Bilibili, Inc. (BILI, BUY) - 2Q26: Quality Community Shines in the AI Era; Ads Resilient, Games Set for 4Q Recovery; Maintain BUY but Lower PT to $25

Bilibili, Inc. (BILI, BUY) - 2Q26: Quality Community Shines in the AI Era; Ads Resilient, Games Set for 4Q Recovery; Maintain BUY but Lower PT to $25 We remain positive on Bilibili following 2Q26 results. Advertising continued to grow materially faster than the broader industry despite a softer macro environment, while healthy user engagement and continued operating leverage support further earnings growth. Gaming remains in transition, but the September launch of Lumi Master and a broader pipeline should position the segment to return to y/y growth as early as 4Q26. More importantly, we believe Bilibili's high-quality content ecosystem and deeply engaged user community could become increasingly valuable in the AI era. As AI lowers content creation costs and expands content supply, trusted creator-user relationships, authentic community interactions, and effective content distribution should become scarcer—and more valuable—assets. We maintain our BUY rating but lower our price target to $25 from $30, reflecting lower near-term revenue estimates and a more conservative valuation assumption amid macro uncertainty. 2Q26 results were broadly in line, with continued operating leverage. Revenue increased 8% y/y to RMB7.94bn, broadly in line with our RMB7.96bn estimate. Advertising revenue rose 28% y/y to RMB3.13bn, VAS increased 5% to RMB2.97bn, while mobile games declined 14% to RMB1.39bn on a difficult San Mou comparison. Gross margin reached 37.2%, while non-GAAP operating income increased 21% y/y to RMB696mn and margin expanded to 8.8% from 7.8%. User trends remained healthy. DAUs increased 7% y/y to 116.5mn, average daily time spent reached a record 113 minutes, and total time spent grew 14%. Monthly interactions increased 9% to 17.4bn, while average follows per active user rose 11% to 96. We believe these metrics highlight that Bilibili's core value lies not only in content supply, but also in the depth of relationships among users, creators, and content. Advertising continues to outperform despite macro headwinds. Advertising revenue grew 28% y/y, driven by improving conversion, advertiser penetration, and broader monetization scenarios rather than simply higher ad load. Management indicated ad load and eCPM were broadly stable q/q, while advertiser count increased 14%, and conversion efficiency improved 19% y/y. Macro pressure is becoming a more meaningful constraint on industry ad budgets, and we now forecast 22% y/y growth in 3Q and 17% in 4Q, implying roughly 23% growth for FY26. While growth should moderate from 2Q, Bilibili is still likely to materially outperform the broader advertising market and continue gaining share. Games could return to growth in 4Q. Mobile game revenue declined 14% y/y in 2Q as San Mou moved further into its mature lifecycle. Management expects 3Q game revenue to remain roughly flat q/q before returning to positive y/y growth in 4Q. The key near-term catalyst is Lumi Master, Bilibili's self-developed simulation title scheduled for global launch on September 17. Given the late-quarter timing, we expect limited 3Q contribution but a more meaningful impact in 4Q. Early testing feedback has been encouraging, and Lumi should also provide an important test of Bilibili's ability to develop and operate proprietary titles with global appeal. San Wang is expected around year-end, followed by Ragnarok Online 3, MISTBOUND, and Three Kingdoms: The Ravages of Time in 2027. We forecast game revenue declining 8% y/y in 3Q before rebounding 9% in 4Q, potentially marking the start of a new growth cycle. We lower our FY26/27 game estimates to reflect the softer near-term base, but successful execution of Lumi could create upside. Bilibili's community may become more valuable in the AI era. Generative AI is rapidly increasing content supply, but greater supply does not necessarily create more high-quality attention. As AI-generated content proliferates, trusted creator-user relationships, strong community interactions, and effective content discovery could become increasingly scarce. And we believe Bilibili is well positioned in this respect. Operating leverage remains intact. Management expects 3Q gross margin to remain roughly stable q/q and non-GAAP operating margin to reach approximately 10%, versus 8.8% in 2Q. The company also reiterated its longer-term gross margin target of 40%-45% and operating margin target of 15%-20%.