Bilibili's Convertible Gamble: How Morgan Stanley's Underwriting Fuels Volatility

Bilibili, the Chinese video and streaming giant, has embarked on a high-stakes financial maneuver that has investors buzzing: a $690 million convertible note offering paired with a concurrent share repurchase. At the heart of this strategy is Morgan Stanley's role as a key underwriter—a decision that has injected both liquidity and volatility into the stock. For investors, the question isn't just whether Bilibili can sustain its growth trajectory, but how the interplay of short positions, convertible arbitrage, and corporate confidence will shape its stock in the months ahead.

The Corporate Actions Driving the Drama

Bilibili's dual moves—issuing convertible notes with a 0.625% coupon and a concurrent repurchase of 5.5 million Class Z shares—appear aimed at stabilizing its capital structure while signaling confidence in its long-term prospects. The notes, due 2030, carry a 27.1% conversion premium over Bilibili's May 2025 stock price, meaning investors can exchange them for shares only if the stock hits a significantly higher price. This premium creates a dual dynamic: it incentivizes upward momentum but also introduces a risk of downward pressure if the stock falters.

Meanwhile, the repurchase of shares, valued at HK$782.9 million, directly reduces the float and could support prices. Yet this optimism is tempered by the Concurrent Delta Offering, a separate sale of 10.28 million borrowed shares to hedge convertible arbitrage positions. Here, Morgan Stanley's role as an underwriter is critical: by facilitating the borrowing of shares to create short positions, the firm enabled investors to bet against Bilibili's stock while holding the notes—a classic arbitrage strategy.

The Short Position Catalyst: A Double-Edged Sword

The Delta Offering's short positions are not Morgan Stanley's own, but the firm's involvement underscores a broader market reality. Convertible arbitrageurs, armed with borrowed shares, can short Bilibili while buying the notes, profiting if the stock declines. This creates structural downward pressure on the stock, even as Bilibili's management signals confidence through buybacks.

The math here is stark: if the convertible notes' conversion price (set at a 27.1% premium) isn't met by the stock, arbitrageurs could force Bilibili to issue shares at a loss or absorb dilution. This creates a “conversion wall” that could amplify volatility—especially if short sellers push the stock lower.

Risks and Opportunities in the Crosshairs

For bulls, Bilibili's repurchases and the management's decision to allocate funds to buybacks rather than debt repayment signal belief in the stock's undervaluation. The convertible notes' high premium also acts as a floor: if the stock rises, holders are incentivized to convert, limiting downside.

For bears, the short positions and arbitrage dynamics create a self-fulfilling prophecy. If the stock languishes below the conversion price, arbitrageurs may aggressively short, compounding declines. The 27.1% premium also raises the bar: Bilibili must deliver growth that justifies a steep valuation jump, which is far from certain in a slowing Chinese tech sector.

The Investment Dilemma: Play the Volatility, or Bail?

Investors now face a binary choice. Those betting on Bilibili's long-term growth—a bet on its gaming and anime content dominance—might view the volatility as a buying opportunity, especially if the stock dips due to short selling. Meanwhile, traders could exploit the swings via options or inverse ETFs tied to Bilibili's stock.

However, the risks are acute. If Bilibili's user growth slows further or regulatory headwinds intensify, the convertible notes' conversion pressure could turn into a liquidity crisis. The short positions, while not Morgan Stanley's own, amplify this risk by creating a liquidity drain on the stock.

Final Analysis: A High-Reward, High-Risk Gamble

Bilibili's corporate actions have turned its stock into a volatility magnet, with Morgan Stanley's underwriting serving as both a safety net and a catalyst for uncertainty. For aggressive investors willing to stomach swings, the conversion premium's tailwind and buybacks offer a potential upside. Yet the short positions and arbitrage dynamics make this a game for the bold.

The verdict? Investors should proceed with caution, but not walk away entirely. Consider a small position paired with protective puts—or wait for clarity on whether Bilibili can hit the conversion price. This isn't just about a stock; it's about who wins the battle between management's optimism and the market's skepticism.

In the words of an old Wall Street adage: “Volatility is opportunity spelled wrong.” For Bilibili, the opportunity lies in proving its worth. The clock is ticking.