Bilibili (BILI 14.39, +1.08, +8.11%), which made its IPO debut in March 2018, opened sharply higher today (+14%) after announcing that Tencent Holdings (TCEHY) will make a substantial equity investment in the company. Tencent will invest approximately US$317.6 mln in cash in Bilibili via a share purchase agreement.

Founded in 2009, Bilibili is a Chinese online entertainment company focused on providing content for China’s young generations. Bilibili identifies itself as “a full-spectrum online entertainment world” that hosts content representing a a wide array of genres and mediums, including videos, live broadcasting, and mobile games. Much of its featured content is Chinese in origin, but selections of overseas content, including certain American movies and Japanese animated series, can also be accessed via the platform. By hosting high-quality content that caters to the evolving and diversified interests of its users, Bilibili aims to provide an immersive entertainment experience, and it facilitates some socialization on the platform, such as live commenting functions, to help encourage user loyalty and a sense of community.

Tencent Holdings, meanwhile, has a major presence in China’s online space. Its social products Weixin and QQ link users to a rich digital content catalog including games, video, music, and books. The company – and its units – is a notable investor in a number of companies from a broad range of industries, including some that trade publicly on American exchanges, including Sogou (SOGO), JD.com (JD) and Spotify (SPOT).

Turning to the details of the investment, Tencent will subscribe for 25.06 mln newly issued Class Z ordinary shares of Bilibili for US$317.6 mln. The purchase price will be US$12.67 per Class Z ordinary share, which is equivalent to US$12.67 per American Depositary Share (ADS) of Bilibili, each of which represents one Class Z ordinary share. The transaction is expected to close in the near future. Upon the closing, Tencent will increase its equity stake in BILI to 12.3%.

In late August, BILI reported Q2 results. While not yet profitable, BILI is growing revenue quickly. Q2 revenue jumped 76% year/year to US$155.1 mln. Revenue from mobile games, its largest segment, increased 61% to US$119.5 mln, primarily due to the increasing popularity of mobile games such as Fate/Grand Order and Azur Lane. Revenue from live broadcasting and value-added services, or VAS, increased 186% year/year to US$17.9 mln. This substantial improvement was attributed mainly to BILI's enhanced monetization efforts and promotion of its VAS services. Finally, advertising revenue grew 132% year/year to US$14.5 mln, primarily due to additional revenue from brand advertising and the company's newly launched performance-based advertising on Bilibili's highly trafficked platform.

BILI says its platform is actively attracting a growing number of users, and with thanks to its “flourishing community”, it's seeing high levels of engagement and user retention rates. As the company progresses through the latter half of the year, it remains committed to pursuing further growth in its user base. Its goal is to be the premier platform for China's coveted Generation Z online entertainment community.

BILI has had its ups and downs since making its IPO debut in March. It priced its 42 mln ADS IPO at $11.50, in the middle of its expected range of $10.50-12.50. However, it opened poorly at $9.80. It struggled for a while before trading sharply higher to $22.70 by mid-June. However, it quickly fell back again into the low teens. Our sense is that this stock has felt a bit heavy. A 42 mln ADS IPO size is fairly large for a Chinese tech name. They probably should have offered fewer shares.

Investors are clearly happy to see this equity investment from Tencent. Not only does it add a boost of cash, just as importantly, it tells the investment community that Tencent sees value here. Clearly, Tencent likes BILI's growth potential. Also, whenever Tencent buys a large stake like this, it leads to speculation that Tencent may just buy the whole company at some point. As always, time will tell.