Home / Hot Topics > / ANALYSIS: Huya Continues Growth Trajectory in Competitive Streaming Environment

ANALYSIS: Huya Continues Growth Trajectory in Competitive Streaming Environment

Donovan Jones 2019-06-16 20:10 PM

Short Take

Huya Inc. (NYSE: HUYA) reported financial results for its most recent quarter in mid-May.

The firm operates a live streaming online network for Chinese media consumers.

Huya’s stock would likely rebound if U.S China trade issues were conclusively resolved, although I am skeptical of that occurring in the near term.

Company

Guangzhou-based Huya was founded in 2014 to provide video game live streaming services as a business unit of its parent firm YY Inc. (Nasdaq: 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 livestreaming and games partnership with Chinese Internet giant Tencent Holdings Ltd. (HKEX: 1800). Tencent also invested approximately $462 million in Huya’s Series B round in March 2018.

Major shareholders are parent company YY and Tencent.

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.

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 forecasted an average CAGR of 8.1 percent 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 percent vs. China’s overall CAGR of 8.8 percent 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 vendors that provide similar online video streaming services include:

  • Tencent Video

  • Youku Tudou

  • Bilibili

  • iQiyi

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:


Recent Performance

Huya’s topline revenue by quarter has grown consistently since its IPO in May 2018:

(Source: Seeking Alpha)

Huya’s gross profit results have also been impressive, growing steadily over the past five quarters:

(Source: Seeking Alpha)

Operating income has fluctuated significantly, but has rebounded sharply since Q2 2018’s poor result:

(Source: Seeking Alpha)

Earnings per share has grown markedly since Q2 2018’s negative result and has been relatively stable in the most recent three quarters:

(Source: Seeking Alpha)

Analyst sentiment has fluctuated since the firm’s IPO in mid-2018, as the linguistic analysis shows below:

(Source: Sentieo)

In the past 12 months, HUYA’s stock price has fallen 48.2 percent vs. iQiyi’s (Nasdaq: IQ) drop of 58.8 percent, as the chart below indicates:

(Source: Sentieo)

Commentary

Despite a difficult Chinese economic environment in 2018 and early 2019, Huya has produced impressive financial results, with topline revenue and gross profit consistently growing.

While operating income and earnings per share have fluctuated, these metrics have rebounded sharply indicating management is effectively managing the business to the current environment.

However, competition is fierce in the online streaming market, leading me to wonder how much in the way of profits streaming firms can generate in the near-term.

Another company, Douyu, is a strong competitor, especially in the e-sports vertical, and the firm may go public in the U.S. later in 2019 as market conditions permit.

Perhaps in response to increased competitive pressures, in April 2019, Huya completed a follow-on financing, pricing $326.4 million in additional ADSs to fund further development of its content ecosystem, add e-sports partnerships, and expand its content categories.

It is uncertain how the U.S. China trade tensions are affecting online media properties such as Huya, so it is difficult to determine whether a resolution to those issues, if it occurs, will affect the firm’s operations.

My sense is that any resolution would likely have little effect on its operations but have a strongly positive effect on its stock price.

Interested investors who are risk-on and who believe a significant resolution of outstanding trade issues is near should consider the stock attractively priced at its currently highly discounted level.

However, I am skeptical of such a conclusive resolution of major trade issues in the near-term, so am still cautious on Huya’s stock performance for the rest of 2019.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)