iQIYI Q3 2023 Preview Financial Report: Performance Expected To Improve, ARM Optimization Supports High-Quality Growth In Membership Revenue

On November 21st, iQIYI will release its Q3 2023 financial report. On October 18th, BOCOM International released a preview of iQIYI's Q3 2023 financial report and stated that the third quarter performance is expected to improve. Measures such as optimizing ARM (average revenue per user) will support high-quality growth in membership revenue. However, movie revenue may fall slightly below expectations.

Stock Rating: BUY

Closing price (at the time of the preview release): 4.650$ (October 18, 2023)

Current closing price: 4.970$ (November 9, 2023)

Target price: 6.9$

(1). The adjusted profit forecast for Q3 2023 has been raised.

(2). iQIYI's drama playback share remains the industry's first, with ARM promotion driving high-quality growth in membership revenue.

(3). The advertising growth rate may be better than the market average, while movie revenue is slightly lower than previously expected

The main business is shown in the following figure:

iQIYI's largest proportion of revenue is from the membership services sector, accounting for 61.08% of the total revenue. BOCOM International predicts that iQIYI's membership revenue will achieve high-quality growth in Q3 2023. iQIYI's online advertising sector accounts for 18.39% of the total revenue, and BOCOM International predicts that iQIYI's online advertising growth rate will be better than the market average in Q3 2023.

It is expected that iQIYI's Q3 revenue will be RMB 8 billion, with a YoY/HoH growth of 7%/3%, slightly lower than previous expectations due to intense competition in the movie industry leading to slightly lower movie revenue. However, they expect that content cost optimization will improve gross profit margins, and adjusted operating profits are expected to increase by 69% YoY to RMB 890 million, exceeding market expectations.

iQIYI's drama playback share in Q3 is 36%, maintaining its leading position in the industry. BOCOM International predicts that Q3 membership revenue will increase by 19% YoY to RMB 5 billion, but the number of members may decrease slightly to 108 million MoM. However, monthly ARM is expected to improve by 12%/5% YoY/HoH driven by optimization and refinement operations based on high-quality content, supporting membership revenue growth despite fluctuations in the number of members during the quarter.

iQIYI's Q3 variety show playback share of regular episodes is 23%, lower than the same period last year and Q2. However, popular variety shows such as "Joy of Life" and top-rated dramas are still expected to drive the improvement in brand advertising revenue YoY/HoH. Analysts predict that optimization of marketing products and budget increases in industries such as online services, e-commerce, and gaming will drive the rapid growth of effective advertising. It is expected that Q3 advertising revenue will increase by 34%/12% YoY/HoH to RMB 1.7 billion, outperforming the overall advertising market. The box office revenue from the produced movies is slightly lower than previous expectations, but new films "Ordinary Men and Women" and "Hot Search" will be released in November and December respectively, which may contribute to an increase in the fourth quarter.

BOCOM International has made minor adjustments to iQIYI's revenue expectations for 2023/24 and raised its adjusted net profit forecast by 2%/3%. The target price is maintained at $6.9, based on an industry average of 15 times the 2024 P/E ratio and 1.4 times the market-to-sales ratio. The company has a rich content reserve, and upgrading membership rights and value-added services can improve member value perception, while cost optimization will bring more profits. Therefore, BOCOM International maintains a buy recommendation.