We keep positive on IQIYI’s long-term subs trend and margin improvement, backed by its sizable users, unique original content and valuable IP. We forecast iQIYI to deliver 11% revenue CAGR during FY20-22E, with subs price hike and ads recovery. Given fundraising partly priced in, we think iQIYI’s valuation is attractive. Initiate with BUY with DCF-based TP US$23.2.
- An online video leader: Not only “Netflix”, but more. iQIYI is a leading online video platform in China, with 105mn subs. Backed by its sizable users, vibrant original content and IP reserve, we forecast iQIYI to deliver 11% rev CAGR in FY20-22E, with subs price hike, ads recovery, and user expansion..
- Original content makes the difference. With online video industry growth tapering off, we believe content matters more to users than traffic or subsidies. iQIYI exceled itself with exclusive original content in both popular dramas and variety shows. Moreover, it bore initial fruits from short-episode dramas (e.g. the popularity of The Bad Kids <隐秘的角落>), and would further enrich Light on Series (迷雾剧场) with stronger pipeline. We expect short-episode dramas series to stimulate its subs & brand ads momentum with higher ROI, such as Who is Murderer<谁是凶手> in 2021 pipeline. In the long run, we see high visibility for iQIYI to achieve its 150mn subs target, despite sequential subs decline in next one or two quarters due to price hike.
- Price hike to unlock membership upside; Ads to bottom out. iQIYI raised its subs price by 26% for Android customers (3/4) to level iOS, and new subscription pricing plan took effect on 13 Nov. We view it positive in the long run to unlock its ARPU upside (forecasting blended ARPU +12% YoY in 4Q20E). Given Netflix’s four major price adjustments in history, we think iQIYI’s APRU was reasonable, and it was still largely behind Netflix of US$8.99. In terms of ads, we forecast 11% rev CAGR in FY20-22E, with gradual ads demand recovery in post COVID-19 period. Backed by its high-quality content pipeline, as well as enriched ads formats, we expect its ads rev to bottom out, and grow at 14% /9% YoY in FY21/22E.
- Initiate with BUY. We set our DCF-based TP at US$23.2 (implying 3.8x/3.5x FY20/21E P/S), below industry average of 6.2x FY21E P/S. Key market concerns lie in the short-term subs fluctuation and fundraising, but have been partly priced in, in our view. Waiting for more catalysts from: 1) hit dramas to be launched; 2) better-than-expected ads recovery; and 3) subs pick up.
