IPO Update: DouYu Files Proposed Terms For U.S. IPO

|
About: DouYu International Holdings Limited (DOYU)
by: Donovan Jones
Summary

DouYu aims to raise $859 million in a U.S. IPO.

The company has developed an online live streaming service for Chinese users.

DOYU is growing at an accelerating rate, is operating nearly at breakeven, and is producing positive cash flow from operations.

The IPO appears reasonably valued, so it is one worth considering.

Quick Take

DouYu (DOYU) has filed to raise in excess of $859 million from the sale of ADSs in a U.S. IPO, per an amended F-1/A registration statement.

The company provides an online live streaming system for Chinese users.

DOYU is accelerating its high rate of growth, is operating at breakeven, and the IPO appears reasonably valued.

Company & Technology

Wuhan, China-based DouYu was founded in 2013 to develop and operate a game-centric live streaming platform in China.

Management is headed by Founder, CEO and Director Shaojie Chen, who previously founded and managed Shenzhen Zhangmenren Network Technology.

The firm’s monetization channels consist of live streaming, advertisements and others, of which live streaming accounted for 86.1% and 80.7% of its total revenue for 2018 and 2017, respectively. Its live streaming income is generated mainly by the sales of virtual gifts.

For Q4 2018, DouYu had 153.5 million average total Monthly Active Users [MAUs], a year-over-year increase of 14.3% from 134.3 million average total MAUs during Q4 2017.

As of the end of 2018, the company had 6 million registered streamers, of which 5,200 were ‘top streamers’ with whom DOYU has signed a contract - an increase from 3.9 million streamers and 2,000 ‘top streamers’, respectively, from last year.

DouYu’s average total eSports MAUs are about 80.9 million and 95.8 million in Q4 2017 and 2018, respectively.

Investors in DouYu include Tencent (OTCPK:TCEHY), CMB International Capital, Nanshan Capital, Phoenix Capital, and Sequoia Capital China, among others (Source: Crunchbase).

Customer/User Acquisition

The company depends primarily on organic growth and states that more than 92% of its new mobile users for Q4 2018 installed DouYu’s app without third-party marketing.

Sales and marketing expenses as a percentage of revenue have been dropping as the firm scales operations, per the table below:

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

To March 31, 2019

8.3%

2018

14.7%

2017

16.5%

Sources: Company registration statement and IPO Edge

The sales efficiency rate, defined as how many dollars of additional gross profit are generated by each dollar of sales & marketing spend, was a very high 6.6x in the most recent quarter, as shown in the table below:

Sales & Marketing

Efficiency Rate

Period

Multiple

To March 31, 2019

6.6

2018

3.2

Sources: Company registration statement and IPO Edge

Average Revenue per MAU (Monthly Active User) had been rising in previous years but fell in Q1 2019, per the table below:

Average Revenue Per

MAU

Period

ARPM

Variance

To March 31, 2019

$1.39

-35.1%

2018

$2.15

36.8%

2017

$1.57

Sources: Company registration statement and IPO Edge

According to a 2018 market research report by Streamlabs, the global live streaming industry was valued at $10.1 billion in 2018 and is projected to reach $13.1 billion in 2019.

DoYou competes with other large social networks, video streaming platforms, and other online entertainment services that provide alternatives to watching eSports competitions.

Direct and indirect competitors include:

  • HUYA (HUYA)

  • Huajiao

  • Youku Tudou

  • Bilibili (BILI)

  • iQIYI (IQ)

Financial Performance

DOYU’s recent results can be summarized as follows:

  • Accelerating and high total revenue growth rate
  • Growing gross profit and gross margin
  • Slightly negative operating profit; positive net profit
  • A sharp swing to positive cash flow from operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

To March 31, 2019

$221,900,000

119.7%

2018

$544,500,000

90.6%

2017

$285,712,121

Gross Profit (Loss)

Period

Gross Profit (Loss)

To March 31, 2019

$30,300,000

2018

$22,500,000

2017

$(712,121)

Gross Margin

Period

Gross Margin

To March 31, 2019

13.65%

2018

4.13%

2017

-0.25%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

To March 31, 2019

$(7,200,000)

-3.2%

2018

$(128,000,000)

-23.5%

2017

$(93,696,970)

-32.8%

Net Income (Loss)

Period

Net Income (Loss)

To March 31, 2019

$2,700,000

2018

$(130,600,000)

2017

$(92,863,636)

Cash Flow From Operations

Period

Cash Flow From Operations

To March 31, 2019

$40,592,091

2018

$(50,301,943)

2017

$(57,732,789)

Sources: Company registration statement and IPO Edge

As of March 31, 2019, the company had $641.9 million in cash and $257.1 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2019, was a negative ($6.1 million).

IPO Details

DOYU intends to sell 67.4 million ADSs, with each ADS representing one-tenth of an ordinary share at a midpoint price of $12.75 per ADS for gross proceeds of approximately $859.2 million, not including the sale of customary underwriter options.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $4.5 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 20.76%.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:

approximately 35% for investment in our content with a continued focus on providing premium eSports content and further expanding our content genres;

approximately 30% for research and development, to continue to strengthen our technologies and big data analytic capabilities to enhance user experience and achieve operational efficiencies;

approximately 15% for further investing in marketing activities for promoting our brand and increase our user base; and

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

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are Morgan Stanley, J.P. Morgan, BofA Merrill Lynch, and CMBI.

Commentary

DouYu is a Tencent-backed firm which is a leading streaming video service in a fast-growing market in China.

The firm’s financials show a company whose topline revenue growth is high and accelerating. It is essentially operating at breakeven and is generating positive cash flow from operations.

The market opportunity for live streaming services is large and growing quickly, but is primarily focused on younger demographics.

Competition is fierce within the industry and DouYu likely could not have achieved its growth rate or results to-date without its close relationship with Internet giant and investor Tencent.

On the legal side, like many Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity. U.S. investors would only have an interest in an offshore firm with contractual rights to the firm’s operational results but would not own the underlying assets.

This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

As to valuation, compared to HUYA, the DOYU IPO assumptions appear in line and reasonable, especially given its more favorable earnings per share results and higher growth rate.

Expected IPO Pricing Date: July 16, 2019.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.