Value Investing HUYA Incorporated - Long Thesis |
- HUYA Incorporated - Long Thesis
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| HUYA Incorporated - Long Thesis Posted: 28 Jan 2021 04:43 PM PST Edit: Not sure who is downvoting this but I've been openly discussing the risk catalysts in the comments below. If there is a genuine flaw in my thesis you're more than welcome to debate it.
As of writing this, HUYA is currently trading at $25. I think it's cyclicality can see it descend to $20, and I will enter a position once it is in that ballpark. This is a long term hold as the merger will take several months to complete and for the market to adjust accordingly. The potential short squeeze is just an added bonus. I will be working on a DCF valuation for the company in the coming weeks and will post that here as well. HUYA Inc., ticker HUYA, is a Chinese live streaming platform. It is the APAC equivalent to Twitch.tv and has a stranglehold on the industry there. HUYA is a subsidiary of Tencent, one of the biggest and most prominent names in China's economy and in global entertainment, infamous for aggressively buying activist positions on Western media companies and owning a significant portion of the world entertainment market share through the subsidiaries it has purchased. Tencent's majority in HUYA is controlled via proxy with YY inc, ($YY). While directly being financed by Tencent, Tencent fronts HUYA through YY Inc., which in of itself is the biggest streaming platform in the APAC region and is a key player on the Nasdaq. With HUYA now merging with the only competitor in the market, Tencent officially dominates and controls the live streaming industry of its mother country, which will be maintainable through its deep-rooted relations with the Chinese legislators and through the puppet war it poses, with HUYA and YY both being publicly listed on the North American exchanges play-fighting as competitors, while in reality being two of the same kin. HUYA is the only member of its sector to be cash flow positive, while essentially being the only peer at all. There are only two other competitors in the live streaming sector of China and HUYA is in talks to buy out its second-most rival, DouYu International. The other competitor, Tian Ge Interactive, is of no significance due it's microscopic market cap and consistent failure to generate cash flows. The merger is set to complete within the first half of 2021, with DouYu integrating itself into HUYA's capital structure and delisting itself from the markets. This merger will bring HUYA to a monopoly sized level of market share, going from 125 million active users to over 300 million when combined with DouYu's streaming platform. With its mother company YY actively participating in the market with a supporting role, this now leads Tencent to having 600 Million users of the Total Addressable Market of China. Assuming this platform will derive its users mainly from major cities and urban environments, the total addressable market equates to the total number of Chinese citizens living in densely populated urban area - which is 57% of the Chinese population. As it stands, that is 798 million people. In short, Tencent will now own 75% of the Total Addressable Market once this merger goes through. HUYA shows income statement numbers on par with your typical growth phase company. they are keeping a steady COGS, while aggressively growing net income, sales, and EBIT. Currently COGS is 51% of revenue, but is down nearly 25% year-over year. Revenue has gone from $114 Million in 2016 to $1.2 Billion in 2019. Gross profit has grown from -42 Million to 318 Million in the same time frame. This gives HUYA a 3-year sales CAGR of 119%. There seems to be a steady trail of share dilution quarter over quarter, despite EPS showing no growth in the same time period. share dilution can impact future equity fundraising should it be overdone. sourcing supplies comes at an incredibly cheap price for the company due to the intense monopoly of its parent company. It derives over 90% of its COGS from JOYY and Tencent. knowing that it is in the best interest of one of the biggest companies in China that HUYA sustains low COGS, high margins, and cheap equity financing, this shows us the golden cog of this ever-growing machine. HUYA has direct access to whatever funds Tencent puts towards live streaming for the foreseeable future. This reassurance has been guaranteed through the balance sheet so far, as the company has taken a little to no debt since its inception and has in fact seen declining long-term debt, going from $12 Million in June of 2019 to $9 Million as of June 2020. For a company valued at $6 billion, this is chump change. In spite of this, HUYA is in the midst of an incredible short float, with 37% of the shares outstanding being shorted. The source of this bearish activity comes almost entirely from hedge funds and short-term traders on the North American markets. This is understandable, as Chinese companies are incredibly shady and require much more due diligence than any company in the West. However, this fear can be dissolved with help from the Benford test. Benford's Law is used to identify numerical irregularities in large data sets. In 2014 researchers at Harvard and Columbia university aggregated all financial statements by industry from the years 2000 to 2011 and found that approximately 83% of firm's financial statements were legitimate. Very few Chinese companies have successfully passed the Benford test. Notable companies who have passed however include the likes of Alibaba and JD, two retail titans. The test assesses suspicious fundraising, high gross margins with the low operating expenditures, the liquidity ratios of the company, noticeably low or decline in revenue, if the IPO was a reverse merger and if there is a considerable lack of insider ownership (<5%). HUYA passed the test with the same exact marks as Alibaba. Whether or not this short squeeze will come to life depends on the growth of the share price. However, the company has been somewhat cyclical since it went public three years ago. A major antithesis to the short sellers is the presence of Cathy Wood, the manager of the famous ARK Invest, who purchased a significant portion of HUYA shares to add to the fund's product – ARKW. Cathy Wood believes HUYA will be an industry leader in the tech and entertainment sector of the emerging APAC markets. Overall the aggressive profitability, industrial monopoly, upcoming merger, and nearguarantee of cheap debt and equity financing from one of the biggest companies in the country, HUYA may be set to see incredible bouts of growth in the upcoming quarters. The irrational fear of those short selling the company will be utilized by the market to drive the price up to levels never before seen. [link] [comments]  |
| Real-estate and equity valuation – Opco-Propco analysis Posted: 29 Jan 2021 03:01 AM PST |
| CIM Commercial Trust: Proxy Fight, Possible Liquidation or Sale Posted: 29 Jan 2021 03:02 AM PST |
| Horizon Kinetics 2020 Annual Letter Posted: 29 Jan 2021 03:02 AM PST |
| Cockroach Labs 2021 Cloud Report Posted: 28 Jan 2021 01:13 PM PST |
| SEC scrutiny delays Roblox stock market listing Posted: 28 Jan 2021 11:35 PM PST |
| Posted: 28 Jan 2021 10:39 PM PST |
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