Huya (HUYA 28.07, -4.81, -14.63%), which was spun off from YY Inc. (YY) in a May
2018 IPO, is trading sharply lower today after reporting Q2 results late
last night. This was HUYA's second report as a public company.
HUYA is a game live streaming platform operating in China, reminiscent of Twitch in the U.S., that serves a large and active game streaming community. The company has cooperated with e-sports event organizers, as well as major game developers and publishers, to foster a thriving online space for gaming and e-sports players and their audiences to engage with each other and to showcase talents. E-sports live streaming has developed into one of the most popular content genres on its platform. HUYA has the largest and most active game live streaming community in terms of average MAUs and average daily time spent on mobile app per mobile active user. Its live streaming content covers more than 2,600 different games, including mobile, PC, and console games.
With game streaming strength providing a sturdy foundation, HUYA has also branched into broadcasting other entertainment genres, such as talent shows, anime, style tips presented by popular anchors, and outdoor activities, from fitness content to videos of street interactions.
HUYA has created an immersive community for game enthusiasts in China, especially among the young generation. Its high-quality streaming content draws in users who share common interests to the platform, enabling them to connect, share their passions, and encourage peers and content providers. Users interact with one another with the support of the platform's array of social functions, such as bullet chatting, real-time commenting, and gifting. Such real-time interactions cultivate a strong sense of belonging, which increases user stickiness and time spent while expanding monetization opportunities for broadcasters.
China has the world's largest games market in terms of revenues and gamers. China had 646 mln gamers in 2017 and is expected to host 917 mln gamers by 2022. E-sports has become a mainstream entertainment option that has attracted growing attention on social media in China. China's e-sports market had the largest gamer base in the world with approximately 229 mln gamers in 2017.
Turning to the Q2 results, non-GAAP income per ADS rose to US$0.06 from a loss last year. Revenue jumped 125.1% year/year to US$156.9 mln. Live streaming revenue makes up the bulk of its revenue, and that increased 124.5% year/year to US$149.9 mln, primarily due to the increase in spending per paying user and the increase in the number of paying users on Huya's platform. Advertising and other revenue increased by 138.1% to US$7.0 mln. Growth is being driven mainly by its fast-growing mobile user base, which reached 42.7 mln in Q2, representing nearly 50% of its total user base. This strong growth also demonstrates Huya's improving monetization capabilities and market opportunities. The company continues to see the e-sports area as vibrant and rich with growth opportunities.
Though these upbeat top and bottom line Q2 results could be expected to augur positive trading action, it seems that the company’s Q3 revenue guidance is being seen as a disappointment, resulting in the stock’s downward trend today. Huya expects Q3 revenue of RMB1,190-1,220 mln, representing year/year growth of 103.9% to 109.1%. After posting 125% revenue growth in Q2, the Q3 outlook is not quite as strong. Perhaps management is just being conservative so that they can post nice upside. But it's tough to tell as Huya has only been public for a few months, so they do not have a long track record in that regard. What exactly the fresh guidance reflects should become clearer when it comes time for the company to report Q3 results in November. Notably, parent company YY Inc.’s latest earnings report guided for third quarter net revenues somewhat below estimates, and that stock also trades lower today.
Huya has had some ups and downs in its first few months of trading. On May 11, Huya priced its 15 mln share IPO at $12/share, at the high end of the $10-12 expected range. It then opened at $15.50. By mid-June, it was trading above $50. But the excitement of debut quickly faded, and the stock had fallen back below $30 by early July. It has mostly stayed steadily within the range of $30-40 since then, although the Q2 report and forward-looking guidance has pushed the stock back below $30 in today’s trade.
Our sense is that Huya is a speculative Chinese name and it probably has a lot of momentum investors in it who could perhaps tend to overreact to every small change in growth rates. Momentum investor participation is probably why the stock has been so volatile. We would be cautious with it until these investors move on to another idea, allowing Huya to begin to trade more on its fundamentals.
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