Huya Files Terms For U.S. IPO

Summary

• Huya aims to raise $165 million in a U.S. IPO of its ADSs.
• The firm is a spin-out of parent YY and provides live video streaming content to younger Chinese demographics.
• Topline revenues are growing rapidly and efficiencies are improving, but the firm faces strong competition in a desirable market.

Quick Take

Huya (NYSE:HUYA) intends to raise $165 million in a U.S. IPO of ADSs representing underlying Class A shares.

The company is a large live game streaming service provider in China.

Huya is rapidly growing revenues, improving its cost and marketing efficiencies as it scales and is making good progress toward profitability, but faces significant competition.

Company & Technology

Guangzhou-based Huya was founded in 2014 to provide video game live streaming services as a business unit of its parent firm YY (YY).

Management is headed by CEO Rongjie Dong, who has been with the firm since 2016 and was previously EVP of parent firm YY.

The firm has a major live streaming and games partnership with Chinese Internet giant Tencent (OTCPK:TCEHY). Tencent also invested approximately $462 million in Huya’s Series B round in March 2018.

Major shareholders are parent company YY (55.5% voting power pre-IPO) and Tencent (39.8%).

Huya has created a web and mobile combination platform optimized for streaming live video and e-Sports content to young Chinese consumers.

e-Sports content is currently the most-watched aspect of the platform, with over 90 e-sports event organizers broadcasting more than 360 tournament matches or events. The site had more than 3.6 million streaming hours of other entertainment content in Q4 2017.

Customer Acquisition

Huya creates relationships with potential users/broadcasters primarily through word of mouth and through connections with major talent agencies in China. It claims to have ‘the largest talent agency network in China,’ according to a Frost & Sullivan report.

The site not only encourages viewers to interact with broadcasters but also with other viewers, creating what management views is a virtuous cycle of increased engagement between producers of content and viewers.

Notably, Huya intends to increase its focus on leveraging ‘AI technology and big data analytics to more identify high potential broadcasters,’ which will presumably add more compelling and engaging content that draws more visitors to the site.

The firm makes money through two aspects: advertising and the sales of ‘virtual items.’ Management says it intends to diversify its monetization channels and is looking into ‘paid on-demand streaming’ as another potential source of revenue.

In 2017, Huya’s cost of revenue has dropped below its total revenue:

• 2017: 88.3%
• 2016: 137%

Sales and marketing costs as a percentage of total revenue have been cut in half:

• 2017: 4.0%
• 2016: 8.6%

Management has turned an important corner in 2017’s results, showing that it can improve its cost of revenue significantly while reducing its Sales and marketing costs vs. revenue.

Market & Competition

The market for providing online entertainment to younger demographics in China is varied and extremely competitive.

According to a market research report by PwC on the China Media Outlook, it forecasts an average CAGR of 8.1% for the categories of Total TV and Video Revenue and Video Games for the period 2015-2020.

While there is some wiggle room for category definition, the overall growth in demand for online media in China is impressive.

The global entertainment media growth rate is forecasted to be a CAGR of 4.4% vs. China’s overall CAGR of 8.8% or double the global rate.

This portends good things for companies like Huya as long as they can stay relevant to young audiences and their fickle tastes.

Major competitive vendors that provide similar online video streaming services include:

• Tencent Video
• Youku Tudou
• Bilibili (BILI)
• iQIYI (IQ)

According to a 2017 South China Morning Post report of Jefferies equity analyst Karen Chan, the chart below shows video streaming market shares for older demographics within China:

Financial Performance

Huya’s recent financial results can be summarized as follows:

• Dramatic growth in topline revenue
• Swing to gross profit in 2017
• Swing to positive gross margin in 2017
• Swing to positive cash flow from operations in 2017

Below are the company’s financial results for the past two years (Audited GAAP):

(Source: Huya F-1/A)

Revenue ($)

• 2017: $336 million, 278% increase vs. prior
• 2016: $121 million

Gross Profit ($)

• 2017: $39.2 million
• 2016: ($45 million) loss

Gross Margin (%)

• 2017: 11.6%
• 2016: Negative

Cash Flow from Operations ($)

• 2017: $37.3 million cash flow from operations
• 2016: ($63.7 million) cash used in operations

As of December 31, 2017, the company had $68 million in cash and $112.3 million in total liabilities.

IPO Details

Huya intends to sell 15 million ADSs representing Class A shares at a midpoint price of $11.00 per share for gross proceeds of approximately $165 million.

The Class A shares will be entitled to one vote per share vs. ten votes per share for Class B shares.

Multiple share classes are a way for existing shareholders and management to retain voting control even if they lose economic control of the company in the future.

The S&P 500 Index no longer admits firms that have multiple share classes in its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s post-IPO market capitalization would be approximately $2.2 billion, excluding the effects of underwriter over-allotment options.

Management plans to use the net proceeds as follows:

for expanding and enhancing our product and service of offerings, including marketing and promotional activities to acquire users and strengthen our brand;

for investment in our content ecosystem and eSports partners to continue expanding our content genres and improving our content quality;

for research and development, to continue to invest in and strengthen our technologies; and

for general corporate purposes, which may include working capital needs and potential strategic acquisitions, investments and alliances.

Management’s presentation of the company roadshow isn’t available.

Listed bookrunners of the IPO are Credit Suisse (CS), Goldman Sachs (Asia) (GS), UBS Investment Bank (UBS) and Needham & Company.

Expected IPO Pricing Date: Thursday, May 10, 2018.

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