Huya And DouYu: Mega Growth And Merger Potential

Summary

• Huya and DouYu are an emerging duopoly in the Chinese game livestreaming market.
• The long-term domestic market opportunity is large and rapidly growing, offering new opportunities for monetization.
• Tencent holds significant stakes in both businesses, with a controlling share in Huya. There's a real possibility of a merger that would unlock huge shareholder value for both companies.
• HUYA and DOYU trade at NTM EV/S of 2.1x and 2.0x respectively, offer significant upside. I've invested in both for a balanced play on the market.

Photo by Alex Haney on Unsplash

Opportunities for undervalued hyper-growth have been rare in the US markets for some time, with pure growth stocks trading at all-time highs. It makes sense for investors to search elsewhere, such as China, that offers geographic diversification benefits and is decoupled partially from systemic U.S. market risks.

Huya (NYSE: NYSE:HUYA) and DouYu (NASDAQ: NASDAQ:DOYU) together are a rapidly growing duopoly that dominates China's game livestreaming market. At first glance, both their valuations appear to be in bargain territory for their growth, market opportunity, and profitability profiles. They're equally sized competitors, which may scare away investors looking for textbook category leaders. However, Tencent holds considerable stakes in both companies and there's a possibility of a merger that may unlock immense shareholder value for both businesses.

In this article, I've introduced the companies, the broader market opportunity, discussed the Tencent factor at length, and concluded with my reasoning for buying both stocks.

Introduction to the Chinese Game Livestreaming Platforms

Simply put, video game live streaming is the activity in which video gamers stream their gameplay to a live audience. This rapidly growing trend has been encapsulated by the commonly used Twitch platform in the United States that was bought out by Amazon for slightly under $1 billion in 2014. During June 2020, Twitch recorded over 7 million active streamers and 1.6 billion hours watched (source), a sharp increase from 2019 levels on account of stay at home trends and overall secular growth of streaming and e-sports.

In China, the market for domestic Twitch-like platforms has been in hyper-growth for some time and is increasingly dominated by two major players, Huya and DouYu. Both businesses have very similar business models that offer a platform that sits between content, users, and advertisers.

• Platform: Mobile Apps and Websites that

Analyst’s Disclosure:I am/we are long HUYA, DOYU. 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.