- Due to its relatively mature user base, HUYA is not as negatively impacted by the recent regulatory changes, as investors might expect.
- HUYA's cash position ($1.7B) is almost as big as the total market cap ($1.9B).
- The company has an EV/EBIT multiple of 1 and a PE ratio of 14.
- HUYA also has many competitive advantages over DouYu and its other competitors and I, therefore, give the stock a BUY rating.
With a combined market share of 80%, HUYA (NYSE:HUYA) and DouYu (DOYU) are the two market leaders in the Chinese game-centric streaming market. Recent regulatory changes have brought both stocks to historical lows. However, taking a look at the user demographics reveals that the market concerns about the future of HUYA and DOYU are overblown.
Besides the market conditions, in my analysis below I will also explain HUYA’s competitive advantages over its competitors, and show HUYA’s stunningly good financial situation ($1.7B cash and profitable business). As somebody who is living and working in China, I believe I can give readers a unique view of this company.
The Chinese government’s new regulations to limit the time that children are allowed to play games are currently the investors’ biggest concerns. By looking at the user demographics and the live streaming market outlook, I want to show that these concerns are overblown.
Market growth & market share
Important to know is that for game-centric live streaming HUYA and DouYu together have over 80% market share.
Industries that are dominated by such a small number of companies usually lead to very high profit margins for these companies, as competition is low. Therefore, it should really be no surprise that the government didn’t allow the planned merger of the two companies to go through, as they would control pretty much the whole market.
Going forward, the user base of game-centric live streaming in China is forecasted to grow with a CAGR of 9.4%.
The revenue growth is expected to be even over 20%. Keep in mind that these forecasts were made before the new regulations; new forecasts will certainly be lower. However, even with these new regulations, there is certainly still growth left for this industry.
To sum up the market situation: The large market share should give HUYA and DouYu great profit margins in a growing market.
The Chinese gaming market is very different from what we in the West might expect. The Chinese gaming market has much more women and mature users than in the West. In China, you can see people play games on their phones almost everywhere: at the hairdresser, in the gym, in the metro, and so on. I have 40-year-old female coworkers who play popular phone games like Tencent’s Honor of Kings ( 王者荣耀). Gaming in China is much more prevalent than in the West.
There are no official figures on HUYA's user demographics, however, on Chinese websites, there are different estimations about the age and gender of the users. Below is the one that I found most convincing:
According to these figures, there are 28.5% female users, and more importantly, only 28% of the users are below 24 years old, with an even smaller share being below 18. There are also other estimates in which the younger group is larger, but certainly, the group of 18 years and younger, who was targeted by the new regulations, is very small.
The new regulation will therefore not have a huge impact on HUYA in the short term. It is of course possible that due to the new regulation children will develop different hobbies instead of gaming and therefore reduce the long-term growth potential of HUYA. But it could also happen that children will watch even more gaming streams when their time limit for gaming has been reached.
But in any case, understanding the user demographic should definitely make investors of HUYA more confident in the stock, as the majority of the existing user base will not be affected by the new regulation.
To sum up: Gaming is much more popular in China, and the new regulation shouldn’t have a big impact on HUYA in the short term.
HUYA vs. DouYu: Users' opinions
I have researched on Zhihu what users think of HUYA vs. DouYu and have also asked some friends. There were two kinds of responses that I got.
Response A: HUYA is better
Response B: Both of them are the same, no difference.
Not a single person said DouYu is better. Also on the Apple Appstore, HUYA has a better rating (4.1/5) than DouYu (3.5):
Source: Chinese Apple Appstore
I am therefore very confident that HUYA’s app is better than DouYu’s.
Revenues & growth
HUYA and DouYu grew at almost the same pace over the last three years. The quarter-to-quarter growth rate of the two companies has been around 8-9%.
Please also note, that right now HUYA only earns 6% of its revenues via advertising. Therefore, there is still a huge revenue growth potential from the existing users.
Based on similar revenue and revenue growth, I would also expect a similar margin of the two companies. However, we can see that HUYA is much more profitable than DouYu.
HUYA has a very stable gross margin, which is also roughly 5% higher than DouYu’s:
However, the difference gets even bigger when looking at the EBIT margins:
The big difference in profitability mainly comes from two areas: DouYu spends much more money on getting popular streamers and also spends much more money on marketing and general administration. Interestingly, HUYA has higher profitability, despite spending 2% more of its revenues on R&D (7% of revenues vs. DouYu’s 5%).
For me, the higher profitability of HUYA is the “proof” that HUYA’s app and brand are better, as they can generate the same revenues and the same growth rates, without spending as much money as DouYu.
Also, when investing in a risky regulatory environment, I feel much safer investing in a company that already has stable profits. Therefore, I believe that HUYA is a safer and better investment than loss-making DouYu.
Both DouYu and HUYA have great balance sheets. HUYA has no debt and around $1.7B in cash and short-term deposits/investments (e.g. bonds). And DouYu also has no debt and around $1B in cash + short-term deposits/investments.
HUYA’s market cap is around $1.9B and DouYu’s is $1B.
Both companies are trading pretty much at the value of their net-cash position. If I didn’t have your attention before, by now I hope I have it!
Honestly speaking, making a valuation for a company with an almost negative enterprise value makes no sense. Obviously, an EV/EBIT multiple of 1 is too low. Also, HUYA’s PE ratio (which doesn’t consider the massive cash pile) of 14 is very low.
I will not set a price target, but I hope everybody can see that the fair value of the company is much higher than the current stock price.
Going forward, I believe the company is in a very strong position to not only succeed against possible new market entrants but also against DouYu.
Most people between 15 and 40 know HUYA. If they think of game streaming apps, only HUYA or DouYu will come to their mind.
For new competitors, it will be very difficult and very expensive to get to a similar level as HUYA and DouYu. Therefore, HUYA will have to spend much less on marketing compared to newer competitors.
HUYA’s sales are already very high, giving the company a big cost advantage over other players. Costs of central functions are therefore a much smaller percentage of revenues compared to the ratio of smaller companies.
Tencent (OTCPK:TCEHY), the biggest company for games in China is invested in HUYA (and DouYu). This gives HUYA a perfect partner and makes it also unlikely that Tencent will enter the market.
As shown above, I believe users think that HUYA has a better app than DouYu. App store ratings confirm my belief.
HUYA’s financials look great and the company seems to be positioned very well for the future. The huge cash position and a profitable business give investors a huge margin of safety. Therefore, I believe that the HUYA stock will outperform the market over the next few years.
The only reason why I don’t rate this stock as “very bullish” is because of the downward momentum and possible further news from the government which could lead to further stock price drops in the short term. However, in the long term, this will be a great investment for value investors. Cautious investors can open a smaller position now, and should the stock really drop more, add more shares later.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of HUYA either through stock ownership, options, or other derivatives. 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.
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