De-globalization, Inflation, and the Strong US Service Sector
De-globalization, inflation, and the strong US service sector… these concepts may look like some terrifying economic disaster to some investors. Not to us. It’s the rhythm of our economy today, a rhythm punctuated by apprehension and opportunity. De-globalization, some argue, is steering the economic vessel towards troubled waters, while others see the potential to recalibrate global trade imbalances. Inflation, that big scary monster, lurks in the corner. It feeds on labor market tightness, particularly in the US service sector, which seems to be enjoying a party of its own.
Yet, amidst all these concerns, we hold a steadfast belief in the transformative power of AI. We assert that AI can and will have a substantial effect on the economy, serving as an antidote to inflation and a catalyst for sustainable growth. By automating processes, AI can streamline operations, reduce expenditures, and boost efficiency, thereby alleviating inflationary pressures and fostering an environment conducive to economic advancement.
Generative AI: Empowering Individuals and SMEs
Generative AI is transforming productivity for individuals and SMEs, as highlighted in our recent article. Once the preserve of large corporations, automation, and creative capabilities are now within reach of all. Thanks to US companies like Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG), intuitive AI tools that streamline workflows and generate quality content are becoming increasingly accessible, fostering growth in the digital age.
Generative AI: Not Replacing, but Augmenting Human Talent
AI isn’t your enemy; it’s your sidekick. The fear of being replaced by robots at work is a dystopian myth. Take Q1 2023 for example, Upwork (NASDAQ:UPWK) and Fiverr (NYSE:FVRR) were deluged with requests for generative AI services. Upwork had a 1,000% rocket jump in searches and a 600% uptick in related job posts. Fiverr? A tenfold surge in AI gigs and a 1,000% leap in buyer searches. That’s not a replacement, that’s demand.
By leveraging AI alongside human talent, productivity, and work quality can be greatly enhanced. Generative AI aids writers and editors by generating drafts, suggesting ideas, and handling repetitive tasks, enabling them to focus on higher-level thinking and adding their unique touch.
China’s Role in Generative AI Development
Chinese companies have displayed remarkable aggressiveness in developing generative AI models throughout 2023. In April, Alibaba launched Tongyi Qianwen, a text generator capable of producing human-quality written content. Similarly, Baidu introduced its own generative AI model, Ernie Bot, which exhibits the ability to provide comprehensive and informative answers to questions.
Exploring the Power of AI in Content Creation and User Engagement
Bilibili (NASDAQ:BILI) employs generative AI to boost different income streams, including its Professional-User-Generated Video (“PUGV”), which accounts for 94.6% of its total video views in 2022. Generative AI plays a key role in enhancing high-quality video production, transforming live broadcasts with interactive elements, boosting user engagement through AI-curated content, and elevating mobile gaming experiences.
AI Integration and Content Creator Growth
Highlights from Bilibili’s Q1 2023 earnings call shed light on the company’s growth and strategic initiatives:
Bilibili’s AI assistant improves search functionality by providing relevant results. It analyzes queries, offers various related topics, and presents different answers. The recommended videos, closely tied to the search keywords, are of high quality and curated by content creators. Its AI translating tool also facilitates seamless interaction between streamers and audiences by converting bullet comments into the streamer’s language. Bilibili experienced a remarkable 42% increase in daily active content creators, with a substantial 79% rise in monthly content submissions year-over-year. In Q1, over 1.5 million content creators earned income through multiple channels, marking a 50% YoY increase.
Additionally, its AI-powered translations enable real-time subtitling for non-English speakers during live broadcasts. The number of monthly active live broadcasting hosts increased by 34% YoY, and the number of live broadcasting paying users rose by 15% YoY. Bilibili also witnessed an improvement in the gross margin of the live broadcasting business, both sequentially and YoY.
Valuation
Bilibili’s current P/S ratio and P/B ratio are trading at levels close to their historical lows. Additionally, the company has projected a revenue growth range of 14% to 23% for the year 2023.
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Considering the relatively favorable valuation metrics and the anticipated revenue growth, we believe that Bilibili represents an attractive entry opportunity for investors.
Risk
Country Risk
In recent months, the term “de-risking” has gained significant attention in the geopolitical landscape, shifting the focus away from the previous discourse of decoupling between the United States and China during the Trump administration. This, in our opinion, is a precursor to investors perhaps increasing their allocation to Chinese companies.
Among Chinese stocks, Bilibili stands out as a company with relatively low geopolitical risk. The main reason for this is that Bilibili operates primarily in the digital services and consumer discretionary sectors, focusing on providing entertainment and creative content to its users. Unlike some Chinese companies in sensitive technology fields, Bilibili does not pose a direct technological threat or engage in patent conflicts that could compete with U.S. companies.
Furthermore, despite the significant geopolitical differences between Japan and China, Sony’s strategic investment of $400 million in Bilibili in 2020 demonstrates the Japanese company’s long-term commitment to cooperation and market development with Chinese companies. This investment highlights Sony’s recognition of Bilibili’s potential, particularly in the anime and mobile games sectors, and signifies their confidence in the continued collaboration between the two companies.
Delisting Risk
Lately, investors have expressed concerns regarding the potential delisting of Chinese ADR from US stock exchanges. However, we firmly believe that the prevailing pessimism surrounding stock delisting is unduly exaggerated.
The United States boasts several competitive advantages within its capital markets, including:
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Depth and liquidity: The US stock market stands as the deepest and most liquid globally. Consequently, there is a consistent presence of buyers and sellers, facilitating smoother transactions for investors seeking to purchase or sell their shares.
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Transparency: Amongst the most rigorous worldwide, US securities laws ensure that investors possess timely and accurate information about the companies they choose to invest in. This commitment to transparency enables informed decision-making.
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Regulatory environment: With a well-established regulatory framework for capital markets, the US provides a safeguard against fraud and other associated risks. This robust system aims to protect investors and uphold market integrity.
Undoubtedly, the US capital market represents a valuable asset for its economy. In this light, it is in the best interest of both the United States and China to continue fostering openness in the US capital market, as such a move would yield mutual benefits.
Solvency Risk
Despite a net loss of RMB 7.5 billion in 2022, Bilibili holds RMB 19.3 billion in cash and cash equivalents as of Q1 2023, securing its short-term financial health. Bilibili’s operational metrics show promise with 93.7 million DAUs in Q1 2023, an 18% increase year-over-year. Its advertising business also saw a 20% growth in Q1 2023. By optimizing commercialization efficiency and reducing losses, Bilibili improved its gross margin to 22% in Q1 2023 from 16% last year. Given that Bilibili is in its growth phase, we believe that it is able to attract continued capital market support despite operating at losses.
Summary
Understanding the vast potential of generative AI for user engagement and revenue growth, Bilibili is a company that truly harnesses this technology’s prowess. In Bilibili’s Q1 2023 earnings call, the company stressed the significant rise in content creators and the smooth integration of AI within its content landscape. Despite certain worries over delisting and country risks, Bilibili’s outstanding business performance, robust operational metrics, and ongoing efforts to increase commercialization efficiency are promising indicators for its future.
Given the attractive valuation metrics and forecasted revenue growth, we firmly believe that Bilibili will be one of the beneficiaries of booming generative AI in China and offers a compelling investment opportunity for investors who are comfortable with Chinese stocks.
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