The core logic of station B investment

Recently, station B got a big bang because of the good reputation in the 2020 New Year’s Eve Party, and the stock price also fluctuated. Putting aside short-term stock price volatility, let’s look at its long-term investment logic.

Revenue is clear
Station B’s revenue comes from three major segments: games, live streaming and value-added services, and advertising.

The game business has three operating modes.

The first is the exclusive agency game (the core two products, FGO and Azur), which counts revenue as revenue, operating costs are IP sharing, CP sharing, and channel sharing. The gross profit margin is about 53% -55%. The revenue of agency games accounts for about 75% of the game revenue of station B, and FGO has the largest performance ratio, and FGO revenue accounts for about 50% of the game business. FGO carried out the 3rd anniversary event in September. The flow was relatively stable from October to December, and a major version update was made on December 30. FGO average revenue per user (ARPU) value is more than 600 yuan.

The second is the intermodal game (such as the Tomorrow’s Ark), which only counts the net income drawn. The role of station B in this model is equivalent to the channel side. In 2019, the revenue of intermodal games accounted for about 25% of the game business, but the gross profit margin was 100%.

The third is a self-developed game. At present, there is only one game, and there is almost no financial contribution. There are nearly 10 games approved, 6 of which are of a certain size, and one that has been on the steam is the AVG game “Dream of Vulnerability”. The self-research team has nearly 200 people. The research and development cycle is generally 2 years. The cost of a single game is mainly labor costs, which is currently not less than 10 million.

The company believes that the game business will be much stronger in 2020 than in 2019, mainly because the pace of release of 2019 version numbers is not satisfactory. The company has stocked 30 unique games, 8 products with version numbers, and 1 has been launched. It will be launched in late 2019 and early 2020. Ten of the 30 models are internally rated A-rated products. Key products such as “Princess Connection” are a combination of Fan drama and RPG. It has topped the list in Japan, and has been approved by the General Administration, waiting for the version number.

Station B believes that it is advantageous to publish overseas games, mainly due to a deep understanding of the two-dimensional category crowd. In 2020, it will expand overseas channels. Most of the 30 unique games are domestic games, usually with publishing rights in Hong Kong, Macao, Taiwan and Japan and South Korea. The company also recruited vice presidents with overseas distribution experience. He was responsible for overseas in Jinshan. issued. The two-dimensional works of Chinese going to sea have successful cases in Japan and South Korea.

In terms of live broadcast and VAS business, in terms of revenue ratio, live broadcast: VAS is about 6: 4, and VAS mainly comes from recharge by large members. The number of monthly active users (MAU) and paid users of the live broadcast business has grown steadily. Head anchors will be introduced next to bring new forms, traffic and precipitation to the live broadcast business.

In the first quarter of 2019, the live broadcast service had 11.4 million effective viewing users and 1.2 million paying users. The growth in live broadcast revenue was driven by the increase in the number of paid users. The ARPU was about 45 yuan, which was very low compared to peers. In the live income structure, entertainment live streaming and game live streaming each account for half, and two-thirds of views are from games. The current quarterly live broadcast revenue is only nearly 200 million yuan, which is a gap compared to Huya’s single quarter revenue of 1 billion yuan.

However, the unique feature of B-site live broadcast compared to competitors is that 50% of B-site live broadcasters are also Up masters, have a fixed fan base, and are more sticky, so the pay rate of B-site is double that of Huya. . The live broadcast share of station B is lower than the competition, and the share of the live broadcast is higher. For other live broadcast platforms such as Huya Betta, the split between platform and anchor is 50:50, and the split between platform B and anchor is 25:75. Therefore, the gross profit margin of B-site live broadcast business is significantly lower than that of competitors. The reason for adopting this strategy is that B-site live broadcast has a small income scale and a competitive share ratio to attract anchors. In the long term, there is room for improvement in the share ratio.

If you only look at the share of the anchor, the gross profit margin of the live broadcast is about 22% -23%. Excluding content costs, the gross margin of VAS members is also 100%.

Finally, looking at the advertising business, the growth rate is very fast, and it is achieved by not inserting ads in the video. According to CEO Chen Rui, the company will not consider advertising directly in the video in the short term, with the user experience and community atmosphere as the core priority. Before MAU reaches 200 million, the core strategy is to acquire customers and retain users.

Currently, there are two types of advertising at station B. Brand advertising revenue accounts for 65% (the top three industries are food and beverage, games, and e-commerce), and performance advertising accounts for 35% (the first three industries are gaming, education, and e-commerce). Consumption is Half and half, brand advertising can also buy information streams.

Ad load is currently 5%, has not changed in the past 6 quarters, and will not increase in the short term in the future. Advertising fill rate, sell-through rate, effective cost per thousand (eCPM price) are all improving, and there is still room for improvement in sell-through rate.

The innovative advertisements for the “Double 11” cooperation with Ali in 2019 were very effective and the GMV exceeded expectations. At the end of the New Year’s Eve Party, Ali is an important sponsor. He is currently in talks with Ali to deepen cooperation.

The gross profit margin of the advertisement, excluding the cash incentive plan for the Up master, is about 70% on average. Considering the cash incentive, the fluctuation will be relatively large.

Community barriers
The biggest advantage of the UGC platform is that the content cost is much lower than the PGC platform. The content cost of station B is relatively fixed. The cost item amortized to the income statement according to the 2-3 year straight-line method has been increasing the investment in content since 2017. 90% of video traffic is UGC content, and only 10% is outsourced. The company can decide whether to invest, how much to invest, and the content investment is more flexible than other long video platforms. Advertising income will not be kidnapped by content income, and can be selectively cast in Japanese dramas (Japanese serialized animated TV series), and users will still discuss the second creation at station B after watching it on other platforms. This is the community barrier at station B.

Content input includes 3 major blocks: Fan drama (including Japan Fan and Guochuang); documentary (including self-made and international big-name BBC, Discovery, National Geographic); home-made variety show; a small number of film and TV drama packages, investment return rate will be considered when investing (ROI), users at station B like to watch old movies. In fact, the cost of old movie packages is low. Because the atmosphere of the barrage review is good, users have a good response. For example, the cost of the Harry Potter movie package is very low. Large members who watch the conversion cover several times the cost of the package.

70% -80% of the content cost amortization under GAAP can be covered by large members and advertisements. In terms of specific investment, 1.1 billion yuan was spent in 2018 and 1.5 billion yuan in 2019. It is expected to be even higher in 2020, the increase will be lower than the increase in revenue, and the content cost will have a leverage effect.

For ROI considerations, variety shows and documentaries pay for costs through advertising sponsorships. Good-mouth projects have multiple times of cost recovery in the second quarter. The old film packages bring traffic and large member conversion rates. Guoman and Riman will not fully look at this, but also see if there is IP value. The own IP “Soul Cage” has good conversion and large members. You are already in development and are expected to go live in 2020.

The main division of Up is not only linked to traffic, but also related to quality. It must be original. The review right is replayed on the user’s positive feedback data, such as the completion rate, coins, likes, shares, collections, and number of comments on the barrage, how positive and how many. The weighted inspection weight is also an operating tool that can increase the weight of regional cash incentive plans that need to be promoted. Up’s main cash incentive plan has an annual budget of 200 million to 250 million yuan.

Slowly out of the circle
According to the data for the third quarter of 2019, MAU reached 128 million (+ 38%), and the growth rate of mobile MAU was 45%. The main driving factor was the number of daily active users (DAU): 37.6 million (+ 41%); monthly paid members The number of 7.9 million (+ 124%) is the number of deduplicated users, excluding e-commerce. Among them, the monthly paid user of mobile games is 1.5 million (+ 64%). The average daily usage time is 83 minutes (excluding game time, 78 minutes in the second quarter of 2019 and 85 minutes in the third quarter of 2018).

The number of full members is 62 million. You need to pass the exam to become a full member. The passing rate is 50% -60%. You can’t speak but you can pay for the exam. The number of large members is 6.1 million, and the penetration rate of regular members is 9.7%. Most of them have been tested. The average price of large members has increased. Currently it is 10-11 yuan / month. The standard price of 25 yuan / month is still There is a lot of space.

Where does the new user come from? In fact, station B is already slowly out of the circle. This is an important fact that is very obvious but ignored by the market. Only 37% of the national surveys heard about station B after 90/00. A large part of it did not watch station B because they did not watch cartoons. But station B is obviously China’s Youtube. The depth and breadth of content can meet twice the needs of today’s users, so a brand needs to be established to let people know what the content is, and the brand is the focus. Station B has been continuously upgraded and out of the circle, and many video contents have been transmitted by non-B station users. Station B can quickly discover and explode to attract large media. In the third quarter of 2019, the number of new million-play videos increased by more than 300% year-on-year, and the overall MAU increased by only 38%, indicating that the improvement of the recommendation algorithm is huge.

Attract new users first is brand promotion, the second is active traffic acquisition, try standard channels, such as application marketing, Huawei, Xiaomi, OPPO, VIVO, big companies Tencent Broadpoint, headline system, information flow products Launch, etc., try to pre-install in 2020. Natural growth and active acquisition are expected to keep at least half of the new users.

The company’s target MAU is from 2021 to 220 million. This assumption is based on China’s 330 million 90/00. This population only penetrates 25% -26%. Even if it doubles, the proportion is normal. And in the future, it can radiate to the post-80s or wider crowd. Station B does not design products according to age. It is a content platform. It is not only after 90/00 that you like to watch cute pets. There are also many 80/70; learning, entertainment, funny Everyone needs it. What they can reach is the people who search for videos. The accuracy and relevance of search for videos is much better than Baidu.

As of now, the acquisition cost of each user at station B is less than 10 yuan, which is very cheap. It has not been launched before 2016. The advantage of the latter is that it has not been tapped in various channels. The marginal effect is high. In addition to the Internet, it will also follow With the cooperation of operators, cooperation with China Unicom, Hua Merchants Card of Bank of China Merchants, and Tencent Music, traffic acquisition has just begun to invest, so the company is very confident in the future growth of MAU.

Profit planning
The company’s current core strategy is user growth, and it will maintain its current momentum until the planned MAU is reached. Because it is now possible to obtain high-quality users at a low price, this is a very short time window. If you strive to break even, you ca n’t make a valuation of one or two hundred million yuan a year, and you should increase your investment if you can grow. In the second quarter of 2018, the gross profit margin was 24%, and net income of 8 million yuan was believed to be able to break even. However, the company will consider whether to invest marketing and marketing expenses to invest in the future. The long-term perspective of management is the fortune of shareholders.

At present, games, advertisements and live broadcasts are the main monetization. Among them, games have good cash flow and high profit margins, and short-term is the focus of financial contributions. Chen Rui said that the recent focus is on live broadcast and content ecology, advertising and games are relatively mature, and live broadcast and e-commerce are still in the investment stage.

B was gradually replaced by the professional management led by Chen Rui after 2015. The transition was very smooth and the decision-making style was the same. The two characteristics were summed up, one was “visionary” and the other was “resolute execution” “.

In fact, the core logic of station B is very simple. It is to develop more and more diverse and larger monetization models based on the rapidly increasing number of highly sticky users. The UGC mode of station B is similar to Youtube, but it adds a layer of young people’s social attributes and stickiness than Youtube. The positioning of the main station of station B is actually the same as that of QQ WeChat to Tencent. It only needs to be responsible for attracting a large number of users, and then diversion users to the surrounding value-added services, and then the surrounding services to achieve profit. In this way, if various peripheral business updates and iterations are replaced by methods to attract money, the main station in the center of the traffic can always remain relatively independent without over-commercialization for profit. This model is extremely healthy and competitive.

Compared with PGC video, UGC video industry has natural monopoly. For example, the PGC in the United States has several giants of traditional television, and the streaming media includes Netflix, Amazon Prime, Hulu, and so on. But UGC only has one tubing, winner takes all, there is no other home. The reason is that the UGC industry Up host and user are a positive feedback relationship that attracts and strengthens each other. A platform with a large number of users will attract more high-quality UGC content, and a strong Up host can only maximize to the platform with the most users interest. Because PGC takes professional content as the core, users are in a position to accept content unilaterally. Users follow the content, but they cannot interact with the producers and have no feelings. In addition, the conversion cost of UGC is also much higher than that of PGC. There is a higher conversion cost from the perspective of Up and the user, resulting in higher stickiness.

But the company’s biggest risk is the short video that divides user acquisition and user time. Because short videos also belong to the sub-categories of UGC, vibrato and fast players are the real competitors of station B. However, from the data of the third quarter of 2019, no matter whether it is MAU, DAU, user duration, or 12-month user retention rate, station B has been growing strongly and has not seen any shadows affected by short videos. Thinking about the end of the competition between short and long videos, you will find that the short video is indeed very strong. Because splitting long videos into short videos can increase the number of inserted ads without affecting the user experience, but the limitations of the video form Very large, Douyin this direct full-screen recommended video mode cannot extend the duration to more than 1 minute, because the user does not have any expectations about the recommended video content. If you do not see it for more than ten seconds, the experience will be poor. The long video could not be seen for more than ten seconds. The user immediately ran away, and the long video of Douyin also violated the extremely effective monetization mode of inserting advertisements between short videos. Therefore, short videos do not exist in UGC instead of long videos. From the data, they are also developing synchronously. The MAU of station B increased by 38%, and the daily average was 83 minutes. The vibrato and fast MAU increased by 50% year-on-year, and the daily use time was 13-14 minutes.

In addition, users at station B have unique sticky cards and are difficult to imitate. UGC for long videos has not seen competitors yet, but short videos are highly competitive.

From the market reaction point of view, the market has accepted that station B does not focus on profitability in the short term and focuses on user growth, and continues to invest in incentives for Up Master and user acquisition. Therefore, as long as the short- and medium-term MAU, DAU, duration, and Up main content quantity and quality are increasing, and the absolute value of each business line’s income is increasing, the stock price will have room.