HUYA Inc: the “Twitch of China”

HUYA Inc was founded in Guangzhou in 2014 and incorporated in the Cayman Islands. Its mission is to operate gaming and esports live streaming platforms to connect broadcasters and their audience. The content covers a wide variety of media from talent shows, anime, outdoor activities, live chatting, online movies and many others. Furthermore, the company operates Nimo TV, a live streaming platform designed for foreign consumption where its audience is primarily in Southeast Asia, the Middle East, and Latin America [5].

History

Operational Structure[1] 

Management Overview

Dong, Rongjie – Chief Executive Officer, Member of the Board of Directors, Member of Nominating Committee, Member of Corporate Governance Committee

Mr Rongjie Dong is the Chief Executive Officer of HUYA Inc since August 2016 and its Director since March 2017. Mr Dong was previously the Chief Executive Officer of Huya Broadcasting at JOYY Inc and served as its Executive Vice President from 2006 to August 17, 2016. Mr Dong was previously the President of Technology at Guangzhou Huaduo and the Head of Technology at 163.com from 2000 to 2006. Mr Dong received his bachelor’s degree in computer hardware from Beijing Information Engineering Institute (now Beijing Information Science and Technology University) in 1999.

Liu, Xiaozheng – Chief Financial Officer

Ms Xiaozheng Liu is the Chief Financial Officer of HUYA Inc since December 6, 2019. She previously served as the Chief Financial Officer of Yixin Group Limited until November 29, 2019. Prior to that, Ms Liu was Head of China Technology Investment Banking Division at Credit Suisse (Hong Kong) Limited from June 2011 to September 2015 and the Vice President in the China Investment Banking Division at Citigroup from October 2009 to June 2011. She also served as the Chief Strategy Officer at 360 Security Technology Inc until October 23, 2015. Ms Liu received her bachelor’s degree in Finance from Nanjing University in 1997, a master’s degree in finance from Renmin University of China in 2000 and another master’s degree in management from the University of California in 2004.

Lai, Ligao – Chief Technology Officer

Mr Ligao Lai is the Chief Technology Officer of HUYA Inc since January 2017. Mr Lai served as the technology general manager at YY from 2011 to 2016. Previously he worked in the research and development department at Kingsoft from 2004 to 2011. He was previously a developer and project manager prior to that from 1999 to 2004 and was responsible for the development of WPS Office software. Mr Lai received a bachelor’s degree in electronics and information engineering from Wuyi University [5].

Board Members

Name	Title
Huang, Lingdong	Chairman of the Board
Dong, Rongjie	CEO & Director
Cheng, Yun Ming	Director
Zhao, Hongqiang	Independent Director
Lei, Zheng	Director
Li, Xueling	Director
Pu, Hai Tao	Director
Tsang, Wah Kwong	Independent Director
Xu, Guang	Director

This is the section where the rubber meets the road, often as the starting point to making an informed investment decision in the stock market. Qualitative analysis is an important stepping stone into understanding the business, how it operates, and how the company makes money and deals with risk.

The Chinese online game streaming industry is undergoing a boom period where the industry worldwide is expected to grow at a CAGR of 9% over the time period from 2021 to 2026 [6], with China being the centrepiece of innovation and market domination with Huya being in pole position as the largest Chinese game streaming business by revenues ($2.61 billion in Q1 2021 vs its competitor DouYu $2.15 billion) [7].

The game streaming culture is different in China wherein the West money is typically made primarily from advertisement services and subscriptions whereas in China 95% of Huyas’ revenues came from gifting and user donations to streamers [12]. Furthermore, China is a mobile phone dominant country where users access and use the platforms through such means [8]. In China, there are two types of donors, Diaosi and Tuhao. Diaosi is a derogatory term that loosely translates to a ‘loser’ or ‘beta’ in the low-class society. This is particularly insulting in a culture obsessed with having a high social status (the Chinese dream) associated with fame, money and a large network etc. Diaosi, according to journalist Siyi Chen, is a reflection of the majority of viewers watching Huya’s gaming streaming events as a way to escape reality. The Diaosi form an almost symbiotic relationship with the streamer who by contrast symbolizes the Diaosi’s antithesis, as they have achieved a level of success that is seen as unobtainable. But, most importantly to the viewers is that the streamers used to be Diaosi and live their fantasies through them. On the other hand, the second type of donor is the Tuhao, who are wealthy donors who donate money like water and make up approximately 80% of the streamer’s income. By generously tipping during these live broadcasts, they command the respect of viewers and most importantly the streamer, through doing this they are seen as having a high social status [12].

Business Model Summary

Huya business model can be summarised in these bullet points:

• Consumer Engagement – The primary target audience is the younger generation who use social media and the internet as a tool to communicate. Huya with this in mind creates in-built functions such as bullet chatting, live comments and gifting.
• Game Streaming – Huya’s primary focus is on live-streaming gaming content and tries to sign the best streamers and gamers to the platform. The most popular gaming titles are League of Legends, King of Glory, PeaceKeeper Elite and PlayerUnknown’s Battlegrounds.
• Other Entertainment Content – To attract a wider audience Huya offers talent shows, anime, outdoor activities, live chats and movies and incentivises its broadcasters to promote this content to their viewers.
• Broadcasters – The broadcasters consist of qualified professional gamers alongside amateurs who can showcase their gaming skills and talents. They are managed by talent agencies and given personalised training to improve audience stickiness.
• Platform – Huya Inc operates Huya.com, Huya app which is available on all major app’s stores, and Huya PC client – Huya products are targeted towards Chinese speakers in China, Huya also operates Nimo.tv and Nimo app which is targeted to non-Chinese speaking foreigners.
• Others – The company develops and operates mobile games jointly with third-party distribution platforms, and game-related apps [5].

Consumer Engagement

The primary target audience is the younger generation who are more open-minded and tech-savvy in which they hope to create an engaged, interactive and immersive community for game enthusiasts. Huya Inc with this mind uses in-built functions through its platforms such as bullet chatting, live comments and gifting. Furthermore, the platform enables streamers and talent agencies to collaborate with the company to encourage healthy competition and regulatory compliance. The company cooperates directly with content creators and their talent agencies in order to improve video quality and to tailor its content for its target audience. Some of the company’s live streaming content is available across Tencent products, such as WeGame, WeChat Game Center, QQ Mobile Game Center, and League of Legends, etc.

Game Streaming

Huya offers a variety of media and streaming content, however, its primary focus is on live-streaming gaming content. As a subsidiary of Tencent, Huya is able to leverage Tencent’s wide relationships with game developers, content creators and e-sports tournaments organisers to gain exclusive rights to use their content and secure live streaming rights of tournaments and matches which is favoured by the community.

As of 2021 Huya’s live streaming content covers approximately 4000 different games with a total of 163.1 million monthly active users on its platform compared to Twitch with 140 million monthly active users [13]. The most popular gaming titles on the platform are, League of Legends, King of Glory, PeaceKeeper Elite and PlayerUnknown’s Battlegrounds, which are the four most-watched in total viewing time in 2020.

Other Entertainment Content

To attract a wider audience Huya offers talent shows, anime, outdoor activities, live chats and movies and incentivises its broadcasters to promote alternative content. In 2020, there were 43.5 million streaming hours of other entertainment content on the platform. Huya Inc also offers original content produced in-house or in collaboration with third-party partners. In 2020, it produced shows, such as All-Star Idol Academy, Godlie (talent show), a long-standing Werewolf game show; and three seasons of Huya Kungfu Carnival, a mixed martial arts competition, which has helped to attract new users and increase user engagement. In 2020, the company live-streamed 130 self-produced e-sports tournaments and game events, and original entertainment shows.

Broadcasters

The company’s broadcaster base consists of qualified professional gamers and content creators, alongside amateurs who can showcase their gaming skills and talents. Most of the broadcasters join the community through the website or app. Huya may also recruit through talent agencies.

The company manages, supports, and promotes its broadcasters based on their respective level of popularity and quality of content. For the popular broadcasters, it co-operates with their talent agencies to develop individualised promotion strategies and help them continue to generate top-quality content. The company also utilises its data analytic capability to identify broadcasters that have shown potential, based on ranking and popularity trends, and devote appropriate resources to them.

Talent Agencies

Talent agencies range from professional organisations to amateur groups that manage broadcasters. As of December 31, 2020, the company has approximately 2,800 platinum talent agencies that manage over 528,000 broadcasters.

The company provides guidance on content monitoring, compliance and corporate governance training to improve their management efficiency and facilitate healthy development. Talent agencies are expected to provide regular compliance training to their broadcasters as well as monitoring and reviewing breaches of rules and conduct.

Platform

Huya Inc platform consists of its mobile app and various websites. Most viewers access the company’s platform through its ‘Huya Live’ mobile app, and its website ‘www.huya.com’. Broadcasters primarily live stream through ‘Huya Assistant’. The mobile app is freely available to download from the Apple Store, Google Play Store and various other Android app stores. The company has also expanded its operations overseas in 2018 where it launched Nimo TV which is primarily targeted towards a foreign audience in Southeast Asia, the Middle East and Latin America. User’s access Nimo TV through its mobile app or the website ‘www.nimo.tv’ [5].

Competition

The Chinese online gaming market is still at an early stage and has already shown rapid growth and increasing profitability. This can be attributed to China having the largest gaming population in the world with over 630 million gamers and being the global hub of esports where analysts project an increase of 100 million esports gamers in 2021 alone [8].

There is still plenty of future growth left for Huya with potential opportunities such as selling media rights, ticketing, selling merchandise and increasing advertisement services which can all serve to grow the top line of the company.

Furthermore, the Chinese gaming and esports industry have a high barrier of entry resulting in a duopoly between Tencent backed companies Douyu and Huya. This control of market share results in the best streamers gravitating towards these platforms and are thus able to host large e-sports events drawing in the attention of viewers. Douyu and Huya are expected to merge at some point this year, however, the deal is currently under the scrutiny of Chinese regulators [4]. If the deal is approved the new entity would control 80% of the Chinese market share whilst holding exclusive rights to stream Tencent Games which is a massive competitive advantage over other competitors such as Billibilli the third-largest esports streaming company in China furthermore Tencent, Huya and Douyu are capable of sacrificing margins to put pressure its competitor due it’s their high liquidity. [14]

This is the section that separates the speculators from the professional investors. Here at Chinese Alpha, we pride ourselves on informing you the investor to carve out your own stock market success story and make the best investment decisions of your life.

In the quantitative analysis section, we will discuss the financial statements (income statement, balance sheet, cash flow statement) and valuation metrics. The data is obtained from the latest 5-year annual reports from Capital IQ.

Financial Performance

Revenue growth looks very positive growing 39% from December 2019 to 2020 and 1.4% from December 2020 to March 2021 which may have been facilitated by a combination of national lockdowns which have benefited the business and natural secular growth within the industry. Other important margins such as Gross margins, EBIT margins and net income margins have remained consistent which is an overall positive as the fiscal year-end for Huya Inc is December 31^st suggesting there is more room for margin expansion alongside revenue growth in 2021 which is extremely exciting for investors.

An interesting thing to highlight is a large amount of capital in cash and short-term investments which indicates a business that is highly liquid and can easily pay off its short-term obligations to be paid within one fiscal year with a respectable current ratio of 4.9x and a quick ratio of 4.8x. However, it can be argued by some that this may be an inefficient use of capital. Asset turnover ratios have remained consistent during the highlighted period ranging from a low of 57.2x to 77.9x which suggests consistent revenue output from fixed assets, however, more prominently accounts receivable turnover ratios have consistently increased year-on-year from 22.1x in 2018 to 64.1x in March 2021 meaning the company is getting better at collecting debt owed to the company. Total Debt to Equity is low hovering at 1% which is expected given the company is relatively young which is very positive given the company is already profitable.

Huya Inc is very aggressive in reinvesting its cash from operations and financing back into the company which is noted by large cash outflows in cash from investing in 2018 and 2019 driven by investments in marketable securities and capital expenditures. There is also an inflow of cash in 2020 resulting from a sale of marketable securities, which is likely to boost liquidity in response to the pandemic. This is great news for long-term investors as we have seen the asset turnover ratio for this company is quite consistent, suggesting that as long as the company continues to reinvest then its revenues should continue to increase.

It’s also worth noting that the company is reducing its cash inflow from financing year on year, whilst the cash from operations has increased from 2018 to 2019 with a drop in 2020. This is indicative of the company’s confidence in its operating cash flow to be able to finance investing activities for future long-term growth.

Valuation

We will take you through each phase of the Discounted Cash Flow Model and provide our key assumptions. We chose an average valuation of the DCF Multiples Exit and Perpetuity Growth. Where the drivers of value are the combination of the cash flows of the company whilst factoring in the relative value of comparables. Our analysts believe this will give a dynamic, adaptive and realistic intrinsic value. Furthermore, our analysts forecasted the growth period for 10 years, to reduce ‘valuation drag’ the reliance of the intrinsic value on the terminal value.

Step 1: Calculate the Weighted Cost of Capital (WACC)

Cost of Equity (CAPM)

We will treat Huya as a Chinese business despite trading on the NYSE; We believe this is the most appropriate course of action given where it conducts the majority of its operations. Furthermore, treating the company this way should produce conservative estimates.

Using the Capital Asset Pricing Model (CAPM) the inputs used is as follows:

Risk-free rate = 3.1% (10-year China Government Debt) – Capital IQ

Damodaran Equity Risk Premium = 5.40% [9]

Country Risk Premium = 0.68% [9]

Beta = 0.85 % (Average of bottom-up levered beta & regression beta) – Regression beta from Capital IQ. Bottom-up levered beta calculated using comparable companies.

• Bilibili Inc
• JOYY
• DouYu International
• Momo Inc
• Weibo Corporation
• IQIYI Inc

Plugging these figures into the equation:

Cost of Equity =  Risk Free Rate + Beta * (Equity Risk Premium) + Country Risk Premium

Cost of Equity = 8.88%

Cost of Debt (Synthetic Credit Rating Approach)

Huya Inc, doesn’t have an official credit rating therefore by calculating its interest coverage ratio, a ‘synthetic’ credit rating can be created using professor Damodaran’s lookup table.

Interest Coverage Ratio = 2.57

Credit Rating = B1/B+[10]

Default Spread (B1/B+) = 3.51% [9]

Country Default Spread (China) = 0.62% [9]

Average Corporation Tax (China) = 25% – 2021 CN PWC Tax Report [11]

Risk-free rate = 3.1% (10-year China Government Debt) – Capital IQ

Plugging these figures into the equation:

Cost of Debt =  (Risk Free Rate + Default Spread + Country Default Spread) x (1-T)

Cost of Debt = 5.42%

Weighted Average Cost of Capital (Discount Rate)

Total Debt = Current Debt + Long Term Portion of Debt + Current Leases + Long Term Leases

Market Equity Value = Diluted Shares Outstanding x Current Share Price

Weight of Debt = 0.33%

Weight of Equity = 99.67%

WACC = 8.87%

Discounted Cash Flow Analysis[1] 

Using 5-year historical financial statements and consensus forecasts up to 2023. We extend the forecast period to 2031 using Morningstar industrial pitchbook reports and conservative assumptions summarised below. Our analyst used the XNPV function (XNPV = Discounted rate, cash flow, date) with midpoint discounting alongside the year fraction to ensure cash flows are discounted appropriately according to the fiscal year-end. We use a 3% perpetuity growth rate which is appropriate as Huya by the end of 10 years should be nearing maturity, alongside a 17.4x EV/EBITDA multiple which is the median value of companies mentioned in the cost of equity section, we believe this is appropriate given the similarity in market cap, location and business operations of those companies to Huya, furthermore using the median value over an average value prevents the effect of fat-tailed values skewing the multiple.

Our intrinsic value of $23.89 with a high of $29.25 and a low of $21.57 according to our sensitivity analysis constitutes a 49% upside from the current price. The sensitivity analysis is a financial model used to audit the inputs of a model (in case the analyst makes a mistake), even at the lowest valuation Huya appears undervalued, potentially making it a good investment opportunity. Our valuation range is in line with analyst estimates at an average of $22.24 with a high of $29.16 and a low of $16.17.

• Huya’s business model is at risk if the company cannot attract popular broadcasters and viewers, which is fundamental to their business operations. – Currently, Huya has no major competitors as they are planning to merge with Douyu.
• Huya may be at risk of inflation is expected, this is because Huya holds a significant amount of cash and marketable securities – If inflation increases the purchasing power of cash and marketable securities decreases – Right now China’s YoY GDP has grown 18.8%, however, YoY CPI and Core CPI has only grown 1.3% and 0.7% suggesting that inflation remains low despite a fast-growing economy [12].
• Huya may be targeted by the Chinese regulators as the government has been cracking down on tech companies alongside business monopolies recently which may be problematic for the M&A deal in process between Huya and Douyu.

Huya can be both a value or a growth play, as the company is a “fast grower” according to Peter Lynch stock category however is currently undervalued.

(Source: TradingView)

Entry

Huya stock price has broken the long-term downtrend (falling Wedge Blue Line) following a positive earnings call (green arrow E) which is indicative of a shift in momentum to the upside. Huya stock price then found strong multi-year support (bottom purple band) and broke and is currently retesting a key level (top purple band). Volume is consistently increasing which is indicative of increased interest in the stock. The technicals suggest that Huya has bottomed out and is ready for a shift to the upside.

Summary

Huya is a fast-growing market leader in a hot industry and is currently undervalued. The technicals are looking increasingly favourable. It’s best to be patient and wait for a break of the upper key level which confirms a change in momentum to the upside. With all these factors taken into consideration, Huya Inc gets a buy recommendation.

Investing Strategy

An investment approach to buying Huya would be a buy and hold strategy over a 5-year period, this is because there are a number of risk factors in the short term which can create volatility in the stock price such as the M&A deal and government regulations. We see Huya as having strong long-term prospects which are facilitated by its partnership with Tencent, strong quantitative fundamentals in its financial statements alongside important revenue drivers such as the increasing popularity of gaming and streaming in China. Alternatively, Huya in our opinion has strong trading qualities due to its volatility, established support, and resistance bands which can be a good opportunity for swing and day traders alike.

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