM EDT
BEIJING, May 18, 2021 /PRNewswire/ -- iQIYI, Inc. (Nasdaq: IQ) ("iQIYI" or the "Company"), an innovative market-leading online entertainment service in China, today announced its unaudited financial results for the first quarter ended March 31, 2021.
First Quarter 2021 Highlights
Total revenues were RMB8.0 billion (US$1.2 billion), representing a 4% increase from the same period in 2020.
Operating loss was RMB1.0 billion (US$154.8 million) and operating loss margin was 13%, compared to operating loss of RMB2.2 billion and operating loss margin of 29% in the same period in 2020.
Net loss attributable to iQIYI was RMB1.3 billion (US$193.4 million), compared to net loss attributable to iQIYI of RMB2.9 billion in the same period in 2020.
Diluted net loss attributable to iQIYI per ADS was RMB1.61 (US$0.25), compared to diluted net loss attributable to iQIYI per ADS of RMB3.92 in the same period of 2020.
The number of total subscribing members was 105.3 million as of March 31, 2021 and 104.3 million excluding individuals with trial memberships.
"We kicked off the year with a solid quarter across the board" commented Dr. Yu Gong, Founder, Director, and Chief Executive Officer of iQIYI. "We had 3.6 million more subscribing members in the first quarter and our membership services revenue grew by 12% quarter-over-quarter, recording the peak level in terms of absolute dollar amount over the past year.
The notable growth was largely a result of our strong content launch across various of categories including dramas, variety shows and films during the quarter. Specifically, the drama titled My heroic Husband set up another milestone in terms of both viewership and monetization efficiency, validating our exclusive content strategy.
On April 22, we celebrated our 11-year anniversary. We are confident that we will further strengthen our leadership through the know-hows we learned from years of fierce competition. We strongly believe the irreplaceability of long-form video as an entertainment format and we are well prepared for future opportunities and challenges."
"Our total revenue in the first quarter has exceeded our previous guidance, recording healthy growth on both quarter-over-quarter and year-over-year basis." commented Mr. Xiaodong Wang, Chief Financial Officer of iQIYI. "In the first quarter, we delivered multiple well-received content titles.
Meanwhile, driven by the improved investment efficiency, our content cost continued to decline on a year-over-year basis for the third consecutive quarter. As always, we are committed to pursuing ROI-driven approach across different aspects of business, including content, technology and marketing and more. This positions us on the right track for the eventual self-sustained status."
Footnotes:
Unless otherwise noted, all translations from RMB to U.S. dollars are made at a rate of RMB6.5518 to US$1.00, the exchange rate in effect as of March 31, 2021 as set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System. Translations are provided solely for the convenience of the reader.
First Quarter 2021 Financial Results
Total revenues reached RMB8.0 billion (US$1.2 billion), representing a 4% increase from the same period in 2020.
Membership services revenue was RMB4.3 billion (US$658.1 million), representing a 7% decrease from the same period in 2020. The decrease was primarily due to the decline of our subscribing members from 118.9 million as of March 31, 2020, which was a high base due to the impact of Covid-19, to 105.3 million as of March 31, 2021. Our subscribing members grew 3.6 million quarter-on-quarter due to the strong content launch coupled with the holidays in the first quarter, during which people spent more time viewing content.
Online advertising services revenue was RMB1.9 billion (US$292.5 million), representing a 25% increase from the same period in 2020. The increase was primarily driven by the rebound of both brand-advertising budgets and the number of brand advertisers amid the macroeconomy recovery.
Content distribution revenue was RMB779.1 million (US$118.9 million), representing a 29% increase from the same period in 2020. The increase was primarily driven by more content titles we distributed to other platforms during the quarter.
Other revenues were RMB961.0 million (US$146.7 million), representing a 10% increase from the same period in 2020, primarily due to the growth of certain business lines.
Cost of revenues was RMB7.1 billion (US$1.1 billion), representing a 10% decrease from the same period in 2020. The decrease in cost of revenues was primarily due to less content costs and bandwidth cost during the quarter. Content costs as a component of cost of revenues were RMB5.4 billion (US$829.6 million), representing an 8% decrease from the same period in 2020. The decrease was primarily attributable to decline of licensed content cost.
Selling, general and administrative expenses were RMB1.2 billion (US$183.3 million), representing an 8% decrease from the same period in 2020. This was primarily attribute to less provision for credit losses, which was a result of improved macroeconomic environment versus the same period last year.
Research and development expenses were RMB672.3 million (US$102.6 million), representing a 1% decrease from the same period in 2020.
Operating loss was RMB1.0 billion (US$154.8 million), compared to operating loss of RMB2.2 billion in the same period in 2020. Operating loss margin was 13%, compared to operating loss margin of 29% in the same period in 2020.
Total other expense was RMB222.4 million (US$34.0 million), compared to total other expense of RMB628.5 million during the same period of 2020. The year-over-year variance was mainly due to less foreign exchange loss.
Loss before income taxes was RMB1.2 billion (US$188.7 million), compared to loss before income taxes of RMB2.9 billion in the same period in 2020.
Income tax expense was RMB20.6 million (US$3.1 million), compared to income tax expense of RMB4.8 million in the same period in 2020.
Net loss attributable to iQIYI was RMB1.3 billion (US$193.4 million), compared to net loss attributable to iQIYI of RMB2.9 billion in the same period in 2020. Diluted net loss attributable to iQIYI per ADS was RMB1.61 (US$0.25) for the first quarter of 2021, compared to diluted net loss attributable to iQIYI per ADS of RMB3.92 in the same period of 2020.
As of March 31, 2021, the Company had cash, cash equivalents, restricted cash and short-term investments of RMB13.3 billion (US$2.0 billion).
Financial Guidance
For the second quarter of 2021, iQIYI expects total net revenues to be between RMB7.21 billion (US$1.10 billion) and RMB7.65 billion (US$1.17 billion), representing a 3% decrease to a 3% increase year over year. This forecast reflects iQIYI's current and preliminary view, which may be subject to change.
Conference Call Information
iQIYI's management will hold an earnings conference call at 7:00 AM on May 18, 2021, U.S. Eastern Time (7:00 PM on May 18, 2021, Beijing Time).
Please register in advance of the conference using the link provided below. Upon registering, you will be provided with participant dial-in numbers, Direct Event passcode and unique registrant ID by email.
Participant Online Registration: apac.directeventreg.com/registration/event/3375215
It will automatically direct you to the registration page of " iQIYI First Quarter 2021 Earnings Conference Call", where you may fill in your details for RSVP. If it requires you to enter a participant conference ID, please enter "3375215".
In the 10 minutes prior to the call start time, you may use the conference access information (including dial-in number(s), Direct Event passcode and unique registrant ID) provided in the confirmation email that you have received following your pre-registration.
A telephone replay of the call will be available after the conclusion of the conference call through May 26, 2021.
Dial-in numbers for the replay are as follows:
International Dial-in: +61 2 8199 0299
Passcode: 3375215
A live and archived webcast of the conference call will be available at http://ir.iqiyi.com/.
About iQIYI, Inc.
iQIYI, Inc. is an innovative market-leading online entertainment service in China. Its corporate DNA combines creative talent with technology, fostering an environment for continuous innovation and the production of blockbuster content. iQIYI's platform features highly popular original content, as well as a comprehensive library of other professionally-produced content, professional user generated content and user-generated content. The Company distinguishes itself in the online entertainment industry by its leading technology platform powered by advanced AI, big data analytics and other core proprietary technologies. iQIYI attracts a massive user base with tremendous user engagement, and has developed a diversified monetization model including membership services, online advertising services, content distribution, online games, live broadcasting, IP licensing, talent agency, online literature and e-commerce etc.
JohnCM
4年前
Can Alibaba And iQIYI Overcome The Onslaught Of Innuendos? You Bet
Jul. 04, 2021
Seeking Alpha
Market commentaries generally blamed the weakness of Chinese equities last week on the lackluster June PMI readings and missed the big elephant in the room: China's aggressive posturing.
With the yawning gap between BABA share price and the consensus price target, the question is whether the stock would recover or the analyst targets would be revised down further.
The same goes for the embattled iQIYI. I share my thoughts having reviewed their revenue and EPS revision trends.
Several significant developments, including an investment tie-up with a provincial government, suggest Alibaba Group remains the go-to internet giant for mega deals and careers.
iQIYI is making real business progress that deserves better communication to investors.
Lackluster PMIs and harsh presidential speech likely spooked market players
Chinese equity indices slumped last week even as the country was in a celebratory mood due to the 100th anniversary of the founding of the Communist Party of China.
Market commentaries generally blamed the stock weakness on lackluster purchasing managers' indices [PMI] that were released over the week.
The official manufacturing PMI announced on Tuesday showed the June reading dipped slightly to 50.9 versus 51.0 in May. That was, however, a tad better than the consensus analysts' forecast for a worse slowdown to 50.8. Any relief that might bring was negligible as the official PMI for China's non-manufacturing sector in June reflected a steep deceleration to 53.5, down from 55.2 in May.
Further disappointment came on Thursday as the privately compiled Caixin-Markit China manufacturing sector PMI also eased from 52.0 in May to 51.3 in June. To rub salt to the wound, the June reading was quite off the consensus estimate of 51.9. Total new business expanded at the slowest rate in three months while new export work was broadly stagnant in June.
In my opinion, a key factor for the fall in Chinese stocks that had been overlooked is the increased likelihood that the U.S. could toughen its measures aimed at containing China's rise. This is because Chinese President Xi Jinping doubled down on rhetoric to warn foreign countries that 'bully' China of 'bloody' consequences in a graphic manner and extolled the developments the country has achieved.
Market players likely read in between the lines and reckoned the Biden administration could be compelled to act quicker and firmer to thwart China's economic progress, implicating Chinese equities in the process. In the past week, the representative ETFs of Chinese companies (CQQQ)(FXI)(MCHI) tumbled even as their U.S. counterparts (QQQ)(DIA)(SPY) closed with healthy gains.
The Chinese Internet sector representative ETF, the KraneShares CSI China Internet ETF (KWEB), was worse off than the broader Chinese ETFs, closing down 5.5 percent for the week. Among the key holdings of the KWEB ETF, the share prices of Pinduoduo (PDD), Meituan (MEIT)(OTCPK:MPNGF)(OTCPK:MPNGY), and KE Holdings (BEKE) declined more than the ETF. NetEase (NTES) was not only the odd gainer, it also climbed by a hefty 6.1 percent.
As explained in a past issue of the Chinese Internet Weekly, I found the KWEB ETF holding the most representative stocks in the sector. As such, an overview of the week's share price movements of the top ten holdings of KWEB (as of Friday) as compared with the ETF itself is provided as follows for convenient reference especially for the stocks mentioned in this article.
BABA stock has likely priced in the negatives
There's no denying that Alibaba Group Holding Limited (BABA) has been down in the dumps since its dramatic fall from grace in November. BABA stock is up a mere 2.74 percent in the past year while other tech stocks have been going like gangbusters. Its regulatory woes are well known and the recent management's decision to invest any incremental profits has left investors worried about returns.
However, with the sharp decline, the share price of BABA has pulled far away from the consensus price target of Wall Street analysts, despite the latter having been reduced substantially already since the start of the year. With the yawning gap between the two, the question in investors' minds is whether the stock would recover or the analyst targets would be revised down further.
I have opined last month in Can Alibaba Stock Hit $1,000? What's The Outlook my belief BABA stock can recover and hit fresh highs. This leaves the question of whether analysts would continue to lower their price targets on BABA. For professional analysts, each downgrade typically comes with a downward revision in the financial forecast, rather than simply blaming a change in sentiment.
In the past three months, Alibaba Group Holding's consensus EPS estimate for the fiscal period ending March 2022 and March 2023 has been lowered by 12.3 percent. Compared with six months ago, the reductions are steeper at more than 20 percent for the upcoming two fiscal periods.
Looking further ahead into March 2026, the current consensus EPS estimate is 36 percent lower than six months ago. Unlike the forecasts for the near years 2022-2024, the estimates for 2025-2026 were shaved off more recently, suggesting that the analysts had finally capitulated and lost hope that the reduction EPS growth would be topped up in the later years.
The unrecoverable EPS estimates out until 2026 suggest the analysts believe the heightened antitrust scrutiny is not something ephemeral and has curtailed Alibaba Group's earnings potential permanently. With the EPS estimates chopped by 20-37 percent across the next five years, could we expect further reductions to come?
I think it's unlikely, as the forward price-to-earnings ratio of BABA stock would compress to an incredulous 11.3 times if the share price stays flat for the next five years as the business continues to grow. How much lower can it go? Already, the analysts have reflected the management's guidance for zero profit growth (-0.23 percent) in the consensus forecast for the fiscal period ending March 2022.
Investor sentiment on Alibaba may be turning positive with favorable developments
Meanwhile, prominent cheerleaders of Alibaba have emerged of late. Hong Kong-based Oliver Cox, who co-manages the $1.48 billion JPMorgan (JPM) Pacific Technology Fund, revealed he's buying into China's internet stocks as he shrugged off the "noise" around regulatory tightening by the "very pragmatic" Chinese authorities.
Hyomi Jie, a fund manager at Fidelity International Ltd., suggested the regulatory clampdown could be at the tail's end "as key industry players have agreed on what needs to be done." Meanwhile, the three ARK Invest funds (ARKQ)(ARKX)(ARKF) that hold BABA shares have increased their holdings of the tech giant since mid-June.
The leading fund titans likely have solid ground intel guiding their China investments. They may have realized beforehand that despite the relentless media bashing, Alibaba was the preferred choice of employer among students of business and commerce at mainland Chinese universities for the second year running, according to a recent survey by Stockholm-based employer branding specialist Universum. This ensures that the internet giant continues to have a solid pipeline of young talents to keep the business humming along.
Furthermore, although Alibaba abandoned its exclusivity demand on its sellers, the latter still placed their largest stock on Alibaba's Tmall. According to Protocol, two-thirds of the surveyed businesses considered Tmall their key platform for the 618 mid-year online sales extravaganza, with 40 percent of them expecting more than half of their 618 sales to come from Tmall.
In a clear refute to critics harping on the stale allegation that the Chinese government has been picking on Alibaba, the internet giant is reportedly leading a consortium of investors including the Jiangsu provincial government on a deal to buy a stake in one of China's biggest retailers of appliances, electronics, and other consumer goods.
Once more investors are able to pick up such subtle hints of Alibaba's healthy developments, BABA stock could see clamoring among market players again.
iQIYI is another downtrodden stock with concrete business strengths
iQIYI (IQ) is another Chinese internet stock that is experiencing a large gap between a reduced consensus analyst target and its collapsed share price. Despite a market price rebound from the May trough and a price target that underwent a steep discount last month, there is still a $5.42 upside representing a whopping 36 percent appreciation potential.
Similar to the Alibaba discussion, if the price target for iQIYI continues to be eroded, the fluid price gap is meaningless. However, there are already six downwards revisions in the last three months. Analysts have not been asleep. The headwinds have been considered and possibly factored in. The consensus EPS estimate for the fiscal year ending December 2022 has flipped from a healthy positive number more than two years ago to firmly in the negative.
The revenue estimates for iQIYI have also been watered down, especially for 2023 which is 29 percent lower than six months ago. The video-streaming platform fondly referred to as the Netflix (NFLX) of China is projected to grow a tepid 8.6 percent this year, followed by low double-digits percentage growth in the next two years.
The current gradual revenue growth estimates as compared to the exponential rise in the past suggest the analysts have all but given up regarding iQIYI as a tech-type growth company. The price-to-sales on a forward basis will decline further from an already low 2.36 times to 1.85 times.
You say IQ stock deserves its low valuation - its shows are mediocre with weak viewership. That is, however, far from the truth. iQIYI's original drama Story of Yanxi Palace released in 2018 was the most viewed Chinese drama series for 40 consecutive days during its run, receiving 700 million daily views at one point and eventually becoming the most google drama series of 2018.
I can personally attest to the quality as I found myself binge-watching the entire series in a few days. The popularity was despite the lack of an A-lister cast and the absence of fancy but costly scene-making in the likes of the Fast and Furious series. The show was nearly entirely shot in a palace setting.
In 2019, The Thunder, another iQIYI original realism drama production topped China's national TV ratings ranking for 22 consecutive days upon its release and received a Douban rating of 8.5. Douban is an influential Chinese social media platform known for its movie and TV show reviews. It is the Chinese equivalent of Rotten Tomatoes.
iQIYI bettered the feat last year with The Bad Kids scoring a rating of 9.0 on Douban and becoming the highest-rated drama series produced in mainland China over the 18 months before July 2020. Hashtags related to the drama have appeared on Weibo's (WB) trending topics list 51 times, of which five hashtags have been ranked number one on the list. Weibo is known as the Chinese Twitter (TWTR).
iQIYI has also achieved success in theaters. Its jointly produced movie Break Through The Darkness reached a total box office exceeding 200 million on the ninth day of screening after topping the attendance chart for six consecutive days. The accomplishment is commendable as the show was released on the Labor Day holiday, a highly competitive season when dozens of films were launched.
iQIYI's productions are not just blockbusters. They are also recognized for their quality by the professionals. The company, which prefers to be known as an innovative market-leading online entertainment service in China, won four prizes (content in Chinese) at Digital Media Awards China 2021. iQIYI received the Digital Media Innovator of the Year and Best Digital Marketing Team awards as well as Bronze awards for Best Use of Integration and Education.
iQIYI's contents have also achieved international acclaim. The Bad Kids series mentioned earlier won the "Best Creative" award at the 2nd Asia Contents Awards, the first Chinese TV series to do so, and beating Netflix's huge South Korean hit Crash Landing On You.
The Awards were organized in conjunction with the 2020 Busan International Film Festival held in South Korea on October 25, 2020. Rong Zishan, who was featured in the TV show, won the "Newcomer Actor" award. This was a testament to iQIYI's strength in relying on lower-cost, non-celebrity castings to produce quality blockbusters.
Killing a Superstar, an interactive virtual reality film produced by iQIYI, scored the Best VR Story Award of the Venice VR Expanded category at the prestigious Venice Film Festival, representing the first time an original VR production from mainland China received an award from a major international film festival.
A total of 31 VR productions, including those from the directors of top films such as The Lion King, Iron Man, and Madagascar, were shortlisted in the Venice VR Expanded category. The Venice Film Festival was founded in 1932 and is considered as one of the three major international film festivals in Europe alongside Cannes International Film Festival and Berlin International Film Festival.
Killing a Superstar, winner of Best VR Story Award of the Venice VR Expanded category at the prestigious Venice Film Festival 2020
I have suggested in a previous write-up that shareholders of Chinese companies who want to access the latest updates should venture to the Press Releases or News sections of their websites in Chinese. This is because the English option typically is slower on the updates or may just show a sample of the developments published on the Chinese version.
iQIYI's website is an example case, with 22 pieces of updates in June on the Chinese portal as compared to just one on the English version. The company may yet populate the English website for June, so I looked at May for a fairer assessment. The Chinese version showed 34 news articles for May, versus just two in the English section.
From the Chinese website, investors would be able to see that IQIYI's self-developed Digital Rights Management [DRM] technology won a national patent award (content in Chinese), based on the news posted on June 29. The DRM system has been certified by ChinaDRM Laboratory, the authoritative radio, film and television digital rights organization in China. iQIYI became the first Internet video platform in China to receive this certification.
iQIYI also revealed that it obtained over 4,500 patents as of the end of 2020, with more than 390 of these granted in 2020 alone, ranking it among the top 57 in China. Readers may be puzzled as to why a content-based company like iQIYI would bother about technological innovations.
The reason is that, with all the heavy investments made in creating shows, iQIYI needs to protect its intellectual property rights. Besides DRM, the company said it needed to "deepen the application of multiple core copyright protection technologies, including anti-leech, video fingerprinting, copyright blockchain, and network-wide monitoring."
The move is important as users on popular short video operators in China such as Kuaishou Technology (OTCPK:KUASF)(OTCPK:KSHTY) and ByteDance-owned Douyin (BDNCE), the Chinese version of TikTok, upload copyrighted clips on these platforms, sometimes even without any additional creative inputs. In April, over 70 Chinese film and television show makers and associations demanded short video platforms to immediately remove any of their content that was being used without authorization. The group included iQIYI, Tencent Video (OTCPK:TCEHY)(OTCPK:TCTZF), and Alibaba's Youku.
Being able to identify unauthorized usage of its creations, iQIYI would be able to claim royalties from those infringers. More importantly, it could secure additional income from the legal licensing of contents. iQIYI could also potentially profit from the licensing of its patented copyright protection technologies, opening up another source of income.
A blessing in disguise for iQIYI is that while it is the leading player in the long-form video space, its inability to enact monopolistic practices meant that it would most likely be safe from regulatory scrutiny. However, it could be indirectly impacted as the crackdown on the after-school tutoring industry diminishes one of its key advertising sources significantly.
It is also hampered by societal pushback over unintended outcomes from certain practices it offers its advertisers. For instance, in May, the authorities took issues with fans buying and then discarding contents from bottles of dairy products while retaining the caps. Turns out, the fans had spent large sums of money to procure the bottles in order to obtain the QR codes printed on the inside of the caps that could be scanned to vote for contestants on the highly popular talent show Youth With You 3 that is produced by iQIYI.
With Beijing having ordered the show to be suspended to "rectify the existing problems," it is clear that advertisers would unlikely be able to achieve the same monetary returns as before. Tim Gong Yu, the CEO of iQIYI, said during the Q1 2021 earnings conference call in May that the new guidance forbid viewers to vote through purchasing goods or buying membership plans. Consequently, advertisers could reduce their payments to iQIYI if they are seeing diminished outcomes from their sponsorships.
Nonetheless, as I bring readers back to my poser earlier, it's not that difficult to acknowledge that analysts have low expectations for iQIYI even as the company continues to improve on its businesses. Xianghua Yang, President of Membership and Overseas Business Group at iQIYI, advised during the earnings call that iQIYI's ARPU growth in the first quarter of 2021 on a sequential basis and also on a year-on-year basis to be around 10 percent. Most importantly, he believed "this trend will continue."
iQIYI has continued to entrench its position in the entertainment business and let the results counter short-sellers' allegations against it. We shall see if the company can be a good example of 'what doesn't kills it, make it stronger.'
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