20221201-招银国际-Mild_recovery_with_better_margin_ahead_12页_1mb

CMB International Global Markets | Equity Research | Company Update Summary

Core Content Overview

This report provides an equity research update on iQIYI (IQ US), highlighting its subsidiary growth, ads recovery, margin improvement, and attractive valuation. The analysis is based on the company's performance and future outlook, with a focus on its content pipeline, monetization strategies, and market position.

Main Points

Subs Momentum and Content Pipeline

• iQIYI has shown mild recovery in its subscriber base, with 101 million net subscribers in 3Q22 (+10.6 million QoQ).
• The blockbuster drama "Love Between Fairy and Devil" (苍兰诀) played a significant role in boosting subscriber growth and viewership, ranking Top 1 in aggregate views and trending topics.
• The company is expected to maintain subs sequential growth in 4Q22E and FY23E, driven by a strong content pipeline including:
  • Wild Bloom (风吹半夏)
  • Unchained Love (浮图缘)
  • New Life Begins (卿卿日常)
  • Super Sketch Show 2 (一年一度喜剧大赛2)
• iQIYI is diversifying its content into romance and comedy, to align with regulatory changes and user preferences.

Ads Recovery

• iQIYI's ads revenue declined by 25% YoY in 3Q22 but showed sequential growth of +4% QoQ.
• Ads are expected to recover in 4Q22E and 1Q23E, with a forecast of +6% QoQ growth in 4Q22E.
• Low single-digit YoY growth is anticipated for FY23E and FY24E.
• Ads recovery is expected to lag behind subs due to regulatory constraints and shift in ad formats.

Margin Improvement

• iQIYI has aggressive cost control and ROI-driven investment strategies.
• The company is expected to achieve non-GAAP OPM of 9% in FY24E and GPM of 25%.
• Non-GAAP OP is forecasted to grow to RMB2.9bn in FY24E.
• Cost discipline and operating leverage are key drivers of long-term margin improvement.

Valuation and Investment Recommendation

• CMB maintains a BUY rating and sets a DCF-based target price of US$4.1.
• The target price implies a 0.8x FY23E P/S and 21.6x FY23E P/E, both below the industry average.
• iQIYI is currently trading at 0.6x FY23E P/S and 14.6x FY23E P/E, indicating attractive valuation.
• The company is expected to deliver a 91% CAGR in topline and bottom line revenue from FY22 to FY24, significantly outperforming the industry average of 15%.

Key Catalysts

1. Hit dramas launching in 4Q22E and FY23E.
2. Ads recovery in sight.
3. Subs pick-up with strong content and pricing strategies.
4. Margin improvement through cost control and operating leverage.

Financial Highlights

Valuation Comparison

Summary of Key Views

• Positive outlook on iQIYI's long-term subscriber trend and margin improvement.
• Strong content pipeline supports subscriber growth and ads recovery.
• Valuation is attractive, with a DCF-based target price of US$4.1.
• Stock should react positively if financial pressure from CB is relieved.
• Potential for upside from hit dramas, ads recovery, and margin improvement.

Conclusion

iQIYI is well-positioned for growth with a robust content strategy, effective cost control, and a focus on high-ROI projects. The company's BUY rating reflects confidence in its ability to deliver strong performance, driven by subscribers, ads recovery, and margin expansion. The target price is based on DCF valuation and is below industry multiples, suggesting potential for further upside.