iQIYI (IQ) made a big move yesterday (+9%) after announcing
a partnership with Ctrip (CTRP). With IQ being a recent IPO (March 2018) but
not a well-known name in the U.S., we wanted to provide some color on what they
do and what this deal with Ctrip means. iQIYI is known as the "Netflix of
China." It's a content streaming company that is majority owned by internet
giant Baidu (BIDU). In fact, when IQ came public, it was the largest tech IPO
since Snap's (SNAP) $3.4 bln IPO last March.
IQ reported that its total subscribing members as of the end of the second quarter numbered 67.1 mln -- a 75% increase year/year -- with paying subscribing members forming the majority of that total, numbering 66.2 mln. The platform also receives traffic from free, non-subscribing users. Comparatively, Netflix (NFLX) reported 130.14 total memberships globally as of the end of its second quarter of this year, representing year/year growth of a little over 25%; Netflix’s domestic memberships totaled 57.38 mln, meaning that looking exclusively at their home markets, NFLX is actually smaller than IQ.
In terms of content, IQ features original content as well as a variety of professionally-produced and partnered-generated content. Action mystery series The Lost Tomb, launched in 2015, was one of its first high-budget original internet drama series, and it generated over 100 mln views within the first 24 hours of its release. Since then, the company has released several other award-winning, highly popular series, such as The Mystic Nine and Burning Ice, which had together aggregated 13 bln total views by the time of IQ’s IPO, as well as other genres of entertainment, such as the hit competition reality show The Rap of China and the original virtual reality film “The Last One Standing VR”. Recently, this summer’s blockbuster iQIYI release, Story of Yanxi Palace, a historical costume drama concerned with revenge and romance during the Qing dynasty, has also proven wildly popular, reportedly garnering record-breaking viewership, and has now been made available to audiences in over 70 territories globally, especially throughout Asia.
In addition to its own content, IQ uses predictive algorithms and big data to select third-party content. So far, it has been quite successful in doing so, as it managed to feature 42 of 2017’s top 50 drama series, film titles, and variety shows streamed on the internet in China. IQ also has dedicated apps for sports media coverage, children’s shows (including imported programming), and online reading. IQ generates revenue through memberships, online advertising, and content distribution.
Over the past few years, membership revenues as a percentage of total revenue have been on the rise. Specifically, the company’s subscription revenue rose from 18.7% in 2015 to 33.5% in 2016, and it then increased further to 37.6% in 2017. The company is expecting membership revenue to remain at a similar level for the foreseeable future.
As noted above, IQ's parent company is Baidu, which has retained its majority stake in the company post-IPO. This relationship with BIDU creates a significant competitive advantage in that through BIDU, IQ has access to significant technology, infrastructure, and financial support. For instance, the company has been able to apply BIDU's artificial intelligence technology to predict which content is most likely to be popular among subscribers.
The company’s addressable market is obviously massive, given the substantial growth of the online entertainment industry in China, which swelled from RMB50.8 bln in 2012 to RMB156.9 bln in 2016. It is projected to reach RMB688.4 bln in 2022 with video leading the way. According to iResearch, internet videos accounted for 80% of time spent on the internet, putting IQ in the sweet spot to benefit from online entertainment momentum. Furthermore, as internet video platforms in China increasingly focus on original content and intellectual property protection, internet users are more likely to pay for membership services from more than one platform, according to the iResearch Report.
Turning to the Ctrip news, iQIYI announced a far-reaching new partnership with Ctrip, Asia's largest online travel agency and the second largest such agency globally. The agreement will enable iQIYI V7 VIP members to enjoy all of the exclusive perks available to Ctrip's Prime Members, including discounts on hotel bookings and entry to sightseeing attractions, fast track airport security service, priority access for train ticket purchase, and more.
"V7" is the highest of iQIYI's seven levels of VIP membership ranking for users. Customers can reach higher levels of membership by accumulating points, calculated through factors such as membership payment status, number of logins, and amount of content viewed. The new partnership with Ctrip adds to the benefits already available exclusively to iQIYI V7 VIP members, which include discounted cinema tickets, priority attendance at star-studded offline events, and exclusive showings of new blockbusters.
iQIYI has had its ups and downs since its IPO debut in late March. By mid-June, it hit a high of $46.23, but has pulled back since then to the low $30 area. There are definitely some positives here. If you consider that 20-25% of the world's population lives in China, you can see that the stock’s growth potential is enormous, and its strong content offerings, efforts to expand the variety of its featured media, and user perk benefits seem to continue to generate excitement for the company amid its market. However, it's still too early to be sure that this business model will work out in China, as IQ, which recorded a net loss per ADS of US$0.45 in its second quarter, is not expected to be profitable for some time. Regardless, it's definitely a name to keep on the radar.
- OUR VIEW
- LEARNING CENTER