Fallen Ex-unicorn DouYu Set For Delisting To Move Under Tencent's Wing?

Key Takeaways

•       90% drop in DouYu shares over past 12 months may presage a Tencent-led privatization bid in the next year

•       Company needs strategic rethink on revenue stream diversification as gaming slows in China

By James Dyson

A precipitous fall in its share price over the past 12 months, helped by a few government prods along the way, has stripped China’s second largest game-centric streaming company DouYu International Holdings Ltd. DOYU of its former unicorn status in spectacular style – making it a downhill gold medal contender, for sure. 

More precisely, the Wuhan-based company’s shares have lost 90% of their value since this time last year, prompting a strategic rethink that could include a delisting from the Nasdaq for an overhaul out of the public eye in the fold of its largest shareholder, Tencent Holdings Ltd. (0700.HK). Reuters reported such a privatization bid was in play late last month, only to see DouYu quickly respond that the report was “untrue” – the Chinese equivalent of a “no comment.”

Yet however that story plays out, fundamental problems with DouYu’s business will need to be addressed.

The double-whammy of a Beijing gaming clampdown and its regulatory veto of DouYu’s plan to merge with larger eSports streaming rival Huya Inc. HUYA last year, were major contributors towards DouYu’s annus horribilis in 2021. Other factors such as data-security concerns, Beijing’s growing disdain for overseas listings and its broader clampdown on the technology sector also made the operating environment for companies like DouYu far more complex.

That combo of negatives put DouYu squarely in the red, posting a third-quarter net loss of 143.5 million yuan ($22.3 million), compared with net income of 59.6 million yuan in the same period of 2020. Its total net revenues for the period were 2.35 billion, falling from 2.55 billion yuan a year earlier, continuing a downward trend that started in 2020.

The company is scheduled to report its fourth quarter earnings on March 18, capping a year it would probably prefer to forget.

For shareholders, it’s been grim. DouYu’s share price hit a high of $20.54 in February last year following announcement of its merge plan with Huya in 2020. But they began to tank after the plan was blocked, and closed Wednesday at $2.43. Since the start of this year, its shares have fallen 8%. With its market capitalization now at $788 million, down from around $5.5 billion just a year ago, DouYu can no longer call itself a unicorn – a popular moniker for companies worth more than $1 billion that offers some bragging rights, but little else. 

To be fair, though, DouYu was joined in its black run by Huya, whose shares fell 80%, as well as No. 2 gaming company NetEase (9999.HK), whose stock is down about 20% over the last 52 weeks.

Bearing the brunt of DouYu’s slump is Tencent, its single biggest shareholder with 37% of the company. Tencent also owns over a third of Huya.

DouYu’s current low valuation makes privatization and delisting a more attractive proposition. The earlier Reuters report said Tencent aims to tie up with at least one private equity firm for the privatization deal, which may have been prompted by recent senior-level disagreements over future strategy. Those disagreements reportedly led to the departure of co-founder and co-CEO Zhang Wenming in December. DouYu said Zhang’s departure was for personal reasons and hasn’t said more on the matter.

Where there’s smoke, there’s fire

Despite the denials from DouYu and also Tencent of the Reuters privatization story, there’s seldom smoke without fire

In this instance, there’s a strong logic behind the delisting talk. If it were to happen, it would make sense – if not now, then in the short- to medium-term. Such a move would give Tencent greater control over its core gaming affiliates at a time when it faces a raft of regulatory issues, according to the Reuters article. It would also help to stabilize DouYu’s business.

Zhang and co-founder and co-CEO Chen Shaojie reportedly had differences over the company’s direction. Chen, who now runs the company, was said to want to focus on game livestreaming as DouYu’s core business, while Zhang sought to shift towards potentially more profitable entertainment livestreaming.

Those differences may have ended with Zhang’s departure, but the discussion on potential diversification into other areas like entertainment streaming continues. Such considerations come as DouYu tries to reverse a decline in its paying customer base. Its average mobile monthly active users (MAUs) in the third quarter of 2021 rose by 3.9% to 61.9 million from 59.6 million a year earlier. But average paying users during the period slipped to 7.2 million from 7.9 million.

That divergence between active and paying users – one rising, one falling – goes to the heart of shareholder concerns and provides the rationale for diversification. The paying users decline is a consequence of two key government decisions last year that were game-changers for DouYu.

The first of those was the State Administration for Market Regulation’s (SAMR) veto of the Tencent-engineered merger with Huya last July on antitrust grounds, killing a combo that would have created a company worth $5.3 billion. A month later, the SAMR introduced new rules limiting minors under-18 to just three hours of gaming per week – on Fridays, Saturdays and Sundays – which reduced the amount of gaming content available for streaming by DouYu.

The new gaming rules may have been a blessing for parents trying to get their children away from screens on schooldays. But they weren’t great for business. For DouYu, they meant reduced content and, by extension, reduced user loyalty.

Yet, despite all that, the situation presents a clear opportunity for Tencent, which has plenty of content – entertainment and other forms – that could well benefit from DouYu’s audiences, distribution channels and reach. With Tencent calling the shots if DouYu privatizes, there would be huge scope to grow the DouYu brand, backed by a much stronger and more diversified content.

For now, at least, the market is taking a wait-and-see approach toward DouYu, which is reflected by the “hold” rating on the company from nine market analysts polled by Yahoo Finance. Only two rate the company a “buy” or “strong buy”, and one has “underperform.” Their average price target for the company is $3.89 – about 60% higher than its latest close of $2.43 – suggesting potential upside for DouYu shares.

Looking ahead to 2022, assuming the regulatory landscape remains stable – a big assumption given the government’s recent regulatory track record – a move by Tencent to privatize DouYu looks both possible and necessary.