In my last portfolio update, I revealed a position in HUYA Inc. (NYSE: HUYA) which I recently undertook. I had a long position in the company at a purchase price of USD 14.88.
I was a little skeptical at first given the uncertainty of the Chinese strict regulation and a lot of the Chinese companies have been impacted negatively in the past few months. However, upon further deep dive into the company and its prospectus, I decided to put faith in my decision.
Based on the price action alone in the past 5 years, this does not look anywhere near justice. In fact, it looks like a company in trouble. Basically, it is a very predictable movement in the price action where the share price visited near the low of $15 in each of the year in 2018, 2019, 2020 and 2021 and then bounced back up strongly thereafter.
While growth rate is visibly slowing down in some of the key operational metrics in the past few quarters due to a saturated market where DOUYU and BILIBILI are competing with them, I believe there will be a transitional change in the business monetization model once post-merger with DOUYU is approved and done with.
Together with an undemanding valuation which I have explained more in detail below, this makes it a calculated buy at this point.
But first, let’s take a look at the business model of this company.
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| Source: Yahoo Finance |
Business Model
HUYA INC. is a one of the leading game live streaming platform in China with a large and active game live streaming community.
The company was initially established in 2014 as a game live streaming business unit of YY INC.
HUYA cooperates with e-sports event organizers as well as major game developers and publishers, and has developed e-sports live streaming as one of the most popular content genres on its platform.
Popularly known as the “Twitch of China”, HUYA is the first Chinese company to expand into the West with its first ground breaking deal with Team Liquid (one of the most valuable e-sports team around the world).
Emergence and Popularity of E-Sports
The emergence and popularity of e-sports tournament worldwide is on the rise.
In the West, e-sports tournament has consistently attracted more than 100m viewers in the past 3 years and this number is growing rapidly across the years.
In Asia, e-sports was featured as a medal event in the 2019 SEA Games in Manilla while there are discussion about including e-sports tournament as a demonstration sport in the upcoming 2024 Paris Summer Games.
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| Source: DBS |
These development built the foundation for the industry needed to succeed in today’s world.
We see massive number of organizers holding gaming competitions where the top prizes can amount to million of dollars. In fact, the prize money for 2019 DOTA 2 International competition held in Shanghai amounted to a total of USD34 million.
According to a report by NewZoo, the industry is expected to grow at an exponential of 25% over the next 3 years. This bodes well for a relatively young industry which is gaining momentum.
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| Source: NewZoo |
HUYA’s Huge Opportunities Lies in its Transformation of its Business Model
When someone look at HUYA earnings result, they quickly point out that the growth has been stalling and slowing in the past few quarters.
If we look at some of the data from the earlier years, they’ve managed well to sustain the growth in the Monthly Active Users (MAU), Mobile MAU and Paying Users (PUs) – building an ecosystem around the platform to keep them engaged.
The current business model of monetizing the platform today is tricky as HUYA generates the majority of 95% of their revenue from the sales of its virtual gifts on its live streaming platform while only 5% of the revenue comes in from digital advertising.
This means paying users, also known as “fans” come in to stream and watch their favorite gamers perform and then purchase and send gifts to them. As a streaming platform, HUYA gets a cut of that gift fees.
You can see that the room to maneuver this is very low as conversion tends to gyrate within the 3-4% rate.
This means that for every 100 active users you bring in to the platform, only 3-4 people are contributing to its topline. The rest of the 97 are what I call as active but non-contributing to the company’s revenue. In other words, opportunities are “wasted”.
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| Source: 3Fs Working Compilation |
Our generation today consume a large part of information from the internet today.
The ability to create an eco-system inside and within its large monthly active customers mean that there is clearly huge opportunities within the monetization model that they have yet to tap into.
While this currently contributes only 5% of the company’s topline revenue, they will be able to quickly scale up their growth topline should they change their business model to incorporate more advertising, subscription and broadcasting – which I am sure is already in the pipeline now that Tencent is the controlling shareholders post-merger.
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| HUYA needs to monetize the model better to utilize all these available and engaged MAUs |
Lesson to learn from Twitch
Merger with DouYu
For a long time, the competition within the streaming and gaming space has been dominated by big players such as HUYA and DOUYU. The planned merger of HUYA and DOUYU will create one large dominant player in the industry.
This means that once the two companies merge, a gigantic one combined platform with a market value of over US$7 billion will be created and it captures more than 80% of the entire market share within China.
The merger may provide many economies of scale within the space of sharing one common platform and operational efficiencies without having to think about wastage and challenges that they have previously faced against one another.
Like HUYA, DOUYU’s unit economic growth is visibly slowing down as well, as evident from the lower increase in the monthly active user and paying users conversion.
Post-merger, should it be approved, will see DOUYU gets delisted from the US market while HUYA will remain as an enlarged entity.
HUYA is offering 0.73 American Depository Shares (ADS) for each DOUYU ADS
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| Source: CaixinGlobal |
Financials: Cheap Valuation
HUYA is today valued at a market cap of around US$3.5b while DOUYU is valued at around US$2.9b – I think it’s incredibly cheap at how the market is valuing them at the moment.
A quick look at the balance sheet across the past 5 years and you can see that the net assets of the company have been growing larger and healthier. This gives us the assurance that at least the company is moving into the right direction.
As at 31 March 2021, the company has more than RMB 9.7b in cash equivalent (sum of Cash and cash equivalent, Restricted Cash and Short-term deposits) and no debt borrowings. Most of the liabilities are related to the accrued and deferred revenues.
If we take the total of the cash equivalent of RMB 9.7b (~USD 1,481m) divided by the 236.2m number of shares outstanding, we get around USD 6.2 / share.
This means that at the current market cap of around $3.5b, close to 40% of current market cap belongs to cash value in their books. If we further add the investments portion, this will add another 10% of the current market cap to 50% overall.
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| Source: Balance Sheet FY2016-2020 |
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| Source: Earnings Result Q1 FY2021 |
Furthermore, the company has garnered US$1.67b in total revenues for FY2020, which puts the current valuation at Price/Sales of only 2x (Current Market Cap / Total Annual Revenue).
If we exclude the abovementioned existing cash and investment, this will put the company’s valuation at only Price/Sales 1x (ex-cash and investment). This is incredible cheap even for a company that’s not growing, let alone one that is in the industry leader like HUYA.
To give a perspective of reminder, Amazon bought Twitch back in 2014 at a value of $970m at around Price/Sales of 70x and today Twitch is estimated to be worth $20b. While we don’t expect the combined entity of HUYA and DOUYU to get anywhere near Twitch for the near term, I think there’s still room for upside.
Final Thoughts
I’ve put some money in my position for HUYA because I thought there are greater risk reward for the company at the moment which might paid-off.
Clearly, a lot of things can go wrong from here, for example the merger is not approved which might provide a setback to the company going forward.
Currently, HUYA short volume ratio is a high 32% and I believe there are many who are suppressing the company’s actual worth because of many of such uncertainty.
With the post-merger play ongoing and a transformation in the business model, as well as an undemanding valuation, a 100% upside target to $32 is not unlikely in the next 12 months. This puts the company at a market cap of around $7b or a price to sales (TTM) multiple of 4x, which is still very much reasonable for such a company.
As always, do your own due diligence and let me know what you think in the comments below.
brian is the best
uncle168,
cash is king
initially gov give out money as they though covid at most last 1 year so it created a false bull market
rising assets prices gave everyone the illusion all is well and the feel good factor made you feel rich and spend more but the wealth is only on paper and not cash
the china engineered bio weapon is now invincible as it mutates to spread faster and kill all ages evading vaccines testing and antibodies treatment
now gov are broke and they do not dare to tell the people this will never end until human become extinct
our lives have to change permanently with no social activity or travel forever
in the future there will be no offices schools airport nor shopping mall
one would be born and stay in place until old age as delivery of food and goods will be the norm using drones
hawker centres will have no seats and flying drones will deliver food to hdb flats
the gov have to redistribute wealth using a communist model via estate duties
the future is bleak for singapore as nobody wants to be pm of a country addicted to foreign labour, an aged and dying population and people fighting for their own race and interest ending up in freak elections and a revolving door government
ah gong would turn in his grave when he see how the gov and people are focusing on race which is a problem that will never be resolved due to deep seeded differences in beliefs instead of bread and butter issues like jobs and cost of living and healthcare
the future after 2020 is bleak even b4 covid as the population above 55 exceed those below 55
this means the workforce is lesser than those drawing on their pension or cpf
the cpf return is higher than the fed rate which means it is unsustainable in the long run and eventually will not be able to pay out if the underlying investment under perform due to financial crisis leading to the devaluation of the sgd
singapore needs foreign capital and labour to stay alive, if covid is prolonged singapore is finished
haiz
uncle168,
the common vector for community case is the public toilet
the gov has to close down most of the public toilet and discourage people from using them except people working there
it is likely dine in will be banned for one more month and wfh as default also
b1617 is spreading fast in the community i estimate 2m kenna already as gov scold the maid go to test centre
if the gov test everyone it is likely 4m had covid last year and 2m had b1617 and no symptoms as stinkies have bcg vaccine to protect the lungs
but future mutation will be more deadly as the virus learns how to kill faster with evey mutation
haiz
uncle168,
pa can sue the women for sedition as she seem to be fanning the fire as pa has apologised
the gov should just use the internal security act to lock up people who try to stir up issues on race or religion
these issues will never be resolved as equality has always been an aspiration which we give and take to maintain social cohesion
the gov must not be soft on this
the people understand this but young people are idealistic but when the fire start to burn regrets is too late
haiz
uncle168,
#steadylah the sti is going to crash
keekeekee
uncle168,
the high oil price is crazy plus the gov raised petrol tax last year its fueling food inflation in hawker and essential items like rice and canned food
eventually people cut back on consumption, sme go bankrupt, retrenchment, bank loan default
fed rate are at zero, it can't raise nor cut, stock market & oil at record high
if the market crash and inflation continue to spike with rising unemployment what tool does the fed have left?
we are in uncharted territory
god speed
keekeekee
uncle168,
banks would be allowed to swap reits debt for units or like sia issued zero coupon convertible bonds to prevent massive foreclosure
many people have mortgages a sudden plunge in valuation would trigger a banking crisis if the fed decide to hike rates as the us economy is booming while asia reits bubble has started to burst
keekeekee
uncle168,
the strategy now is to slowly let foreigners that got retrenched to go home and replace them with retrenched stinkies because the gov has no more money to give out
so sectors like banking, travel, entertainment, restaurants will be hired by healthcare, it, central kitchen, logistics
the opportunites are in liquidation restructuring in banking to prevent massive foreclosure, structured eldercare using cpf to pay for end of life support and logistics for essential items supply chain
everything else is going to go bankrupt including the property bubble as the population shrinks and foreigners go home nobody will rent nor buy singapore properties
keekeekee
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uncle168,
thg seems to nearly breach buyback rules:
"SGX Regco states that issuers should be paying no more than 105 per cent of the average of the closing market prices of the shares over the last five consecutive active trading days – referred to as the Maximum Purchase Price Limit. Share buybacks exceeding 30 per cent of the daily on-market traded volume are also considered excessive."
its buyback is moving the price upwards with significant volume
average closing price = 1.28
105% = 1.344
thg bbp = 1.32491
volume % = 427300/1376400 = 31% which is more than the 30% limit
thg has breached sgx sbb rules
keekeekee
uncle168,
thg also brought back shares less than 1 month after its fy2020 results breaching sgx listing rules
https://www.sgx.com/zh-hans/media-centre/20181126-what-companies-should-observe-when-conducting-share-buy-backs
"The Listing Rules do not expressly prohibit a company from buying its own shares during any particular period. However, as best practice, a company should refrain from carrying out share buy-backs during the 2 weeks immediately preceding the announcement of its quarterly financial statements and 1 month immediately before the full-year financial statements."
"Some share buy-back activities were excessive, for instance, purchases that exceeded 30% of the daily on-market traded volume. These may interfere with the trading of shares, and result in the artificial inflation of the trading volume and price of the security."
jialat menz i think sgxregco going to query liao
keekeekee
uncle168,
oops its 1 month before fy2020 not after
keekeekee
uncle168,
i think the ceo want the market cap to hit S$1b which is $1.42 then can hao lian is billion cap stock leh
but today thg cannot buy back its shares above S$1.296 or breach the rules
keekeekee
uncle168,
seems food empire also shh 40% of volume as illiquid
but it never buy so high
keekeekee
uncle168,
looks like swiss watch export peaked in april
no more free money from gov to buy lorlex
keekeekee
Hey B maybe you should moderate comments? Too much spam and bots
uncle168,
a lot of sg50 notes on the market now
knn cannot deposit in machine
mas should recall all the sg50 notes they are too troublesome to use
keekeekee