Is M&A Coming For DouYu? Is Tencent Interested?

The company's stock jumped 17% after it reported strong progress in moving beyond its legacy livestream gaming business, even as its quarterly loss swelled

Key Takeaways:

• DouYu's fourth-quarter revenue sank by 12% and its net loss more than doubled as its monthly average users fell 14% to 44.5 million
• The company's revenue from advertising and other sources rose 63.6% last year to make up 28% of its revenue as it diversifies from its original livestream gaming business

Its name means "fighting fish," and these days DouYu International Holdings Ltd. (DOYU.US) may indeed be fighting a battle for survival as its livestreaming business that once lifted it to fame slips away. Its latest quarterly results released last week showed continuing declines in revenue during the fourth quarter, extending a string of declines dogging the company for the last four years. At the same time, its quarterly loss more than doubled, as the company fell into the red for the year.

But investors took heart in the company's progress toward diversifying away from livestream gaming, which has come under pressure from stiff competition and government clampdowns to limit online time by minors. Some may also be betting DouYu's days as a standalone company could be numbered as it becomes a potential merger or acquisition target, which would likely see it sold at a premium to its current share price.

Co-CEO Ren Simin said on the company's earnings call that DouYu plans to allocate more resources to its newer businesses this year. "Our strategy is not about contraction, it's about reallocating our resources from inefficient initiatives to high-value business segments," she said.

While building up those business is a longer-term goal, reversing the company's sliding revenue – which has been contracting since 2021 – is a more immediate objective. That slide continued in the fourth quarter, as the company's revenue fell 12.3% to 1.14 billion yuan ($156 million) from 1.3 billion yuan a year earlier. Its net loss widened to 163.7 million yuan from a loss of 62.2 million yuan in the same quarter of 2023.

Average mobile monthly active users (MAU) fell 14% year-on-year during the quarter to 44.5 million. But in an encouraging sign, the latest figure was up 5.9% from the previously quarter. Average paying users also fell year-on-year in the fourth quarter from 3.7 million in 2023 to 3.3 million in the latest period.

The company is trying to restart its growth by focusing on its "other businesses," which include advertising, voice based social networking and game membership services. Revenue from that segment rose 47.2% year-on-year to 405 million yuan in the fourth quarter, and the figure grew by 63.6% for the year to 1.2 billion yuan.

Investors seemed to focus on the strong gains in DouYu's diversification drive, with shares leaping 17% in the two trading days after the announcement. But other factors were also likely at work behind the rally.

One clue was a 35% drop in the company's cash from 6.86 billion yuan at the end of 2023 to 4.47 billion yuan at the end of 2024. Officials said on the earnings call that Douyu spent $620 million on dividends and share buybacks since the start of 2024, including its latest cash dividend in January this year. Vice president of finance Cao Hao said that the company's cash reserves were sufficient to re-allocate resources to its growing businesses and manage business fluctuations, while "substantially" reducing net losses.

That seems to indicate DouYu is prioritizing shareholders and share price stability while accepting the inevitable rise of larger competitors, particularly Douyin, the Chinese version of TikTok.

M&A coming?

Investor enthusiasm may also owe to renewed expectation for a potential privatization or purchase of the company by a larger rival, which would likely include a premium to the company's current share price. One potential buyer could be leading game company Tencent (0700.HK), which is already a major DouYu stakeholder with 38% of the company's shares.

Tencent has been buying up gaming assets lately, including video game studios from Douyin parent ByteDance, which has retreated from the sector. Some may be guessing that Tencent may also make bids to privatize DouYu and rival Huya (HUYA.US), which also counts Tencent as a major shareholder and whose situation is similar to DouYu's. Tencent previously tried to engineer a merger of DouYu and Huya, but that bid was ultimately vetoed by China's market regulator in 2021 on anti-trust grounds.

Similar to DouYu, Huya on Tuesday reported a 2.3% year-over-year revenue decline during the fourth quarter to 1.5 billion yuan, while its net loss narrowed to 172.2 million yuan from a loss of 275 million yuan a year earlier. Like DouYu, Huya's livestreaming revenue is falling, dropping from 6.5 billion yuan for the full year in 2023 to 4.7 billion yuan last year.

While the original DouYu-Huya merger plan was squashed, the regulator might see things differently now as the livestream gaming industry suffers under the weight of government restrictions, competition from newer players like Douyin and weak consumer sentiment. Chinese media have reported such a merger may only be a matter of time, and Tencent's investment team met with senior executives from both companies last year to discuss such a plan.

While DouYu's and Huya's revenues from livestreaming have been shrinking, Douyin and Kuaishou (1024.HK) have been expanding fast in the livestreaming space. Kuaishou previously reported its third-quarter revenue rose by 11.4% to 31.1 billion yuan year-on-year, and its profit was up 49.9% to 2.1 billion yuan.

One other data point supporting prospects for a DouYu-Huya merger or third-party acquisition of one or both, is recent signs of cooperation between the two platforms. These began last March with a simultaneous broadcast of a livestreamer's broadcast on "Honor of Kings," a popular game operated by Tencent, on DouYu, Huya and Tencent's own WeChat.

Any such merger involving Tencent would be easily affordable by Tencent, since it's quite cash rich and already owns 38% of DouYu as well as 50% of Huya. Based on DouYu's latest market cap of $265 million and Huya's $838 million, Tencent would need to pay $162 million for the rest of DouYu, and another $420 million for the rest of Huya, or about $580 million combined.

DouYu's current price-to-sales (P/S) ratio stands at just 0.44, well below Huya's 1.02, making the company look undervalued. That may reflect the tepid view towards DouYu by the analyst community, with all five analysts polled by Yahoo Finance rating the company a "hold."